Global regulatory steps might be conveying a disturbing clue to the whole crypto industry and its performers that are obliged to stay observant and defend their right to privacy.
Regulatory reform is coming, with governments globally studying to impose firmer limitations on access to cryptoassets, according to Jake Chervinsky, General Counsel at Compound Finance.
While looking at the big picture of recent crypto regulation and implementation news, what we have on our hands is “an ideological war over self-custody and privacy,” said Chervinsky.
He clarified in his recent Twitter thread that,
“Perhaps most importantly, policymakers worldwide are signaling a desire to expand existing laws to restrict access to crypto.”
An instance is the ‘Swiss Rule,’ which he stated: “practically prohibits self-custody in the guise of verifying the owner of a private key.” Furthermore, the Financial Action Task Force (FATF), an international standard-setting body for anti-money laundering (AML) regulation, said in June that the “lack of explicit coverage of peer-to-peer transactions…was a source of concern“, and next June, they might adopt the Swiss Rule as a global standard, warned Chervinsky.
In other cases, the Counsel noted various governments’ statements naming financial privacy as a significant risk, with the Bank for International Settlements (BIS) saying in its report on central bank digital currencies that: “Full anonymity is not plausible.“
There is a shift coming, wrote Chervinsky. While converting fiat into crypto and withdrawing any amount to one’s wallet is “quite easy” for most people, with not enough regulation “to seriously infringe on the freedoms of self-custody & privacy,” – now the approach to AML regulation by policymakers is “shifting significantly toward harsher restrictions on a global scale.”
The reason is that, when it comes to paper cash and electronic cash, AML regulations “break down.” There is no intermediary, that is, financial institutions, to deputize so to detect transactions, identify counterparties, determine sources of funds, conduct censorship and seizure, etc. for the governments, so the governments cannot perform these actions.
And while paper cash is less of a concern, as it’s used for in-person transfers and is challenging to transport far in large amounts, “[r]egulators are much more concerned about digital transfers,” said Chervinsky.
They’ve been satisfied so far with tracking crypto transfers via blockchain analytics, regulating on-ramps and off-ramps, limiting access to conversion, given that they believe crypto’s leading utility comes from conversion into fiat and catching criminals in the process. However, said Chervinsky, over the last year, Bitcoin (BTC) has gained geopolitical significance, while stablecoin trading volume jumped, making authorities worried about illicit activity, as well as the threat to their monetary sovereignty.
“I fear we’re heading for a world where withdrawing crypto from exchanges to self-custody is restricted as a means of attacking privacy. We’d have two separate crypto markets: one of “clean” custodial coins & another of “dirty” self-sovereign ones, with no bridge between.”
But this is a worst-case scenario, he added, with industry insiders working to change the policymakers” stance on these issues, but it is “our main challenge for years to come.”
The authorities in different countries are hard at work, creating digital money they can fully regulate and control. The European Central Bank (ECB) Executive Board member Fabio Panetta stated that “a digital euro would conform to the people’s fundamental right to privacy” and that, unlike private suppliers, “the central bank has no commercial interests related to consumer data.”
Some commenters opposed this statement, arguing that central banks do have a commercial interest there.
Rohan Grey, Research Director at Digital Fiat Currency Institute, wrote that central banks are “being too cozy to law enforcement,” terrified of standing up to the US Financial Crimes Enforcement Network (FinCen) or “any of the other pro-surveillance entities,” and that they capitulate to every AML request. And this is the reason they will not seize the unique opportunity they have now “to build genuinely privacy-respecting digital currency,” according to Grey.
Meantime, Alex Gladstein, Chief Strategy Officer at the Human Rights Foundation, commented on the recent news that the government of Chinese Shenzhen city began a digital yuan (DCEP) airdrop, calling it a “hell of a way to kickstart a nextgen spyware currency.“