Former Coinbase and current Storj regulatory expert talks policy with The Block

This interview has been edited for length and clarity

Katherine Johnson has recently taken up the mantle as VP of Compliance at decentralized cloud storage company Storj. However, before the move, she served as Coinbase's Director of Compliance and Regulation. The Block sat down with Johnson for a discussion on the regulatory landscape, including the recent downward trend in ICOs, the struggle to comply with FATF guidance and the differences in regulatory concerns at a money transmitter like Coinbase to a storage solutions company like Storj.

From Coinbase to Storj

The Block: You were Director of Compliance Regulation at Coinbase during a lot of FATF’s feedback period before they revealed that they would in fact include the travel rule. What was that time like? What sort of things were you doing there?

Katherine Johnson: It was an exciting time, and I’m grateful because it was seeing a company go through hypergrowth in a cutting edge industry and watching how all of that is managed and steered, and meanwhile maintaining open communication with our regulators as well as our bank partners. It was challenging and exciting and highly educational and I'm grateful for having a seat at the table at that particular point in time. I’m also confident taking that experience and going to another company [Storj] that is very poised for success.

I started out as director of compliance management. I was brought in in 2017 and started scaling the compliance team. After that I became director of compliance regulation where I worked directly with our regulators. I led the regulatory exams and our audits, and maintained and managed relationships with our bank partners. Last fall, I ended up moving to Minneapolis, and that role obviously belongs in San Francisco, they've got a great team there. I made the moves from Wall Street to Coinbase because of my belief in the company's commitment to compliance. And I think that it was very smart of Coinbase early on to make that commitment. I think it served them well and I'm happy to now be with a company that's just as dedicated to transparency, compliance and solid governance.

The Block: They’re two companies in different parts of the industry, so how do the regulatory conversations at Coinbase compare to those at Storj? 

Johnson: When I joined Coinbase, we were at about 150 people and Storj is at 50 people. So some of the differences are just in the stage of the company. I feel like I'm getting a view of Storj before it really explodes, so that's interesting. When I got to Coinbase, it was already a little bigger, so at Coinbase it was a matter of kind of maturing and scaling, and at Storj it's more a matter of making sure that we have the proper framework in place to begin with, which we do. When I became an advisor to Storj in February, one of the things that we did was we looked at their internal policies, worked on the trading policy and other internal controls and so on – policies and practices.

Storj is also different in that it doesn't have money transmission licenses like Coinbase. It's a different kind of company obviously, and so I have been able to shift more to the legal focus as opposed to just compliance. 

It's early for a travel rule solution, but VASPs are still at risk.

The Block: In a lot of recent Financial Action Task Force (FATF) coverage regarding the travel rule, people have been talking about a non-blockchain solution. From your experience and what you’re seeing now, is that what most are doing and is it effective?

Johnson: I think it's early to say. I'm not sure. The thing with the way regulation has developed is that it really hasn't been linear and I don't think it's going to be, so it's more a matter of just watching these numerous developments, keeping your ear to the ground and paying attention to what's happening both with legal cases and the congressional hearings and the guidance that we've gotten. Some of it is clearly just a starting point, like with the no-action letter with TurnKey Jet for example, or like with the FATF guidance that I think will be developed as the industry responds to these developments and provides feedback that I think can be helpful to policymakers as they get to know this area better. I think the quality of the guidance is also going to improve, but it’s going to take a while and we're going to see some different approaches floated and it's hard to say which are actually going to be adopted.

The Block: Right. But on the current timeline, are we reaching a juncture where VASPs will start to be affected if they’re not compliant? 

Johnson: Well, I think so. Or at least they’re at risk of it. For example, if you take a look at like the Kik and Veritaseum cases, I think those are going to be instructive for some players in the industry. I think for companies like Storj that are uniquely situated for a number of reasons, I think those developments are going to be less impactful to us, but to others in the industry, I think that they are going to have a greater impact. That said the SEC is not the courts. The approach that the FTC has taken, particularly in the application of the Howie Test, that's getting challenged and it is through the development of case law that we're able to ultimately come to what will hopefully be a more clear standard for how cryptocurrencies and digital assets are regulated.

I clerked for two years in the Southern District of New York early on in my legal career. It's interesting to see how these things play out because even once it's in the courts, you're going to potentially have district courts having different opinions about the SEC’s approach... So these cases can move forward and then be tried in courts of appeal, of course, courts of appeals can have different opinions and it can go all the way up to the Supreme Court. So all of those things take a really long time. 

In the meantime, there are companies that because of their ICO, because of the nature of how they were conducted and because of the nature of their digital asset, you may be subject to action by the SEC. And I know that's scary for a lot of people, understandably. Now for us [Storj], we're uniquely situated though, because our asset is clearly a utility token. 

The Block: In terms of solution governance, is it more likely or effective one solution will rise to the top, or a number of applicable solutions across jurisdictions?

Johnson: I can't predict what's going to happen but I think that different jurisdictions coming together and, looking at these issues more from a global perspective is helpful. Like the G7 task force isn't saying everything the industry wants to hear all the time because it is looking at this as something that is very new. At the same time, I think what matters is that they are coming together to give a global perspective. Hopefully, they take learnings from jurisdictions that have different regulatory frameworks in place, like Japan and Malta, and places that have encouraged innovation like Switzerland. Jurisdictions coming together and looking at what others have done can draw from that. I think that makes a lot of sense, particularly when you're dealing with borderless assets. 

A shift away from ICO's, but encouraging signs for regulatory clarity

The Block: You mentioned that Storj is safely positioned in terms of regulation. Could you expand on that?

Johnson: When we had our token sale, we already had a product. We had already launched our product. So that's one thing that they look at. Also, when we did our token sale, we consulted with a big four advisory firm. I was at Ernst & Young previously, so I was familiar with the importance of working with experts, especially in the areas that can be a little murky, and where there's not a lot of precedent for how to approach these things. So Storj did consult with the big four accounting firm as well as the leading national law firm. Subsequently we've been super transparent with our community about the storage token how it's handled through thorough reports and public town halls with live Q&A portions. As for the nature of our token, which is used just on the network for capacity and bandwidth, we use the Storj token in payment to our node operators. It enables micropayments. So it has a very clear function and utility. And then we also accept it in exchange for our Storj services.

The Block: So for companies that are doing token raises that do not look like this, not necessarily because they're not transparent, but because their asset just isn't necessarily clearly a utility, where do you stand on that? Should companies go the route of making sure their token is clearly a utility or should regulation be catching up to define these assets?

Johnson: That's a fair question. It's very much company to company and asset to asset – what is the purpose of the token? What is the company doing overall to have sound token governance and hands-down corporate governance? I know there's been a huge shift away from ICOs, and I understand that given the greater need for regulatory clarity, so I think people are looking at alternatives. There's a challenge there because there's just so little precedent in this industry. But there are some things give me hope that we are catching up. I think the congressional hearings this summer were encouraging. I think seeing the SEC work with Blockstack on its Reg A+ offering is encouraging. Seeing efforts like Wyoming’s Regulatory Sandboxes is encouraging, but it's a big question about whether all of that will be enough to provide the framework that companies in this industry need to move forward. 

Policy to look forward to

The Block: What are some of the biggest policy issues that you are looking to right now?

Johnson: Well, not so much in the area of compliance, but I would say some of the legislation that's pending is interesting to me, like the digital taxonomy act this year. I'm hoping that even if we can't get detailed regulatory clarity around some of these issues, that at least we start to have a framework we can operate in so that we're all talking the same language so that we're helping raise awareness and educate people who aren't necessarily dealing in this industry day to day. But there's a difficulty there in accessing clear information, and only some of that is due to lack of regulatory clarity, some of it is just this is a new industry. When it comes to digital assets, there's just a lot of unknown about how it's all going to be used, how it's all going to be regulated. But I'm so pleased with the industry effort and push for clarity and guidance. I think Facebook Libra has brought attention to it and that's a good thing, so I feel like the pace has started to pick up as far as establishing a solid regulatory framework.