Bitcoin Series 21: BTC, Retirement Plans and IRAs

Louisiana Baby Bonds, circa 1880.  Source:  Wikimedia Commons

Louisiana Baby Bonds, circa 1880.  Source: Wikimedia Commons

Today I was invited to help give a Continuing Legal Education presentation on "Retirement Plan and IRA Investment in Bitcoin and other Cryptocurrencies" for the Practicing Law Institute being taught by two of the top benefits lawyers in the US,  Arthur Kohn of Cleary Gottlieb and Howard Pianko of Seyfarth Shaw.  Amusing tidbit: Howard wrote the "Pianko Letter" that generated the guidance for futures contracts under ERISA back in 1982.

Some observations from the call:

1.  There are plenty of regulations across all parts of the financial systems that already apply to bitcoin.   Just like with AML/KYC laws for money service businesses, if cryptocurrencies are to interact with retirement plans, there is a whole set of regulatory issues that must be thought through.  As was said in the Senate hearings last year relating to AML and KYC regulation, it makes a lot of sense to see if the existing legislation can be interpreted in order to adequately manage cryptocurrencies before worrying about adding new legislation.

Bitcoin is an incredible technical breakthrough, but in many financial and economic domains, there are already frameworks, laws and principles that can be used to think about it.   

2.  This is a complex and subtle topic.  We spent hours before and during the call trying to see which framework (currency, commodity money, intangible, contract, collectible) fits different aspects of each regulation as it applies to bitcoin.   We definitely made some progress, but even with two very knowledgeable experts in the room, there was still room for disagreement and spirited debate. 

3.  The thorniest topic actually falls under ERISA and has to with the 'indicia of ownership' standard aka how do you prove you own the bitcoins and they have nexus to the US (a requirement under the regulations).  

Certainly you can demonstrate that you have the private key (that part is easy), but how do you demonstrate that nobody else does?  You might consider that bearer instruments are a good analogy but there the indicia are clear -- whoever physically holds the bearer bond owns it.   By contrast, any number of people can have a copy of the private key without that being obvious.   I personally suspect the answer lies somewhere in the direction of multi-signature transactions and formal custodians, but this needs work and, ultimately, some standardization.  

This is a question that will come up again and again.   For example:  how does a hedge fund undergoing its annual audit prove to its accounting firm that it is, in fact, the *sole* owner of 53,432 bitcoins?

4.  The registration attendee list was something like 40% big name law firms, 40% FT 500 firms, 20% regulators.  There was only one BTC firm listening in. 

I believe there is absolutely a need for BTC firms to be reaching out more aggressively to the existing financial services field and, IMO, forming a cross-disciplinary group (BTC technical experts, financial services executives, lawyers, accountants) to be working on these issues and providing best practice recommendations and guidelines to regulators and other related parties (aka auditors).  

Each side needs expertise from the other side in order to get to the right answer and, without everyone in the room, silly mistakes will be made and/or poorly drafted regulations will be written.

I am including the presentation in case you are interested.   The written material is a bit dry and just used to frame the issues - the interesting part was the debate and discussion it stimulated.

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Posted on February 27, 2014 and filed under Bitcoin.