Marco Santori - Bitcoin Lawyer

Marco SantoriNew York bitcoin lawyer Marco Santori explains Bitcoin law from ground zero.


Interview with Marco Santori, the Bitcoin Lawyer

Trace Mayer:  Okay. Here we are back to the Bitcoin Knowledge Podcast. We have an awesome interview with Marco Santori. He's a New York bitcoin lawyer and one of the legal committees for the Bitcoin Foundation, taught CLE classes. Tell us about yourself, Marco.

Marco Santori:  Well, thanks for having me first of all. And, yeah, a little bit about me. I am an attorney here in New York City with Pillsbury Winthrop. I also chair the Regulatory Affairs Committee of the Bitcoin Foundation. I have taught classes in CLE on digital currency law from different disciplines and different angles, money transmission, securities, derivatives. It's a pretty deep rabbit hole as I think a lot of people who are listening to this will probably know or will know soon.

Trace Mayer:  Or at least suspect

Marco Santori:  Yeah. Or at least suspect.

Bitcoin legal landscape

Trace Mayer:  And you're right in Ground Zero. We got this BitLicense, the superintendent Lawsky from the Department of Financial Services in New York has proposed. You've been speaking to a lot of these regulators, you’ve been speak to lots of other attorneys. You know, let's just start with the simple stuff.

The previous interview was with Charlie Shrem. He found himself in some trouble with how he was selling his bitcoins. When new people are coming into this bitcoin space the last thing I want them to do is find themselves to do is find themselves in any type of trouble. So can we talk a little bit to start with the general landscape like the general legal landscape with digital currencies?  I mean, are they even legal?

Marco Santori:  Yeah, at least in the US I think that – well, let me back up a bit. Across the globe there is really a -- just a myriad different ways that digital currencies are treated. You can find some jurisdictions that are welcoming to digital currencies, you’ll find different jurisdictions that are pretty hostile. Here in the US I think we're really leading the charge on bringing digital currencies under the umbrella of regulation. And that, you know, that resonates differently with different people.

But I think the regulators in general here in the US recognize that bitcoin and the core bitcoin protocol at least and the technology behind it is here to stay. I don't think too many of them really believe we're all going to be sending bitcoins back and forth to each other as payment. That's in the next couple of years. But I think they all recognize the power of the protocol to move money, to move property, to move digital assets, to enforce smart contracts and beyond.

Marco Santori:  Yeah.

Trace Mayer:  And we should probably hit on like none of this is to constitute legal advice. I mean, you know, we've got how many 200 plus countries in the world, we've got fifty different states. As we talked in Charlie's interview, just in the money transmission area of the law a lot of those laws are 40 years old, in a lot of cases. And yet we're dealing with this new technology that has as you just alluded to lots of different applications than just currency. You mentioned smart contract, smart property.

Marco Santori:  Yeah. There's really a lot of different disciplines that, you know, if you want to say this is what bitcoin law is, you're roping in a lot of different disciplines and that's what I think the smart lawyer does is take an interdisciplinary approach to this. And, you know, we work on teams. And when somebody comes to me with a digital currency issue it's very rarely just something that one lawyer can address with one set of expertise. With one, you know, skill set. And so it oftentimes takes a team.

Trace Mayer:  So, like a brand new person coming in. They’ve heard about this bitcoin thing. They want to use it. Kind of like people heard about email and wanted to use that. What, you know, can somebody just go and, you know, buy a hundred dollars worth of bitcoin and start experimenting with it? I mean.

Marco Santori:  I encourage everybody. I'd encourage everybody to try that. No. Okay. I think that you have to be careful about what you do. This is a new space it's a space that is heavily regulated and also very vaguely regulated. So, that's really a recipe for confusion in a lot of people's minds. And unfortunately just getting bitcoin is one of the most difficult things to do in this space. You can do a lot of great things with bitcoins once you have them.

But getting them is difficult. And that has quite a bit to do with the fact that the regulatory regime is, as you mentioned, Trace, that governs this stuff was written a year before the creation of the floppy disk. And think about that. These -- the people who sat around and wrote this law had no conception of the fact that we could be carrying around millions of dollars of convertible value in our pockets. Let alone on a laptop or a USB stick.

So, those who are breaking new ground and pushing the envelope, at least on the business side look it's difficult to do without any risk at all. And I’d said it's almost impossible to do without any risk at all and still be quick to market.

FinCEN guiding Gunshot to Bitcoin Industry

Trace Mayer:  Now, FinCEN, they issued some guidance. We have what users, merchants and exchangers.

Marco Santori:  Yes. The guidance that you’re referring to was issued in March of last year. It's what I'd call the starting gunshot for the industry. The guidance created some categories. Or FinCEN was just essentially trying to understanding, get its arms around who the participants were in this industry. And they came up with different categories of participants. So, people like exchangers, administrators and users.

Exchangers are people who either exchange digital currency for government currency or one digital currency for another or just hold your digital currency and then return it to you at a later time or place. That's an exchanger of digital currencies. Those people are money transmitters. And you’ve mentioned money transmission before. That's the set of laws that within the Bank Secrecy Act which is that law that was created so long ago that requires people who do this stuff as a business to register with FinCEN among other things.

Trace Mayer:  So companies that we know would be Circle, Coinbase, BitPay, even though they are a payment processer. Kraken would be an exchange, Bitstamp. So those would all be exchangers.

Marco Santori:  Well, some of them. So, BitPay is one that I -- that is probably contested. I believe BitPay's position. And that is just what I'm informed, but I'm not sure of it. But I believe BitPay's position is that they fall into an exemption under the Bank Secrecy Act. I know I just sort of explained what an exchanger was.

But like every rule there are exemptions and BitPay is a good example of that. So, BitPay says they fall under the payment processor exemption. And I won't talk about BitPay and I won’t analyze their business model because --.

Trace Mayer:  They have their own bitcoin lawyers and --.

Marco Santori:  I'm sure they get their own guys to do the work.

Trace Mayer:  And they’ve got their Chief Compliance Officer, who came from Visa I think it is or, you know, so it's not like they're just running around Wild West or something.

Marco Santori:  No, not at all. They have the right people on the issue. But suffice to say their position is that they are a payment processor, a merchant payment processor and under the Bank Secrecy Act even if you would otherwise qualify as an exchanger you might still qualify for an exemption, which means you don't have to register and you don't have to do all those things.

The merchant payment processor exemption is for individuals or I should say it's for businesses who stand in between the customer and the merchant. And they stand -- they participate in the flow of funds. And they have a contract with the merchant that allows them to accept payment on behalf of the merchant. So long as that payment is just enough to cover the goods being purchased then they aren't a money transmitter. They're not a money services business. They’re not an exchanger and provided they satisfy some other requirements. They don't have to register with FinCEN and they don't have to be a financial services company. They can just be a software company.

Trace Mayer:  And there are actually, I think like six exemptions or something and some of those exemptions would also be analogous to other business models on the space. For example, we have some of these wallets that actually hold the private key in cold storage. So, instead of like the individual holding the private keys themselves, they're held with the custodian. And that would be very analogous to like the security company like Brinks or something which is not a money transmitter because they're just taking the cash for the business from Point A to Point B. But they're not transmitting it between people.

Marco Santori:  Yeah. I think those are – well, those two categories are interesting. So, you mention Brinks and that's the armored car exemption. And there is an armored car exemption in the Bank Secrecy Act. Typically, if you're holding private keys and I'm not going to, you know, connect this to any particular companies but typically, if you're holding private keys the regulators are going to say that's taking custody of funds. That's participating in the flow of funds, that's probably if you're a wallet company, receiving money and then transmitting it back to the owner. Back to whomever the owner tells you to send it to. Any number of things. If you're wallet company, you're probably a money transmitter.

Trace Mayer:  If you're holding the private keys.

Marco Santori:  If you're holding private keys, yeah.

Who is a bitcoin exchanger?

Trace Mayer:  Now, what about if you're just the customer?  Like if you're just buying bitcoins from say Coinbase or Circle or you're selling your bitcoins back to them to get dollars into your bank account. Would you, I mean, are you an exchanger too or is it mainly just the company that's the exchanger?  Or is it based on volumes or --.

Marco Santori:  You know, the answer is no. You are probably not an exchanger. FinCEN was careful to identify other categories besides the exchanger category. One of those is the user category. So, you're merely a user of digital currencies and therefore not a regulated entity. If all you're doing is buying bitcoins or just selling bitcoins on your own account not as a business. So, if you're doing it for an investment purpose. And you're using your discretion, your own market timing, your own strategy. Then you're probably not acting as a business and you're probably not a money transmitter. You're probably just a user of digital currencies, an unregulated individual.

Trace Mayer:  And so, my barber, for example, he -- we were talking and he seemed to like this idea of bitcoins. Can I pay him with my bitcoins?  Am I going to be an exchanger if I pay for my haircut?

Marco Santori:  Yeah. You can absolutely pay him with your bitcoins and he can accept them and still not be a money transmitter. That activity alone won't make you a regulated entity. You can go on to any one of those. So as a user, if you focus on the experience here. Day one, I wake up and I decide I want to get into bitcoin. So I walk up to a bitcoin ATM. I put in some cash. I present my wallet to the ATM and it sends me bitcoins. Am I a regulated individual?  No. No, I'm just a user. Just the everyday guy looking to use digital currencies like I would use any government currency. Then I go to -- but is the -- I should say now the guy who runs the ATM. He probably is a regulated entity.

Trace Mayer:  Because he is doing it as a business.

Marco Santori:  Because he is operating it as a business. He is exchanging digital currencies for government currency. So, I get my bitcoins from the ATM. I walk down the street to my barber. And I go to my barber. I say give me a shave. He says okay, that'll be, what is it, a fraction of a bitcoin. And he shaves you and you pay him. Again, you're just a user. You’re just an unregulated entity. And the barber is also just a user. He is an unregulated entity. He can take those bitcoins in exchange for his goods and services, the shaving cream and the shave. And not have to worry about any kind of financial regulation.

Who is a bitcoin administrator?

Trace Mayer:  Okay. Now, what are these administrators?  Are bitcoin miners administrator?

Marco Santori:  So administrator are a different category. So, we went over exchangers and users. An administrator is somebody who puts -- who can issue digital currencies to circulation. And uncritically also withdraw them from circulation. So bitcoin, as a decentralized digital currency system doesn't really have any administrators as far as I can tell. The closest thing we would have would be Satoshi, right. Because he put all this stuff into circulation arguably or maybe the miners put it into circulation. But they can't remove digital these -- this particular digital currency bitcoin from circulation. So no, they're not administrators either.

Trace Mayer:  So now it's not like FinCEN put bitcoin in its guidance, you know, wanted this to catch other things like Litecoins or other virtual currencies. Does this touch other instruments out there like frequent flyer points or gift cards or things of that nature?

Marco Santori:  Yeah. You can even -- you can keep going. You can say World of Warcraft gold, Amazon coins. I think they may have shut that down, but Reddit gold. All of these different valuable things that companies set up for you to acquire, accumulate, trade, spend. These are probably kinds of digital currencies. But FinCEN recognizes this and so they introduced another definition, another distinction.

They said look what we're concerned with, but we're concerned with regulating are not just digital currencies. In fact, they call them virtual currencies. So, we'll start using that terminology, even though most all the community really hates it when you do. It’s not all virtual currencies we're concerned with. It's only convertible virtual currencies. And a convertible virtual currency., and I don't have the definition in front of me.

But generally speaking, it's a currency that has a value in what they call the real currency, government currency. Some kind of ascertainable value, it can be exchanged and used in place of government currency. So, you mentioned airline miles. Airline miles could be a virtual currency. But they're not a convertible virtual currency because you can't go down to Starbucks and spend them on – and spend them for a latte. You can't go to Overstock and buy socks with them. I’ll pack a sock.

Meaning that we always say.  You can't go and buy a pack of socks with your airline miles. Because of that FinCEN is less concerned with them. They don't require these people who use them, who exchange them to be register --

Trace Mayer:  Who even issued them.

Marco Santori:  Or who issued them as money transmitters. Because if you think about it your gift certificates to Best Buy to any other big box retailer. They're a form of currency. They are the stored product and there's a different set of regulations that applies to them but not the stuff that we're talking about. Not the heavy financial services regulation that applies to things like bitcoin.

Trace Mayer:  Yes. Because this is actually very exciting space. There's a website called

Marco Santori:  Yeah.

Trace Mayer:  I don't know if you've seen Pointshound. But it's – you book your hotels on Pointshound and then you get your rewards. And you can choose to get like American Airlines miles or Hawaii airline miles or you can actually get bitcoin back as your reward program. And so I think it's going to be very interesting to see the different types of innovation that begins to happen in the space. Because, you know, you talk about these smart contracts or the digital autonomous corporations using these virtual currency and really it's just a new form of internet protocol. Currency is just one application of that.

Kind of like we have gold and currency is only one application of gold, but we can also use gold in a watch or in a dental filling or something like that. And like our virtual currencies and these smart contracts that are made possible. We could have the actual airline tickets be on the immutable blockchain, for example. Or we could have the gift certificates or even the dollar could be issued on the blockchain and it’s theoretically possible. So we have a lot of different potential ways that these -- that this new virtual commodity can be applied and can be used. Let's see what else is there to kind of cover in this area?

Marco Santori:  You know, I think it depends on how you're approaching this issue. If you are a business person there is a big, you know, there is its own set of concerns and its own challenges and issues that are important to you. If you're an investor and one of those business people there is – there is really a different set of interests and challenges for you. A lot of it overlaps with the interests of the business but some of them are a little different.

If you're just a participant, an every day kind of Joe, who wants to buy some bitcoins and decouple themselves from the banking system as much as you can. A lot of people want to do that. Then there is a whole different set of concerns. They all revolve around privacy, around security, around regulation, around keeping your investments safe and all these other things. So, there are a lot of different approaches to this depending on what your interests are.

Trace Mayer:  So, you know, the US Marshals. They just auctioned off like $20 million worth of bitcoins. They don't -- when they seized cocaine, they don't auction the cocaine, but they auction the bitcoin. So I mean, the US government has come out of affirmatively and actually sold the bitcoin and gotten dollars for them. I mean there's no reason to really be scared that the bitcoins themselves are illegal. It's really what you do with them.

Marco Santori:  I don't think right now it would be fair to characterize bitcoins as contraband. And I think that, you know, you gave the example of the US Marshal auction and yeah, the US Marshal doesn't auction contraband. Now did the US Marshal come out with some kind of official opinion saying oh. bitcoins are legal. No, in fact, FinCEN hasn't even done that and I think that -- I know that FinCEN has specifically come out and corrected people who have said that FinCEN said bitcoins were legal. They say no, you're putting words into our mouth. We never said that. Were just saying this is how they are regulated. So no government agency has come out to say bitcoin is legal. But you know no one, no government agencies come out to say picture frames are legal either.

Trace Mayer:  And that’s that which isn't prohibited is allowed.

Marco Santori:  Yeah, generally that is one of the fundamental maxims of common law.

Trace Mayer:  Yeah. I mean, we have to point to some authority that would say it easily it is illegal.

Marco Santori:  Yes, actually --

Trace Mayer:  In order for there to be due process of law.

Marco Santori:  Yes, especially on the criminal side.

Trace Mayer:  So, for a brand new person coming into bitcoin do they really have much to be scared of from like any type of legal liability?  If they're just coming in to buy twenty or fifty or a hundred dollars worth of bitcoins from a friend or from an ATM or from Coinbase or Circle and then using that with some merchants?

Marco Santori:  Not really. I mean, look it -- if you're looking to get involved in digital currency there's nothing wrong with going and buying some bitcoins. Now, obviously all kinds of things might come up during the purchase or sale if you're buying from an individual or you might be buying from some kind of exchanger that may not be fully compliant with some jurisdictional regulations or regulatory standards. But for you as the individual just looking to buy some bitcoin and experiment. No, there's really nothing to be scared of except, you know, volatility, right.

Trace Mayer:  Yes.

Marco Santori:  As with any currency or commodity it changes value.

Trace Mayer:  Have -- in your practice, for example, have you seen any people, you know, perhaps been robbed or otherwise aggressed against because they’re trying to like enter the space? I mean, you know, if you're going to meet somebody at Starbucks and buy some bitcoins with cash they could be kind of dangerous.

Marco Santori:  Yeah. You hear stories about that kind of stuff. But I haven't had any real first hand or I guess technically since I'm a lawyer everything is second hand. I haven’t had any real second hand experience with that in my practice. I think, you know, most people are smart. It's like if you're going to buy something on Craigslist you’re doing it in a public place. In a well-lit area or you just do it online, you know, there is plenty of people there.

Trace Mayer:  Or with someone you know that already has some bitcoins.

Marco Santori:  Yeah. Absolutely.

Trace Mayer:  Let's see. Are there any other things that we should discuss or things that are kind of off the top your mind that you think our audience here would find valuable?

Marco Santori:  Look, I think for investors, right. I think that it's important to know what -- just what role you're -- the company you're venture investing in plays in the ecosystem. Just because people can use their website to buy and sell bitcoins doesn't mean they're an exchange and it doesn't mean they're very heavily regulated. If you're a business the same applies to you too. And you have to chart your regulatory course carefully.

If you're somebody who is just looking to get into bitcoins and shopping for a wallet provider there’s different metaphors out there. Do you want to go with the bank metaphor, the Give us your bitcoins will take care of them for you metaphor or do you want to go with the wallet metaphor?  Here, here is some software for you to hold onto your bitcoins yourself. It's a whole wide world out there and I would encourage you to do your research and talk to people and come to the conferences and see what you can learn.

Trace Mayer:  Yeah. It's been a wonderful interview. Thanks for sharing a lot of your expertise and knowledge on the subject with us. If people need to get in contact with you. How can they do that?

Marco Santori:  Easiest way is to google my name and you can find me all over the place.

Trace Mayer:  Yeah. So,

Marco Santori:

Trace Mayer:  Okay. Wonderful. Thanks so much for being on the interview with us.

Marco Santori:  You got it. Thanks for having me.

Written by Marco Santori on October 30, 2014.