There Is Rumour to Regulate Self-Hosted Crypto

There Is Rumour to Regulate Self-hosted Crypto Wallet

Photo by David Everett Strickler on Unsplash

For about a week, there had been rumors circling around that the USA Treasury and Secretary Steven Mnuchin were planning to quickly implement a new regulation around self-hosted crypto before his term in office expires, these rumors have since been confirmed by Brian Armstrong, CEO of popular Financial platform, Coinbase; the well-known and outspoken executive confirmed these rumors on the 25th of November, via Twitter, where he raised his concerns regarding the regulation and its likely implications should the regulation targeting self-hosted wallets be implemented.

Self-hosted wallets — or self-custody wallets as some would prefer to call it — are forms of software that lets people own, store and transfer their own cryptocurrency without the help of a central financial institution like the Central Bank. Self-hosted wallets can be seen as the closest software has come to perfectly replicating the main features of the internet because normally as long as you have an internet-enabled computer or internet-enabled smartphone, anyone can access the open web, hence, the same applies with self-hosted wallets because it enables anyone to access financial services without the need of any third-party financial institution or platform.

Self-custodial cryptocurrency wallets form the backbone of Blockchain technology and are behind one of the most unique value proposition of Cryptocurrencies like Bitcoin because they enable the admirable data privacy and security usually associated with cryptocurrency by leveraging on the decentralized nature of the technology and giving everyone equal autonomy in accessing key financial services. It has been the impetus driving innovations in Decentralized Finance(DeFi) and has enabled individuals to make transactions on a peer-to-peer (P2P) basis, a form of transaction that was never imagined to be possible until the emergence of the technology behind self-hosted wallets.

Why Regulate Self-hosted wallets then?

The heading to this portion of the article might first seem odd as the intuitive thing and mostly correct thing is for every form of sector or industry to be regulated especially by the government in order to monitor the activities and ensure that it is more efficient, however, when it comes to self-hosted crypto wallets, the reverse is actually the case, the lack or absence of a third-party or centralized body is actually behind its success and remains arguable its most important feature.

The open and decentralized nature of cryptocurrency is what makes it a powerful and very attractive tool for innovation, and it is what levels the playing field globally and is fuelling innovation such as Decentralized Finance (DeFi) and cross border transactions because of its massive potential to bring down the cost of financial services, and improve accessibility; the absence of third-parties reduces the cost of transactions and digital payments while the effects of weaker fiat currency are non-existent in cryptocurrency because there is no central financial institution.

Asides, the financial utility briefly highlighted, the security and most importantly data privacy that self-hosted wallets give crypto users, cannot be underestimated as it remains one major reason why a lot of people are beginning to adopt Blockchain and P2P based solutions; the problems around data privacy and infringement coupled with cybercrime or internet fraud as increased the attractiveness of Blockchain technology due to the level of data privacy and security it guarantees, in fact, no government in any country has a back door to for demanding identities of wallet owners, except in cases where the Crypto community initiate the “hard fork’ for certain scenarios where there is a large concession that the identity of a wallet owner should be revealed, hence, when you consider the advantages and significance of self-hosted wallets being unregulated as it forms the bases of its existence in the first place, one has to wonder why the US government is working on regulating it, and the answer lies in one of its utility.

As already stated, there is no central financial body that monitors the transactions carried out via self-hosted wallets, and that notion that people can just go ahead with transactions away from the financial watchdogs has never seated well with policymakers, in fact, it forms the major basis why highly successful cryptocurrency like Bitcoin remains banned in some countries and why even in countries where it is accepted there are still pushbacks from the government.

This is somewhat understandable as the argument against self-hosted wallets is that they can be a suitable outfit for money laundering and financial fraud as there may not be the need for a money launderer to use the conventional means of creating an off-shore account since he or she can just create a cryptocurrency wallet to store the money in crypto within his or her secure and private self-hosted wallet, hence, the regulation the USA is pushing for is rumored to center around identification and authentication via data collection where for example financial platforms like Coinbase would have to verify the owners of self-hosted wallet by collecting identifying information on that party before a withdrawal could be sent to that self-hosted wallet which is a step further from the basic verification procedure done by crypto platforms as this particular verification would be accessible to a central body or third party most likely the Central Bank.

Like I said before, the idea of such regulation would sound reasonable at first thought but a critical and more in-depth look will show that it is bad practice to start collecting such information in a crypto-economy and if it is implemented its likely implications can seriously affect the already fast-growing Blockchain industry.

Likely Implications

Financial inclusion is like the buzz word these days with a lot of Fin-tech platforms springing up each day to provide financial service and accessibility for various individuals in the world with some already launching online banking platforms even in developing economies, the goal of financial inclusion is to fit into the increasing dynamism happening in the world due to the internet and technology and to find ways to ensure that everyone globally can find financial solutions that make transactions, payments, investments, micro-financing, and even banking easier, cheaper and faster.

Hence, the position of self-hosted wallets in a very unique and progressive one as people in the world can make financial transactions easily with less “payment fee burdens” but most importantly this generation is becoming more skeptical of putting their data out in the public and has found a secure place in Blockchain technology, therefore, the U.S regulation on self-hosted wallets that would most likely make people verify details of sender, purpose, and receiver of transferred funds on Blockchain-enabled platform is highly regressive and does not fit into the evolving and progressive nature that financial inclusion is taking.

However, more importantly, is what it does to the fast-growing Blockchain industry and I think if this new regulation is implemented, the Blockchain industry would receive the largest setback:

Firstly, the new regulation against self-hosted wallets is most likely to infringe on people’s identity due to the nature of the information I already highlighted they would most likely have to give, and such demands for such details would definitely not be seen as innovation to anyone who has already been using Blockchain-enabled platforms and can therefore radically affect the usage of these platforms since data privacy remains a unique value proposition by Blockchain and crypto platforms.

Secondly, we have to realize that the invention and massive adoption of Blockchain and Cryptocurrency is a testament to the present needs of people and what they want and should in case the new regulation is implemented, there is a large possibility that people would switch to unregistered platforms that can ensure the same data privacy they seek for their financial transactions as most people fear giving out too many details to public institutions. The advent of this would still mean that the government’s reason for the regulation is not met but would also affect the Blockchain industry as more people might begin to avoid cryptocurrency transactions on registered platforms like Coinbase or Luno.

Maybe this is actually a Path Being Created for CBDC

Although the Central Bank Digital Currency (CBDC) is not yet officially launched in any country in the world, some governments over the world are beginning to consider the possibility and viability of the legally approved digital currency to be issued by the Central Bank with many countries already reportedly testing pilot programs of the Central Bank Digital Currency(CBDC) for it to supposedly act as a digital fiat currency which would leverage on the cryptographic and security features of Bitcoin from a central point just like regular paper or coins fiat currencies.

However, due to the unique nature of Bitcoin (data privacy, decentralization, isolation from economic effects) combined with the already massive adoption of the popular cryptocurrency I engaged the fact in one of my other articles as to why the CBDC might not have enough Unique value proposition to outrightly replace self-hosted wallet currencies like Bitcoin but may have to settle for being an alternative despite its other benefits because Bitcoin’s data privacy and decentralized nature remains something that people would always want to subscribe for in this new digital era.

However, with the likely features of the regulation to be implemented around self-hosted wallets, it is looking possible that the CBDC might have a bigger chance of replacing Bitcoin outrightly even though Bitcoin would still have the insulation from effects of conventional economic factors like inflation that fiat currencies like CBDC would still have; the provision of basic personal data would undermine crypto greatly and make it really similar to CBDC, and that can level the playing ground for both currencies to compete, but when you consider that world governments would own CBDC, there is no level playing ground because it would definitely have an advantage over cryptocurrencies if the regulation around self-hosted wallets is implemented.

Hopefully, the government Still wants Cryptocurrencies

Reports have it that Coinbase and other cryptocurrency firms have already sent a letter to the US Treasury in which they carefully made their case and highlighted their concerns and possible effects the new regulation can have on financial inclusion globally, the United States, and particularly, the fast-growing Blockchain industry.

Besides not everyone who uses Blockchain or self-hosted wallets want to carry out unlawful activities and according to a comprehensive report by the Blockchain association in 2017, cryptocurrencies have become the easiest thing to blame for these illegal activities when the percentage of illegal transactions in conventional financial systems is more frightening and that therefore, the best move by the government would be to focus on drastically reducing illegal financial activities in traditional financial systems instead of coming up with laws that can greatly affect a relatively new and fast-growing industry.

However, when you consider how many government pushbacks the blockchain industry has had to overcome, you would really have to wonder if the government in the first place wants cryptocurrencies to be existent. No government likes the idea of being bypassed and the recent leak of the European Council plans to ban end-to-end-encryption is another testament that governments want to control technologies — irrespective of their benefits- that seemingly undermine their control would be a threat to them. Hopefully, the letters sent by these crypto platforms would receive a positive response from the government, hopefully, even despite the previous pushbacks by the government, they still want cryptocurrencies to exist.


There Is Rumour to Regulate Self-Hosted Crypto was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.