As decentralized systems, crypto currencies like Bitcoin are difficult to regulate. But an advance by US Secretary of the Treasury Mnuchin could do serious damage to the industry.
It sounded like a cry for help. On the morning of November 26, Brian Armstrong, founder and CEO of the Bitcoin Era exchange Coinbase, placed a Twitter thread in which he speculated about new regulatory approaches by the U.S. government. The thread discusses plans of the outgoing U.S. Treasury Secretary Steven Mnuchin that could threaten the core of the U.S. crypto industry.
Last week we heard rumors that the U.S. Treasury and Secretary Mnuchin were planning to rush out some new regulation regarding self-hosted crypto wallets before the end of his term. I’m concerned that this would have unintended side effects, and wanted to share those concerns.
– Brian Armstrong (@brian_armstrong) November 25, 2020
Last week, we heard rumors that the U.S. Treasury Department and Secretary of the Treasury Mnukhin is planning to introduce a new regulation regarding crypto-wallets before the end of his term of office. I fear that this could have unwanted side effects and I wanted to share these concerns.
Brian Armstrong, translation of the tweet.
Under the plan, crypto-companies will be required to verify the identity of the owner of self-managed wallets before allowing transfers. This would eliminate Bitcoin’s at least rudimentary anonymity in one fell swoop. Because in the further process, transfers from this wallet can be clearly assigned to a real person.
From an anti-money laundering perspective, this may sound like a plausible request, but in the opinion of the Coinbase CEO, it would have a catastrophic effect on the sector. In the decentralized crypto country, it is therefore difficult to assign a wallet to a real person. Smart contracts, for example, are made up of multiple identities. Coinbase would not be able to fulfill its legal mandate to audit them at all. In addition, customers of Exchanges do not necessarily withdraw their coins on their own wallets. In practice, it is often the case that Exchange BTCs go straight to the account of traders. However, according to the regulations, in such a case the respective user would also be responsible for proving the identity of the trader. A completely impractical system.
Hardly feasible in practice
Another case concerns MultiSig Wallets. Bitcoin, for example, allows the possibility of clearly dividing ownership among a number of parties. For such a so-called MultiSig Wallet then not a single person, but a multiplicity at parties holds a part of the private key. The allocation of clear ownership is thus hardly possible.
Armstrong also criticizes the fact that many users of the stock exchanges come from countries with dysfunctional financial systems. Establishing the identity of this user group is usually difficult, since hardly anyone has an identity card or similar identification documents. And even if one could build a system that would meet the requirements of the legislator, the question remains as to the legitimate interest of crypto users in rudimentary privacy and the protection of property rights. Bitcoiners with a penchant for privacy are hardly likely to be willing to disclose wallets with clear names.
In the worst case scenario, Armstrong fears that the proposed regulation could lead to the crypto industry leaving the US. The introduction of unworkable regulations would present both exchange customers and the exchanges themselves with hardly solvable tasks and could thus lead to the migration of the entire industry. It is therefore understandable that the alarm bells are ringing for stock exchange managers like Armstrong.
KYC: Already common practice in the Netherlands
What came over US exchange operators like bad news is already commonplace elsewhere. In the Netherlands, crypto investors have recently been required to prove that they are the real owner by means of a screenshot of their wallet.