It sounded like a cry for help. On the morning of November 26th, Brian Armstrong, founder and CEO of the Bitcoin exchange Coinbase, posted a Twitter thread speculating about new regulatory approaches by the US government. It is about plans by the outgoing US Treasury Secretary Steven Mnuchin that could threaten the US crypto industry at its core.
Last week we heard rumors that the US Treasury Department and Treasury Secretary Mnuchin wanted to initiate a new regulation regarding crypto wallets before the end of his term in office. I fear that this could have unwanted side effects and I wanted to share this concern.
Brian Armstrong, translation of the tweet.
The plan provides that in the future, crypto companies must first check the identity of the owner of self-managed wallets before they allow transfers. Bitcoin’s at least rudimentary anonymity would then be gone in one fell swoop. Because in the further course, transfers from this wallet can be clearly assigned to a real person.
What on the surface sounds like an understandable suggestion from an anti-money laundering perspective would, in the opinion of the Coinbase CEO, have catastrophic effects on the sector. Because in the decentralized crypto country, it is difficult to assign a wallet to a real person. Smart contracts, for example, are structures made up of diverse identities. Coinbase could not fulfill its legal mandate to check this at all. In addition, customers of exchanges do not necessarily have to withdraw their coins to their own wallets. In practice, it is often the case that Exchange-BTC go straight to the trader’s account. According to the regulation, however, the respective user would be responsible for proving the identity of the retailer even in such a case. A totally impractical system.
Hardly feasible in practice
Another case concerns MultiSig wallets. Bitcoin, for example, allows the ownership structure to be clearly divided between a number of parties. For such a so-called MultiSig wallet, it is not a single person but a large number of parties who hold part of the private key. The assignment of clear ownership is 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 because hardly anyone has identity cards or similar identification documents. And even if you could build a system that meets the requirements of the legislature, the question of the legitimate interest of crypto users in rudimentary privacy and the protection of property rights remains. Bitcoiners with a penchant for privacy are unlikely to be willing to disclose wallets with real names .
In the worst case, Armstrong fears that the intended regulation could lead to the crypto industry saying goodbye to the USA. The introduction of impracticable regulations would present both Exchange customers and the stock exchanges themselves with difficult tasks and could lead to the migration of the entire industry. It is understandable that the alarm bells are ringing for stock market leaders like Armstrong.
KYC: Already common practice in the Netherlands
What broke in like bad news about US Exchange operators is already common practice elsewhere. In the Netherlands, crypto investors have recently been required to use a screenshot of their wallet to prove that they are the actual owner.
PlanB, author of the stock-to-flow model and Bitcoin bull, has confirmed this via Twitter. On the short message service he writes:
The Netherlands introduced such a law two weeks ago. You now have to submit a screenshot of the wallet before you can withdraw BTC. Simple but annoying.
PlanB. Translation of the tweet.
Judging by PlanB’s statements, the consequences are already noticeable. The first exchanges are located in neighboring countries and customers from the Netherlands use foreign exchanges for crypto investments.
Decentralized systems cannot, of course, be prevented by such control. Nonetheless, impractical regulatory measures are annoying for entrepreneurs who have invested time and capital building infrastructure. Bitcoin exchanges are still on the rise and could mature into great employers. Anyone who breaks the regulation of domestic industry will consequently shoot themselves in the long term.