The Cato Institute

Regulators Struggle to Identify What Exactly Cryptocurrency Is

Cryptocurrencies have moved from the fringes of financial market activity to a $300 billion asset class traded on exchanges and owned by mainstream investors. And, yet a great deal of regulatory uncertainty still surrounds them…

In less than a decade, cryptocurrencies have moved from the fringes of financial market activity to a $300 billion asset class traded on exchanges and owned by mainstream investors. The technology underlying Bitcoin and Ethereum has spawned more than 1,600 new platforms designed to compete with established providers.

Yet a great deal of regulatory uncertainty still surrounds cryptocurrencies, particularly when it comes to whether cryptocurrencies are securities — which affects who can buy and hold them, who can deal in them and keep custody of them, and what disclosure laws pertain to them.

An unresolved question that has recently gained prominence with the advent of ICOs (initial coin offerings) is whether new issues of cryptocurrency are disguised securities offerings operating outside of applicable laws.

For example, one former regulator from the Commodity Futures Trading Commission (CFTC) has suggested that the second-most-popular cryptocurrency, Ethereum, is a security to which securities regulations should apply retroactively. However, this view has been recently contradicted by a top official at the Securities and Exchange Commission (SEC), who stated that the decentralized nature of the Ethereum network means its cryptocurrency does not fit the established definition of a security.

An overzealous application of securities laws to cryptocurrencies could raise barriers to investor access and capital formation, which would have a chilling effect on the development of cryptocurrency technology and markets. As a sitting regulator recently warned, cryptocurrencies’ many novel features can lead policymakers to focus excessively on their potential harm rather than on their likely benefits.

A clear, reasonable, and appropriate definition of what qualifies as a security would allow the market for cryptocurrencies to develop while also enabling securities regulators to properly fulfill their mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

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The Government Wants to Hack You: What You Need to Know About #ApplevsFBI…..

The first thing to understand about Apple’s latest fight with the FBI—over a court order to help unlock the deceased San Bernardino shooter’s phone—is that it has very little to do with the San Bernardino shooter’s phone. 

It’s not even, really, the latest round of the Crypto Wars—the long running debate about how law enforcement and intelligence agencies can adapt to the growing ubiquity of uncrackable encryption tools. 

Cato scholar Julian Sanchez says, “It’s a fight over the future of high-tech surveillance, the trust infrastructure undergirding the global software ecosystem, and how far technology companies and software developers can be conscripted as unwilling suppliers of hacking tools for governments.”

It’s also the public face of a conflict that will undoubtedly be continued in secret—and is likely already well underway.

The Department of Justice is demanding that Apple, maker of the iPhone 5c used by one of the ISIS-inspired San Bernardino shooters, make new software that would allow the FBI to bypass the passcode lockout and data-erasure security measures on the phone so the FBI can see if there is any additional evidence relevant to the shooting on the device. Doing so would make every American more vulnerable to identity theft and cyber crime.

In a blistering letter, Apple CEO Tim Cook pledged to fight the demand, warning that the court order would set a “dangerous precedent” threatening the security of millions worldwide.

Can Apple be forced to hack its own iPhones? The answer may depend on an 18th-century law you’ve never heard of…

To persuade a judge to compel Apple’s assistance, the feds turned to a 1789 law, the All-Writs Act — in essence, a catchall empowering courts to issue orders that are necessary to carry out other legal functions. A search warrant for an apartment, for instance, might come with an order compelling the landlord to produce the key.

Traditionally, the All-Writs Act has been used to force companies to cough up information they already have about their own customers, like a phone company ordered to turn over a criminal suspect’s billing records.

Here, Apple engineers are effectively being conscripted to build forensic software — a hacking app — for the FBI. That’s like ordering a locksmith to help crack a safe, or a linguist to make sense of a suspect’s diary, against their will, if necessary.

Instead of being asked to hand over its own information, Apple is being instructed to help hack into someone else’s — someone whose only connection to the company was owning a phone that Apple produced.

Four important pieces of context are necessary to see the trouble with the Apple order:

1. This offers the government a way to make tech companies help with investigations.  Law enforcement and intelligence agencies have for years wanted to require companies to build the government backdoors into secure devices and messaging apps. In the face of strong opposition from tech companies, security experts and civil liberties groups, Congress has thus far refused to do so. The government is seeking an entry point from the courts it hasn’t been able to obtain legislatively.

2. This public fight could affect private orders from the government. The precedent set in the public fight may help determine how ambitious the government can be in seeking secret orders that would require companies to produce hacking or surveillance tools meant to compromise their devices and applications.

3. The consequences of a precedent permitting this sort of coding conscription are likely to be enormous in scope. Once it has been established that Apple can be forced to build one skeleton key, the inevitable flood of similar requests—from governments at all levels, foreign and domestic—could effectively force Apple and its peers to develop internal departments dedicated to building spyware for governments.

4. The effects of a win for the FBI in this case almost certainly won’t be limited to smartphones. Armed with code blessed by the developer’s secret key, governments will be able to deliver spyware in the form of trusted updates to a host of sensor-enabled appliances. Don’t just think of the webcam and microphone on your laptop, but voice-control devices like Amazon’s Echo, smart televisions, network routers, wearable computing devices and even Hello Barbie.

Apple’s resistance to the FBI’s order is not just over whether the federal government can read one dead terrorism suspect’s phone, but whether technology companies can be conscripted to undermine global trust in our computing devices.

A court-mandated encryption “back door” ruling will harm the entire U.S. technology sector. It will not only cost jobs, but it will put the financial security of every American at risk by leading to online products and services that are more vulnerable to hackers and hostile intelligence services.

That’s a staggeringly high price to pay for any investigation.

Learn more about Apple’s fight and the ongoing Crypto Wars…..

• “This Is the Real Reason Apple Is Fighting the FBI,” by Julian Sanchez
• “Codes, Ciphers, and the Constitution,” by Patrick G. Eddington
• “Can an 18th-Century Law Force Apple into Hacking Killer’s Phone?,” by Julian Sanchez