What Grinds My Gears: Banning Bitcoin & The Long Arc of an Infinite Revolution

Encryption has long walked the line between weapon and tool. While the so-called “Crypto Wars” ended in the 1990’s, in 2013, Edward Snowden showed us why the fight was long from over. This week, we discuss the brink of another type of Crypto War, the one over cryptocurrencies.

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Meltem Demirors
From Meltem Demirors and Jill Carlson, welcome to What Grinds My Gears, a podcast about bizarre and buzz-worthy happenings in the world of cryptocurrency. Each week, we delve in to one key theme, and examine it through a broader financial, political, and cultural lens to learn from the past, understand the present, and explore the future.

Announcer
All opinions expressed by Meltem, Jill, and podcast guest are solely their own opinions. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Meltem, Jill, and guest may maintain positions in the currencies, assets, and companies discussed in this podcast.

Jill Carlson
This podcast is presented by BlockWorks Group, the only media production company I trust. For exclusive content and events on crypto, visit them at blockworksgroup.io.

In the 1990s, as mobile phones were first taking off, the NSA introduced a mandatory bit of technology to be integrated into them, the clipper chip. The clipper chip was part of the Clinton administration's program to "allow federal state and local law enforcement officials the ability to decode intercepted voice and data transmissions". In other words, this would give the government a backdoor.

This was just one battle waged in what has come to be called the crypto wars, the fight between government and, often, individuals, technologists, and even corporations over how encryption technology should be treated.

Meltem Demirors
Post World War II encryption was treated solely as a munition's export, meaning a weapon, and was regulated as such. Now, in the 1960s, they started to receive some pushback from financial institutions. Finally, in the 1990s, as the internet and technologies like mobile phones started to takeoff, this all came to head with this clipper chip.

Now, if you've been following the news, this isn't new to you at all. We've seen companies like Apple take a stand and encrypt iPhone data in such a way that even the company itself would not be able to access it. We've seen T-shirts with export-restricted RSA encryption source code printed on them making the shirt an export-restricted munition or a weapon.

Now, we may have thought that the crypto wars ended in the '90s with the Cypherpunks, but Edward Snowden had showed us otherwise. Now, we may be on the brink of another type of crypto war.

This week, we're going to talk about Washington finally taking notice of this little thing we call Bitcoin.

Jill Carlson
So, it's been a big month for Bitcoin in the United States, and specifically in Washington. So, over the course of about one week and this is a couple of weeks ago now, we saw the likes of Donald Trump, obviously, the president, the chairman of the federal reserve, the secretary of the treasury, all of these people saying the words Bitcoin for the first time and finally taking notice.

Now, it seems like a lot of this has come on the back of the Libra announcement because as we all know, Facebook even sneezes these days in Capitol Hill and Washington had jumped all over it, and it's been a really interesting time to observe how the framing of Libra as a cryptocurrency or as another player in this space has affected the way that Bitcoin and these other technologies have been received.

So, let's just run quickly through the timeline here. Shall we, Meltem?

Meltem Demirors
Yes. I like to call this Crypto Goes To Washington, little Mr. Bitcoin or Ms. Bitcoin goes to Washington. So, I'll kick it off. What we can do is maybe just highlight what we thought was most interesting about some of the remarks that have been made over that one week. So, Thursday, I believe it was July 17th, but you can check the date, Jerome Powell gave a testimony in the senate, and he compared Bitcoin to-

Jill Carlson
July 11th.

Meltem Demirors
July 11th. Thanks, Jill. He compared Bitcoin to digital gold. What was so amazing to me about watching the Jerome Powell testimony, and you can actually see snippets of it on Twitter, where people laid his words over the testimony, is he actually described Bitcoin really well.

Jill Carlson
Yeah. I mean, he said people use it as an alternative to gold. It's a speculative store value, which I would say is actually spot on. He says no one uses Bitcoin for payments, which is more or less true today. We may see that change, of course, as lightning continues to be developed, but he got a lot right.

Meltem Demirors
Yeah. I was amazed at the level of nuance. So, what I want to know is what Bitcoin maximalist, Jay Powell, been talking, too.

Jill Carlson
Well, the other funny thing here about this is that, of course, Powell earlier this past week, he cut interest rates for the first time since 2008. It was a very controversial move. There were a lot of folks saying, "Oh, he's only doing this because he's in Trump's back pocket, and Donald Trump threatened to fire the chairman of the fed and folks at the fed if they didn't find a way to stimulate the economy further. Then here, three weeks prior to this, you have the same guy standing up saying. "Yeah. Bitcoin is treated a lot like gold, guys."

Meltem Demirors
Totally, and he's not the only one at the fed, by the way, who talks about Bitcoin. Bullard at the St. Louis fed actually last week released a new research paper that he and his team at the fed have written. He's been writing about Bitcoin since about 2013, not always getting it right, but the fed has actually been pretty active. So, let's go to Trump.

So, the next day, July 12th, our chief executive himself, Mr. Donald Trump, POTUS, if you will, tweeted about Bitcoin. Do you want to read the tweet, Jill, or do you want me to?

Jill Carlson
Yeah. I'm not going to be able to do a good Donald Trump impression. My dad does a really good Donald Trump impression. He even has the hair for it.

Meltem Demirors
Oh, wow!

Jill Carlson
I'll just read this in my regular voice. So, this was actually the evening of July 11th. Donald Trump tweets, "I'm not a fan of Bitcoin and other Cryptocurrencies, which are not money and whose value is highly volatile and based on thin air. Unregulated crypto assets can facilitate unlawful behavior, including drug trade and other legal activities. Similarly, Facebook's Libra's virtual currency will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new banking charter, and become subject to all banking regulations just like other banks, both national and international. We have only one real currency in the USA, and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the world, and it will always stay that way. It is called the United States Dollar."

Now, there's so much to unpack there. The first thing I want to point out is the sheer irony that he's saying the US dollar is stronger than ever when, really, what Donald Trump has been calling for over the last year has been a weaker dollar.

Meltem Demirors
It's pretty amazing. Look, if we actually look at the text of the tweet, what I think is really interesting about it, number one, he differentiates between unregulated crypto assets and Bitcoin. So, there's a clear line here where the administration is recognizing, "Oh, there are regulated activities happening with these things." So, I think that's number one.

Number two is Facebook's Libra "virtual currency", the way it's referenced, the virtual currency part is put in air quotes, which I think shows some awareness from the administration that Bitcoin and other cryptocurrencies are fundamentally different from what Facebook is proposing to do. So, I think that's really interesting.

Then the third component is really what you see here and when we get to Mnuchin's press conference, we can talk about this more, is what Trump is really saying here is, "Look, regulated activity in this country is fine. If you want to operate in the financial market and speculate, it's fine, but if you run a regulated business, if you conduct business activity that's typically regulated under, say, bank regulations, follow the rules."

I think those three things are really interesting. I did not expect that level of nuance.

Jill Carlson
I mean, let's be honest. Donald Trump I don't think actually wrote these tweets.

Meltem Demirors
Okay. I think Neutron wrote it.

Jill Carlson
I think that's absolutely right. There is a decent amount of nuance in here. Something else that stood out to me, though, is he says, "Unregulated crypto assets can facilitate unlawful behavior," blah, blah, blah. Look, that's all true. I'm not going to sit here and pretend that that's not, but just the sheer double think that can go on with people who are newer to the space in terms of seeing that, but not seeing that the same is true of cash is just shocking to me.

This is, I think, a good segue probably into what Mnuchin had to say as well.

Meltem Demirors
Yup. So, then the next Monday ... Was it Monday or Friday that he did the press conference? I honestly don't recall.

Jill Carlson
We keep messing up these dates, so let's not every try it.

Meltem Demirors
Whatever.

Jill Carlson
I think it's July 23rd or 24th.

Meltem Demirors
Okay. Order of events, Mnuchin does a press conference right after the Trump tweet. He does this press conference. Basically, in the press conference, what he laid out, which I thought was, again, super nuanced is, "Bitcoin is highly speculative. Do your own research if you want to speculate on Bitcoin. Follow the rules. If you run a Bitcoin company and you engaging in activity that's normally regulated, we're going to regulate you, and if you try to use Bitcoin for unlawful activity, we will find you and treat you as criminal." That's basically what he said.

Jill Carlson
Yeah, that's right. He had this whole comparison to Bitcoin as this Swiss bank account, and we're going to avoid that becoming the case. We're going to avoid this being yet another way for people to basically get their money out of the regulated financial system.

There, again, I just want to point out, if you think that Bitcoin is the issue here, you want to take a good long hard look at cash. Of course, Mnuchin is the one who ... There's that great meme, that great photograph of him and his wife holding up a palette of, I think it was $100 bills. Do you remember this?

Meltem Demirors
Oh, yeah.

Jill Carlson
Everyone said, "Oh, they look like Cruella de Vil," or the characters, the evil villains out of a Disney movie. Just again, the irony of, "Okay. Here you are holding up the real tool that is actually used for money laundering and all of these illicit activity, and instead you're going to come after Bitcoin whose entire market cap is a small fraction of what goes on in cash, and also in the regulated banking system."

Meltem Demirors
Look, at the end of the day, who doesn't want to have their signature on dollar bills? I mean, secretary of the treasury sounds like an amazing job, not going to lie.

Jill Carlson
I mean, you can go back through history of kings putting their faces on coins.

Meltem Demirors
Oh, totally. Look at ICOs, right? It's similar, "Let's print some money and put our face on it." Anyways, we won't get into that, but look, I thought overall the tone of that press conference was really interesting. I also thought the delineation between regulated capital markets activity and speculative assets was really important. I think, basically, what they're saying and Mnuchin in subsequent interviews has said, "If you want to buy Bitcoin and speculate on it, I have no issue with that, so long as they follow the rules and do their own research," right?

There are tons of assets that people like to dive that are speculative in nature. People buy lottery tickets. Look, all you have to do is look at penny stocks, right? There are tons of assets that people buy, as long as you follow the rules of this country when you're issuing these assets, when you're listing them, when you're trading them, when you're marketing them, go crazy. Do your own research.

He doesn't think Bitcoin has value, but, again, I think the really important nuance here is the government shouldn't be the ones deciding what is and is not good, right? We'll get into this when we talk about what the SEC does in their role, but it's not really up to regulators to decide what people should or should not have. It's up to them to enforce the laws of the country as they stand, and make new laws if they're needed. So, I thought that was actually quite good.

All right. Let's get into the darker side. So, the next day, there's senate banking hearing with just David Marcus, who's the head of Libra, Facebook's digital payment project. I refuse to call it a cryptocurrency. It's a digital payment project. Not much really to say there. I mean, I think it was a typical hearing, where no real questions were insert, and mostly senators just wanted to get soundbites in.

Jill Carlson
Yeah. I mean, I'll say I was pretty impressed, actually, though, on both sides. I think that my last point of reference on this was, I guess, the Zuck hearings in a lot of ways. This couldn't have been more different, right? I think that the senators came equipped, yes, with their soundbites, but with some pretty legitimate questions and on the other side of it, I have to say I think that David Marcus did a very good job of being educational and factual, and also, I guess, pretty humble for what they have to say.

Meltem Demirors
Interesting. Well, let's talk about what happened Wednesday. So, on Wednesday, there was a house financial services committee meeting, so not the senate of the house, the other part of America's congress.

Jill Carlson
I think one of my good friends might have been there, Meltem.

Meltem Demirors
Yeah. We can talk about this. So, first, they had a morning hearing with just David Marcus, and I think what's most interesting about the morning hearing was what some of the Republican congressman said. As you know, Maxine Waters is the chairwoman of the Financial Services Committee, but the ranking member, meaning the member of the non-majority party is Representative McHenry.

He's Republican, and he gave a really interesting five-minute opening commentary, where he basically said, "Look, Satoshi, 10 years ago, introduced this idea to the world, the idea of Bitcoin. Bitcoin is here. We can't stop it. We can't kill it. It's not going anywhere. So, what we as regulators can do and policymakers can do, we're either going to figure out how to take this new technology and embrace it, and take what Satoshi gave us and make it work for America or we're going to bury our head in the sand, and that's going to put us at a great disadvantage," something to that regard.

Hearing some of the Republican congressmen talking about Satoshi, one of them talked about GitHub and IRC. Another one was talking about the dollar bill and not being able to sense or use of the US dollar on a global basis. It was really interesting to see the level of knowledge, but also the level of nuance, again, in some of the commentary questioning.

Jill Carlson
Yeah. Absolutely. The stark contrast of that versus the talking heads status of Trump and Mnuchin that we saw earlier in the week I thought was really notable. Meltem, I got to ask you, so what was it like to be up there and to hear the word Shitcoin, to be asked, "Are you familiar with Shitcoins versus Bitcoin?" You, the Shitcoin queen, what was that experience? Did you know the question was coming?

Meltem Demirors
No. Look, so the way it works in these hearings-

Jill Carlson
You really didn't know it was coming. Wow!

Meltem Demirors
No. So, the way it works in these hearings, just to give people an inside peek, I don't know anything about Washington or politics, right? So, this was all new to me. So, what's really interesting, again, the Democrats are the majority party. So, whenever there's a hearing, the majority party gets to invite four witnesses, and the minority party, the Republicans, get to invite one.

The way it will work is the witnesses will give a five-minute testimony. Everything in the house is five-minute segments, and it's timed. If you go over, you get gaveled and stopped. So, the way it will work is the chairwoman who's of the majority party will give opening remarks, then the minority member will give opening remarks, then the witnesses will each give their five-minute opening remarks, and then it will go into a Q&A, where it will start with the Democrats, Democratic representative, typically in order of seniority, will have five minutes to interrogate the witnesses or just to talk if they just want to use that five minutes to talk.

Then it will to a minority party member, so the Republicans, and then it will go back and forth until people are done with their questions. Then there will be a five-minute wrap up from the chairwoman and the minority member. So, that's how it works.

So, I gave my testimony. I had written my testimony over the weekend. Shout out to the folks at Coin Center, who were really helpful. A few other people read through it, but, really, it was my words. You can read it online. It's about 17 pages, and then I distilled it into a five-minute opening.

Really, what I talked about was Bitcoin, and why Bitcoin is such an important innovation, and really drawing a distinction between technology, open source code, and open network like the internet, which is the Bitcoin network, and companies building on top of this network, which in this country are there are many Bitcoin companies that provide various products and services that interact with Bitcoin. The majority of these, if not all of them, follow rules and regulations. So, that's really what we talked about.

McHenry's office, so he's the Republican ranking member of the committee, they all coordinate amongst one another. So, if you listen to the questioning from the Republican during both the Marcus hearing and the witness hearing after, they clearly were aligned. Everyone received the testimony. So, I had to have someone drop off, I think, 150 copies of my printed out testimony ahead of time. So, there's a whole process. It's posted online. It's on film.

The Republicans, they were really coordinated in their messaging, and they were really knowledgeable. Now, what you may already know is Representative Davidson is someone who's been interacting with the crypto community for some time along with Jared Polis, and a few others. So, what I thought was really interesting, in the morning hearing, he was giving me a funny look, and I was like, "Did I do something wrong? Do I have lipstick on my teeth?"

Then when he started his questioning in the afternoon session, when it was his five-minute turn, he started off with some general commentary on how important Bitcoin was, and everything else, but then when he turned to me and he said, "Ms. Demirors," and then he started his question. The moment he said Shitcoin, I'm sitting there, right? You have five minutes. You have to respond very succinctly because people cut you off, and it's very high stress.

I was like, "Oh, my God! What do I do?"

So, you can see in the video a smirk or a smile or something, and I was like, "I am. Yes."

Then he's like-

Jill Carlson
Yeah. You said it so seriously. Your mask did not slip for a second.

Meltem Demirors
I don't know. Then he asked me to explain the difference between Bitcoin and Shitcoins. I was like, "Okay. I'm not going to talk about Shitcoins. I don't want to be known as the Shitcoin queen." So, I really just tried to use every opportunity to talk about Bitcoin because look, at the end of the day, I think what we have to remember is people who've only been reading the news headlines about Bitcoin and crypto, they think it's all garbage and people are out to scam and just drugs on the internet, and that's not what it is.

Getting someone to understand Bitcoin is like step one of a very long process. So, to me, the only thing we should be doing right now is just introducing people to, "This is what Bitcoin is and here's how it works, and here's why it matters," because everything else is just derivative of Bitcoin.

Jill Carlson
Yeah.

Meltem Demirors
I think that's what we need.

Jill Carlson
No. I mean, yeah, go ahead.

Meltem Demirors
Look. So, it was an interesting experience. Overall, I think there are parts of that day where Bitcoin really stood out, and there were some comments that were made that really I think were good little snippets to get in about Bitcoin.

Jill Carlson
I was going to say, I mean, I have to give you a lot of credit, Meltem, because I think that you could not have represented us better up there, and I'm not just saying that as your friend and your podcast cohost, but it was remarkable to watch as time went on over the course of the hearing how the conversation really started to change from being about, "Okay. We have these cryptocurrencies, and then we have Libra, and we're thinking of them all in the same bucket," to really everyone in the room coming along to this much more nuanced understanding of, "Okay. No. There's this thing called Libra that's new and developing, and we don't quite know what it is yet, but it's probably more keen to a payment's network or a digital currency versus something like Bitcoin that is a tried and true cryptocurrency." Then, of course, somewhere in the middle, we have Shitcoins, and we're still not quite sure what to do with those, but, yeah, it was truly remarkable.

Meltem Demirors
Look, there's going to be more hearings on Bitcoin, right? I will say the Democrats invited a lot of academics as their witnesses, which was well and good. I think the Republicans deliberately invited someone from the industry to just talk about what's happening in the industry. So, I was very happy to be there and to have had the opportunity. I would encourage other people as these opportunities present themselves to think really carefully about the platform you're given, engage with folks who are experienced in the world of Washington, D.C. To help you navigate how to effectively deliver messages, but there's going to be more.

I think what was a really great takeaway is Chairwoman Waters did say after hearing and in subsequent conversations, there will be more hearings on Libra, but they're going to treat that separately. Then I think they want to start a separate conversation around Bitcoin and cryptocurrencies. So, that separation, I think, hopefully, is something that was accomplished.

Jill Carlson
That's great. I mean, I'll take that as a win. It's funny. I think that I've said this a few times, but previously, it was Bitcoin versus the US dollar, right? It was very easy, I think, for outsiders or folks in Washington or whoever it might be to look at the two and say, "Bitcoin bad, US dollar good."

Meltem Demirors
Right.

Jill Carlson
Whether or not Libra has intentionally done this or what the framing was meant to be, in a lot of ways, now people look at it and say, "Bitcoin versus Libra. Okay. Good, bad, ugly. What's going on here?" It's just cast Bitcoin in a very, very different light.

Meltem Demirors
Totally, but then, look, it was a crazy week. I think I was very impressed with the level of nuance that was demonstrated, and really the specification of the conversation, but I want to switch gears a bit. So, the hill Washington, D.C. had this crypto awakening, and to be determined where that goes. They're out of session right now. They're on recess for the next month. So, when they come back in September, going into election season, it will be interesting to see what candidates start to pick up on. Bitcoins start to core the Bitcoin community for contribution, maybe. This is the game of politics after all. So, we'll see.

What I really want to talk about is there's all this commentary around Bitcoin. People want to have conversations, but there's really still so many fundamental misunderstandings about Bitcoin and regulation. So, let's talk about what is the status of Bitcoin.

Jill Carlson
Well, it's unregulated, right?

Meltem Demirors
As someone who's been in this industry for a very long time, and you as well, that is completely false. So, let's dive in. Jill, Bitcoin is not regulated.

Jill Carlson
Yeah. So, this is a meme that goes round and round of, "Oh, well, Bitcoin, it exists outside of the law. It's not regulated." Of course, for anyone who's built something with Bitcoin, who's used Bitcoin, who's bought Bitcoin, you know very well that Bitcoin is heavily regulated.

Meltem Demirors
Jill, it's the Wild West.

Jill Carlson
It may be the Wild West, but there were still sheriffs trolling around out there.

Meltem Demirors
Yeah, and expensive lawyers, and accountants and, basically, everything.

Jill Carlson
Exactly. We've got every sheriff and his brother trying to get involved in Bitcoin from the SEC, the CFTC, the IRS. We'll run through them all here.

Meltem Demirors
Okay. So, who's the biggest, baddest daddy of them all when it comes to regulation in US capital markets?

Jill Carlson
The SEC, so the Securities-

Meltem Demirors
SEC, baby.

Jill Carlson
Exactly.

Meltem Demirors
What does the SEC do?

Jill Carlson
So, it's the Securities and Exchange Commission. They regulate anything that is a security, including determining whether or not something is a security and, therefore, whether or not it has gone through its securities filing process and securities offering process. So, that is where things get really interesting for tokens and ICOs, et cetera, right? Because the SEC has oversight of all securities issuance. So, if you're token, in fact, is a security, then you should have filed with the SEC.

Meltem Demirors
That's right. So, the SEC, as a licensed of FINRA representative, I can tell you this, the SEC, the Investment Act of 1933, 1940, basically, give the SEC purview over the issuance of new securities. So, if you're a company and you want to raise money from the public in the form of an equity or debt offering, you're security, and you would follow these rules, and then the Securities and Exchange Act is the regulation of secondary trading of securities.

So, once you've been approved to issue a security, now you're trading it, you're making markets. There are all sorts of rules around how all of that happens, and the rules of the SEC are typically implemented at the individual company level by issuers themselves.

So, companies offering investments, whether that's a corporation offering debt or equity, a municipality offering some bond, whether that's a investment firm like a hedge fund and a mutual fund or another offer a mutual fund offering an investment vehicle, tons of different things fall under the purview of the SEC. When it comes to Bitcoin, the SEC, after a period of contemplation, has decided what.

Jill Carlson
Well, so, they've decided that it's not a security. I want to go back in history just for a second, though. It was two years ago, almost exactly to the day. It was the end of July in 2017. SEC came out with one of its first statements ever about cryptocurrency. That was specifically with regards to the DOW tokens. So, for the OGs in the room, you'll remember the Ethereum DOW was the first decentralized autonomous organization that ended up getting hacked. A bunch of people bought shares in that DOW.

Meltem Demirors
Objection. It did not get hacked. It was a smart contract with a flaw, and the flaw was exploited, but it was legal exploitation.

Jill Carlson
Okay. Fine.

Meltem Demirors
Not a hack, Jill.

Jill Carlson
If you want to get specific about it, which the SEC does appreciate a high level of specificity, you've been hanging out with a lot of lawyers, Meltem, but the SEC came out and concluded that DOW tokens were securities, but in their statement, the SEC Chairman Jay Clayton at the time, he said that they were, in fact, digital securities that had been bought and exchanged for ether, a virtual currency. So, that was the first statement that gave us a hint that Bitcoin and Ethereum might not, in fact, be securities.

Meltem Demirors
That is correct. So, Bitcoin, not a security according to the SEC. So, you know what? They don't have to deal with it. Now, let's go to the second largest regulator when it comes to markets, the CFTC. The CFTC is the Commodities and Futures Trade Commission, and they have oversights of commodities and commodities markets, as well as futures derivative swaps and all sorts of product constructions that rely on future physical delivery of a product.

Jill Carlson
Derivatives, basically.

Meltem Demirors
Exactly. Right. Synthetics, things that allow markets to grow far beyond their physical capacity. So, here's what's really interesting about the CFTC. The CFTC is an interesting agency. We probably all are familiar with the former CFTC Commissioner Mr. Giancarlo, who we love and we called-

Jill Carlson
Bitcoin Dad.

Meltem Demirors
...Crypto Dad, Bitcoin Daddy, yup. He recently left the CFTC. There's now a new commissioner who doesn't have a moniker yet, but maybe he will at some point in the future that the CFTC, basically, has said Bitcoin is a digital commodity, and so they're only going to regulate swaps and futures on Bitcoin and other crypto assets as part of their mandate.

Jill Carlson
That's right. There's a lot of confusion out there about commodities and the CFTC, in general. People will often get confused. People who aren't necessarily deep in the finance space or spending all day on this will get confused about what regulations apply to commodities since they're not securities.

One area in particular that's relevant to highlight here, especially as we talk about Bitcoin and crypto, is that there isn't the same notion of insider trading when it comes to commodities as there it is with securities, right? Even though, of course, there's still privileged access to information if, say, you are running an airline that's highly dependent on oil or if you're a gold miner, et cetera, you may have privileged access to what supply is going to look like, et cetera, but it's ultimately a very different market that's subject to very different regulations from securities.

Meltem Demirors
What's really interesting is whenever people talk about Bitcoin, what I find so interesting is people are like, "Oh, there's insider trading." Commodities are not securities. So, in securities, you can't have information asymmetry, which is why the SEC and FINRA, which is a self-regulatory organization, but it's focused on rules and conduct, they have a lot of rules around information asymmetry, what you can and can't do, and there have been a lot of lawsuits about insider trading, most notably one involving Martha Stewart, believe it or not, but commodities are not securities.

So, in the commodities world, there is no insider trading. There is not real information asymmetry because commodities are physically produced, right? When I was trading ethanol and methanol, which are commodities derived from natural gas, I would actually go to Iowa and look at cornfields, corn is used to produce ethanol, and we would try to figure out what the supply curve was going to look like, demand was going to look like based on plastics production.

So, commodities are very different. There is no concept of insider trading. So, I think a lot of people when they talk about Bitcoin and information asymmetry, that's something they don't quite grasp.

Jill Carlson
That's right. Interestingly, I'll just tie this back very quickly to what Jay Powell said in his statement. Again, he's the Fed Chairman comparing Bitcoin to gold. It makes a lot of sense thinking about Bitcoin in that framework under the auspices of the CFTC to me, given all of the perils there. Moving right along because we've got a lot of other agencies to get through, what's next? The IRS.

Meltem Demirors
Yes, the IRS. "We know you need to pay us taxes. We can't tell you how much, but once you figure it out, and once you think you figured it out, we'll look at it. You'll know if we think you're right." That's basically the IRS. It's so bad.

The IRS has said Bitcoin is property. It's taxed as property, meaning capital gains rules apply. If you've held Bitcoin for less than a year, it's taxed as ordinary income. If you've held it for longer than a year, it is taxed as capital gains at the capital gains rate, which is typically 20%.

Jill Carlson
That's right. So, pay your taxes, kiddos. Don't get audited. Keep good records of everything, even though the crypto exchanges aren't going to help you do that.

Meltem Demirors
Look, I've been audited by the IRS. I was audited when I was in grad school. I had good records, luckily. I keep great records. You can use services. I personally use Token Tax, but there are a number of other ones out there that help you pull data directly from exchanges. The IRS has been getting inspired about Bitcoin. They did this John DOW summons of coin base in their customers, and they've now gone on a little fishing trip, where they're sending out letters to a bunch of different coin base users.

So, look, the IRS is going to come for you. Two things in America are certain. You're going to die and you're going to pay taxes, in reverse order and, hopefully, not related to one another.

Jill Carlson
This is why, though, crypto and cryo are so popular. It's people trying to avoid those, but-

Meltem Demirors
That's amazing, Jill.

Jill Carlson
...I don't think it's going to happen.

Meltem Demirors
Crypto and cryo.

Jill Carlson
There you go.

Meltem Demirors
Taxes and debt. I love that.

Jill Carlson
All right. Who else have we got here on the docket? FinCEN. So, FinCEN is the agency that is in-charge of basically all KYC and AML enforcement. KYC and AML is-

Meltem Demirors
I think it's Financial Crimes Enforcement Network, I think is that is.

Jill Carlson
There we go. So, KYC, know your customer rules. This is what banks have to abide by to make sure that they know who's on the other side of all of the transactions going through them. AML, anti-money laundering speaks for itself here. FinCEN, of course, collaborates with OFAC, which is the Office of Financial Assets Control, to make sure that the folks on the other side of the transactions going through the US system are not people who have been sanctioned by the US government.

So, it starts to get really hairy here in terms of thinking about what the actual ... If the IRS comes and audits you and finds that you haven't paid some of your taxes, you're going to get a big old fine and a slap on the wrist. If OFAC comes along and discovers that you have been intentionally or unintentionally sending money to terrorists or people on the sanctions list, it's going to be a much, much bigger deal. So, we can start to see the range of trouble that you can get in with the US government when it comes to Bitcoin, which contrary to popular belief is very much regulated.

Meltem Demirors
That is very true. Let's talk about-

Jill Carlson
All right. What else do we have?

Meltem Demirors
So, let's talk about the OCC, the Office of the Controller of the Currency. So, the OCC is an interesting regulatory agency for this reason. They tried to create a fintech sandbox, where, basically, what they were going to do is you know in the US there's this patchwork approach to regulation where you have federal regulation, but you also have state level regulation.

Now, what's really interesting is states in the United States of America have a very specific area of regulation that is theirs, and there is a loan to oversee, and that is money transmission. So, even though we have all of these federal agencies that have oversight of markets and all of these other things at the federal level, super nationally, right? The states at the state level govern transmission of money across state lines.

So, money transmission is a hot button issue. The State Bankers Association or SBA, basically, got wind of the fact that the OCC was going to try to create a fintech charter, whereby smaller companies wouldn't have to apply with SBA, state banking laws or money transmission laws, but they were actually going to be able to use a different regulatory regime at the federal level until they got to a certain size. As we know, the revolution of the United States of America in 1776 was really important to people of United States, states rights. So, there's a big battle. Basically, the states sued the OCC N1. So, just interesting, again, to see the battle for power over money transmission, obviously, the ability to tax. We see this with the role of the New York Department of Financial Services, which is the regulatory in New York. NYDFS has its own scheme regulating Bitcoin companies.

Jill Carlson
This is one of my favorite things about if you ever log in to create an account on Bitcoin exchange or Bitcoin wallet, et cetera, often, what you'll see is a sign post before you get led in the door saying, "If you are domiciled in North Korea, Iran, Somalia or the New York or the state of New York, then you will not be allowed to use these products." It's like, "Yeah. What do these things have in common?" That's hilarious.

Meltem Demirors
All right. Then once we get through money transmission, really, what we have is the intelligence community. So, a lot of what we talked about blends regulations, meaning rule making and enforcement, meaning how you enforce the rules, meaning how you get punished. Typically, punishment takes two forms. There are civil crimes, right? Then there are federal or criminal crimes, and they have different penalties. In the US, you can expect to pay fees, and in some cases, you personally can expect to go to jail or be incarcerated, have your assets ceased, and assets frozen, et cetera.

The intelligence community is a really strong part of this. As we know, the Department of Justice has a cyber crimes division. They were very involved in the Silk Road case. As we know, Katy Haun, who was part of that DOJ cyber crimes group was a big part of that. In addition, the FBI, the CIA, MI6, Global, Europol, Interpol, the Global Intelligence Community has been interacting with Bitcoin companies for a long time.

In fact, in 2015, a number of the exchanges I was an investor in partnered together with the help of a law firm called Steptoe & Johnson and formed something called the Blockchain Alliance and, basically, what they did was create a streamlined way for intelligence agencies to issue subpoena requests to exchanges about specific quality addresses because all of these exchanges were getting hit on a daily basis with hundreds of requests from intelligence for data about specific quality addresses.

So, what people I think sometimes fail to recognize is the intelligence community has been one of the earliest adopters of a Bitcoin monitoring technology, Bitcoin network monitoring technology. Obviously, we saw that Darpa and other parts of the intelligence community and the military community have been very focused on research, have been very focused on understanding network topology, network morphology, and how different parts of the crypto ecosystem interact.

Jill Carlson
That's right. So, whew! That covers just about everything here, I think. I'm sure that there are one or two agencies reading this.

Meltem Demirors
Jill, Bitcoin is unregulated. Bitcoin is unregulated.

Jill Carlson
Yeah, and don't forget, Bitcoin is unregulated, you guys.

Meltem Demirors
Please. I literally want to vomit when people say this to me because these companies in the US are spending millions of dollars complying with all of these different agencies, who, by the way, issue conflicting guidance.

Jill Carlson
Yeah. No. That's exactly right.

Meltem Demirors
It's great. It's just a peach. All right.

Jill Carlson
So, this is far from the first time as we discussed in the opening that we've seen the government try to regulate technology and this is far from the first time that we've seen them basically flail around in their attempts, too. So, let's go through some of the ways that they're actually trying to have the rubber meet the road here, and let's put that into some context for our listeners. What do you say?

Meltem Demirors
Let's do it. Grind my gears, Jill. We've talked about Washington, D.C. We've talked about how unregulated Bitcoin is. Let's talk about something that really grinds my gears, banning Bitcoin.

Jill Carlson
So, yeah, there's lots to dive in to here. I just want to set the stage, though, first, and mention there's big difference between regulating something and enforcing that regulation on it. This is a point of confusion that we've seen time and time again with governments and with agencies when it comes to technology, and Bitcoin is no different.

That, of course, is why we started today's episode talking about the encryption bans of the '80s and the '90s, right? This is not the first attempt that we're seeing with Bitcoin to weaponize software. Now, of course, code is protected under free speech. You gave that example, Meltem, which I think is a great one of having the RSA code on a T-shirt. Is that really going to be considered a munition's export, that T-shirt? Maybe, maybe not.

We have many examples of this. One that you brought up as well to me was GitHub banning Iranian users because, of course, Microsoft is a US company subject to sanctions. What all that brings us to is this idea that somehow, somewhere, somehow, a government is going to be able to ban the Bitcoin protocol, which I am just not buying.

Meltem Demirors
Right. I think this, again, in my testimony to the house, this is what I really wanted to enunciate or clarify. I view it at three levels. There's the Bitcoin protocol, which is code, and as you've just mentioned, code is protected under free speech. Code, in and of itself, it doesn't do anything, right? It's an idea and information and ideas can be expressed openly.

Now, where that starts to change is when the code gets rotten, right? So, this is the network lair, where the codes meets space or physical space. How do you stop people from running code? People have tried, right? So, if we recall some of the saga around file sharing, BitTorrent as we all know, which now got acquired by Tron, which is so depressing, Jill. I hate 2019.

Anyways, how are you got stop people from running code? Again, this is one of the ideas I think that make Bitcoin so subversive and so powerful, you have this piece of open source code that anyone can download, and then you have an internet connection and a computer or a device, even, that can run the Bitcoin code or Bitcoin client, you can now be a part of the network.

Now, one of the interesting things, and I know you and I have been wanting to do an episode on this for a while, is the fact that when you run the Bitcoin code, even though code is respeeched, even though running code isn't an activity that governments can necessarily ban, you are depending on ISPs or internet service providers and telecommunication companies or telcos. These are regulated companies. They've helped the government sensor the flow of information before and they'll do it again.

So, what the Bitcoin community has come up with, and this is not a new idea, it's existed in different forms for a long time, ham radios, actually, were one of the first implementations of this. Ham radio operators in the US, they're hobbyists. They created their own network community outside of the existing telcos, the existing service providers, but this isn't mesh networking, right? So, the idea that you could create a peer-to-peer computational network, where you're no longer relying on centralized intermediaries or ISPs, a number of different meshes. Like I said, I think we'll do an episode on one.

There's also the block stream satellite, which I think is super cool. So, basically, you have a satellite in space. It's supernational. It doesn't fall into the jurisdiction of any one country, but basically, you can beam transactions up to space and it could beam transactions down.

I think the affordability of cube sats or nano satellites, really small satellites that are very inexpensive to launch, and aren't quite in space that just in Earth's atmosphere, that's another idea people are working on. Then one thing that a few people at MIT and at Chaincode Labs are working on is even reducing the requirements to run a node. This is one of the things that a project called Chia, which is being built by the creator BitTorrent, Bram Cohen, is working on.

Jill Carlson
Not to be confused with the part of BitTorrent that was acquired by Tron, of course.

Meltem Demirors
Exactly, because, basically, the idea is like, "Okay. So, fronting a Bitcoin node, you need at least 260 gigabytes on your hard drive. You need constant connectivity to the internet. It's not exactly easy to do." Could you create networks whether it's Bitcoin and…derivation thereof, an entirely new network, where you could actually run a node or participate in the development and growth of the network on your phone, right?

So, a lot of different ideas here, but I think the network layer, as long as you're dependent on ISPs and existing internet provides and telecommunications providers, there's always risk there, but there's so much internet traffic, honestly, that it's going to be really hard to throttle back people running the client nodes.

Jill Carlson
A lot of what this reminds me of, actually, is music and the music industry. There's this notion in the music world of a pirate radio, right? So, one of the most famous examples of this was in the 1960s, late 1960s in the UK, the BBC radio was not servicing pop and rock music. It was just far too progressive for them and their stiff upper lips and their cups of tea.

So, what you had was all of these, in a way, quite literally pirate radio stations that would station themselves in Irish waters or in other waters offshore of the United Kingdom broadcasting pop and rock music back to the coast and to the British mainland. It goes to show that wherever there's a demand, people will find a way to service that demand when technology is involved.

Meltem Demirors
Oh, 100%.

Jill Carlson
The government might try as the ISPs might, try as telcos might, try as the radio stations might. People are going to find a way to continue to rock on.

Meltem Demirors
That's actually. I want to talk briefly here also about the challenge of enforcing bans on peer-to-peer network and peer-to-peer file sharing. So, obviously, a lot of us use Limewire or Kazaa, which were basically interfaces that allowed you to easily run the BitTorrent client, right? What's really interesting is when Kazaa and Limewire and all these things got shut down, there was this service that emerged called PirateBay, and the PirateBay was basically a site where you could go to file share and you go there and get the latest music, get the latest movies, whatever.

So, they actually ... It was, I think, a Swedish group of founders, but one of the interesting things is, typically, regulatory jurisdiction is defined by physical boundaries. So, what they did is they started moving their services around. So, for a while, they put the servers where they ran the code on a ship and they sailed the ship in open water. So, basically, what that meant is it wasn't really clear who would have regulatory jurisdiction to go in and shut the service down because the server is really in a specific place.

Then in 2012, they started talking about hosting servers in drones that would fly around in open water and make it difficult for people to shut down the network, which I thought was amazing. Then in 2014, they actually picked up all of their servers, and moved them to Ascension , which is a volcano island. I think it's in the middle of-

Jill Carlson
Stop!

Meltem Demirors
I'm not kidding. It's in the middle of the Atlantic, off the coast to South America, somewhere. It's this random island, and they're like, "Hey, we're just going to put our stuff right here." Now, it turned out that island was a British protectorate. So, there was some jurisdiction, but this is new. I think it's going back in history. It's just really entrusting to see human ingenuity at work when it comes to people trying to transcend the physicality of what we, historically, have seen as boundaries. So, it's pretty amazing.

Jill Carlson
So, okay. Where does the rubber actually meet the road then here? If we don't think it's the code or protocol layer, if we don't think it's actually running the network, I think that there's one obvious answer, right, which is the on and the off ramps because at the end of the day, we're still talking about the financial system. I, again-

Meltem Demirors
Anytime that Bitcoin touches a US dollar, you better believe that there is going to be boom boom lightning.

Jill Carlson
I always joke that my Bitcoin isn't any good to me if I can't ultimately cash it out and go buy a Lambo with it, right? Now, I don't actually believe that for myself, perhaps, but ultimately, you do need these on and off ramps in order to give the damn thing value.

Meltem Demirors
Well, until we can upload our brains into the metaverse and live in a world of crypto only where we have no human needs, we don't need food, we don't need to pay rent. So, until we hyper Bitcoinize and upload our brains to whatever servers and drones floating in the outer space, we're stuck here, Jill, in these meat sacks we call our bodies. Oh, God!

Jill Carlson
Anyway, so, as we discussed FinCEN, we still have KYC and AML requirements to contend with on all exchanges. We have even Bitcoin ATMs, which at one point were the last bastion of being able to get Bitcoin in and out of the system. Without having to go through that, they are pretty much fully regulated now. Every time I see a Bitcoin ATM sign, usually at gas stations, I'll stop in and just see what the process is. They all require a picture of you and your license, your driver's license, whatever it is that displays your address-

Meltem Demirors
Actually, the rule ... Wait. Hold on, but the rules for ATMs ... So, actually, I'll tell a story. Last time I was in Boston, Boston, Jill, you'll like the story.

Jill Carlson
Boston.

Meltem Demirors
I was at a bar in the North Shore.

Jill Carlson
You were at a bar in the North Shore.

Meltem Demirors
I was going to be at a bar and I wanted to get some scratch tickets, some lottery tickets, right? They're called scratchies. It's my favorite hobby. It's something my partner's family likes to do. So, there's a machine in the bar where you put dollars in and you get lottery tickets out, right? There's a limit, right? Same thing with Bitcoin ATMs. I think any transaction under a certain threshold doesn't require ID. So, if it's under 50 bucks, you don't need to use ID. This is part of existing money transmission law, right?

So, again, it goes back to this thing where people are like, "Oh, I went to a Bitcoin ATM, and I didn't put in my ID. It's unregulated."

I'm like, "No, dumdum. They're following money transmission laws which state that cash transactions under a certain amount don't require KYC, AML." Boom! Period and sentenced. I'll stop there.

Jill Carlson
Well, so, yeah, I mean, regardless of what they actually involve or demand, the reality is, is that most of these ATMs at this point do require some kind of KYC, AML hurdles. Everyone is just engaging in a fair amount of CYA, cover your ass. Local Bitcoins was another one that for a long time was one of the last holdouts of a place where you could go. Local Bitcoin is basically like Craigslist. You can think of it, right? It's an online marketplace. You can go on there and you can find people who are buying and selling Bitcoin.

For the most in the United States, the way it's been used has been people going and meeting up in person and doing Bitcoin for cash trades. Again, local Bitcoins more recently has cracked down on this by instituting KYC and AML functionality on their site as well.

Meltem Demirors
Again, I think it goes back to show you, Jill, this is the difference between regulation and enforcement, right? So, you could have regulation that says you can't do XYZ, but if you don't have a central entity, where you can enforce that rule, then, okay. This is what makes peer-to-peer technology ... Well, what are you going to do, right?

This is what's so interesting to me. All of these companies is basically pain in the ass to be a company because you as a founder can be jailed for violating law. You are responsible for following rules and regulations. You have physicality. You operate inside of a body that exist in the XYZ in T-time dimension. So, they can find you.

I think that's what's so interesting about Bitcoin, right? Satoshi Nakamoto is a pseudonym. Nobody knows who, what, where that is. Similarly, if you have a group of people, an open source movement with a no central entity controlling it, there is no central point for enforcement to go and attack and enforce regulations. I think this is one of the things that makes Bitcoin companies, in particular, it's so interesting, and actually, we've talked about this in our prediction markets episode, right? If you're a company and you're running a decentralized prediction market, you are the choke point.

So, this, to me, will be really interesting to see if more and more people in this world decentralized finance or permissionless applications will choose not to start companies and raise venture capital, and blah, blah, blah, but will choose instead to be pseudonymist, to be unknown and to just simply release really simple software clients that allow people to interact with technology, so that there can be no real enforcement. It's kind of cool.

Jill Carlson
Yeah. No. That's exactly right. So, I know that you wanted to talk for a second as well here about bank accounts, and a little something called operation choke point, right?

Meltem Demirors
Yeah. So, the on and off ramps. The biggest choke point for any Bitcoin company is getting access to a bank account. Over the last five years, in the 150 companies I've invested in and worked with, bank accounts have been the number one issue. So, operation choke point, if you have time, look it up. It's actually an initiative that the Department of Justice undertook, where they investigated a bunch of things, and they applied all sorts of scrutiny and, basically, the unstated goal of operation choke point was to shut down any businesses that could potentially weighed into a regulatory gray area.

So, examples are people who sold ammunition, people who sold cable box, descramblers, people who provided dating services, people who sold fireworks, escort services. Basically, what they were going after, money transfer agents were a big part of this as well. Porn companies were part of this. Basically, it was a way for the government and the DOJ to apply pressure to the banks providing banking services to businesses that the government finds unsavory in some way, shape or form, even though under the laws of this country they're doing nothing wrong.

Obviously, Bitcoin and cryptocurrencies fall squarely into that category, and so many companies that were touching Bitcoin were part of the targeted group of operation choke point. Operation choke point has been a big contentious issue. There have been lawsuits. People have sued the DOJ. People have sued the government. People have sued banks. It's been really interesting.

So, again, what we're going to see is that governments are going to apply choke points to the places they can. Banks are already heavily regulated. If you are an enforcement and you go to a bank whose pro-crypto banks or crypto companies and you say, "Hey, we're going to come in and audit your every single week for the next five years unless you cut off these companies." That's what you're going to do.

Jill Carlson
Yeah. I mean, it's really dystopian when I start to read through the details of this. I was actually not familiar with this. I mean, it's just so open to interpretation. It can get very dystopian very quickly here. Look. I'm no die-hard libertarian. I am all for consumer protection, a lot of these measures, but, yeah, it gets scary very quickly.

Meltem Demirors
Oh, yeah. If you want to talk more about this, Bill Barhydt at Abra has stories. He's the one who include me into it in 2015 when we first met. I remember having breakfast with him at a small diner in Palo Alto, and he just started yelling about operation choke point. He got so angry, and I was like, "Oh, my God! Am I going to die?" It was week three working in Bitcoin professionally, but, no, he's totally got it. I think you can read a lot about it online.

Going on, look, local Bitcoins brokers are being convicted of running illegal money transmission schemes. It goes both ways, right? People are buying and selling Bitcoin. The company itself is now being pressured to do KYC/AML, which you already talked about. Craigslist and peer-to-peer marketplaces are under pressure as well. The on and off ramps are going to be the places where pressure really gets applied.

Jill Carlson
That's right.

Meltem Demirors
So, let's talk about enforcement. So, what happens? So, we're talking about here regulation, which we've talked about a bit, and we're talking now about enforcement and really applying action. The other two things I want to talk about, number one is custodians and intermediaries.

So, what we talked about in the ETF, F No? episode, episode 20, one of the things I mentioned, Jill, is that, and now since we did a coin share show that 17% of all Bitcoin is already managed by intermediaries, and custodians also become choke points, right? If I know that coin base custody is 5% of the world's Bitcoin and I want to cease Bitcoin, I'm going to go to coin base and I'm going to freeze those Bitcoins.

So, I think, again, anytime we add an intermediary ... I was talking to someone yesterday who's trying to say that we needed a new DTCC for Bitcoin. I was like, "Honestly, if that's what we're doing, I don't want to do this because that defeats the whole fucking point of this." It's illogical.

Jill Carlson
Totally. I mean, there are a couple of arguments you can make around that. If your viewpoint is that that is the way it's going anyway and we're just going to accelerate it and take it to its illogical conclusion, fine. I can at least engage in that conversation, but I think that exactly right that the point has to be that we need to prevent it from going in that direction, anyway, because as soon as it goes there, as soon as we have one or even a few centralized custodians that are holding all of the Bitcoin, it loses a huge portion of its value growth.

Meltem Demirors
Absolutely. This is where I want to get to the last point. It's super dystopian, and we'll end it here, ceasing Bitcoin. Governments have been ceasing Bitcoin for a very long time. First-

Jill Carlson
Longer than people realize. Exactly.

Meltem Demirors
The Department of Justice, DOJ, on the Silk Road auctions, they ceased Bitcoin from the Silk Road. In fact, they ceased 150,000 Bitcoin and they auctioned them off in 2015 for $48 million or $334 per Bitcoin. I recall because I was trying to put together a syndicate to bid on the auctions. There were a bunch of people putting together these syndicates because they run as a Dutch auction, so basically, the highest price won the lot, and then it went in pecking order.

The second example I want to talk about is the Bulgarian government. They ceased a little over 200,000 Bitcoins. If you think about that, that's a little over 1% of the total fully diluted Bitcoin supply ceased by one government. That was worth nearly $3 billion at its peak in 2017. The Bulgarian government said it's been liquidated through open market activities over the last year or two. Some people think they still hold it. Some people are trying to advocate saying Bulgaria is the first country to have Bitcoinized, which is just beyond stupid. I didn't want to go there. Then you'll look at Venezuela and Iran where governments are ceasing Bitcoin miners, right? That's another route of seizure.

So, again, what I want to get down to is this. The line between regulation and enforcement is a fine line. Jurisdiction in a world that is digital is hard to define. Physical borders don't necessarily apply, but at the end of the day, anytime you're centralizing activity, anytime you're taking a bunch of coins and putting them in the trust of an intermediary or a company that has a base of operations in a country that is known, that has a reputation for applying draconian self-serving laws, you are doing it wrong. That is not the point of Bitcoin.

Jill Carlson
Strong ending. I think we'll leave it there for this week, but I just want to also highlight as well, as much hype as Crypto Going To Washington has gotten, we are years into this story. It is not just beginning. I also want to emphasize we are years away from it ending, if ever, because as you put it Meltem, revolutions, they don't have an ending. They're ongoing bites.

Meltem Demirors
That is correct. What fun, Jill, and we'll be back next week with more gear grinding, I'm sure. Bye, everyone.

Jill Carlson
Hey, this is Jill and Meltem. Thanks for joining us for another week of What Grinds My Gears. We love hearing from you, so please hit us up on Twitter, send us feedback, join the conversation. Follow us on medium @WhatGrindsMyGears, where we share a summary of each week's episode references, reading materials and, of course, memes.

Meltem Demirors
Our episodes go live Thursday mornings at 7
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