Is the US government regulating the Bitcoin industry dead?
As decentralised systems, crypto currencies such as Bitcoin are difficult to regulate. But a move by US Treasury Secretary 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 exchange Coinbase, posted a Twitter thread speculating That Bitcoin Code about new regulatory approaches by the US government. The thread discusses plans of the outgoing US Secretary of the Treasury Steven Mnuchin that could threaten the core of the US 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 rumours that the US Treasury Department and Secretary of the Treasury Mnukhin intend to introduce a new regulation on crypto-wallets before the end of his term of office. I am concerned 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 in future have to verify the identity of the owner of self-managed wallets before allowing transfers. This would remove at least rudimentary anonymity from Bitcoin at a stroke. In the further course of time, 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 disastrous consequences for the sector. In a decentralised crypto country it is difficult to assign a wallet to a real person. Smart contracts, for instance, are made up of multiple identities. Coinbase would not be able to fulfil its legal mandate to audit them at all. Moreover, customers of Exchanges do not necessarily withdraw their coins from 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 impracticable system.
Hardly implementable in practice
Another case concerns MultiSig Wallets. Bitcoin, for example, allows for the possibility to clearly divide ownership between a number of parties. Such a MultiSig Wallet is not owned by a single person but by a number of parties who hold part of the private key. The allocation of clear ownership is thus hardly possible.
Armstrong also criticises the fact that many users of the stock exchanges come from countries with dysfunctional financial systems. It is usually difficult to establish the identity of this user group, as hardly anyone has an identity card or similar identification documents. And even if one could build a system that meets 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 prepared to disclose wallets with clear names.
In the worst case, 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 almost impossible tasks and could lead to the entire industry moving away. It is therefore understandable that the alarm bells are ringing for stock exchange managers like Armstrong.