It’s here: Treasury proposes rule to monitor crypto going to self-hosted wallets

Many have called the long-rumored rules an existential threat to peer-to-peer transactions.

The Treasury has released its long-awaited proposal to restrict money services businesses, including U.S.-registered crypto exchanges, from dealing with self-hosted wallets.

In a Friday evening announcement, the Treasury’s Financial Crimes Enforcement Network, or FinCEN, announced proposed rules requiring registered crypto exchanges to verify the “identity of their customers, if a counterparty uses an unhosted or otherwise covered wallet and the transaction is greater than $3,000.” 

The rule is currently just a proposal. The Treasury has given stakeholders 15 days to respond with comments. 

Rumors of the proposed rules have been circulating for the past month. With Treasury Secretary Steven Mnuchin on his way out the door as a new administration comes in, they have been viewed as a parting shot at crypto. Of the announcement, he said: 

“This rule addresses substantial national security concerns in the CVC market, and aims to close the gaps that malign actors seek to exploit in the recordkeeping and reporting regime.”

A number of leading lawmakers have already come out in opposition to the proposed rule, which many see as an assault on the nature of peer-to-peer transactions. However, in the absence of a formal law, the Treasury has considerable rulemaking power in this area.

That said, the current proposal is not as radical as some feared. It would, rather, apply existing requirements to keep reports on transactions — the $3,000 threshold of the Travel Rule — to registered entities interacting with self-hosted wallets. Among registered entities, that threshold would instead be $10,000. 

This story is breaking and will be subject to updates. 

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‘Secret’ bridge turns ERC-20 tokens into privacy coins

“Secret Tokens combine the programmability of ERC-20s with the privacy of coins like Zcash or Monero.”

An open-source blockchain protocol called the Secret Network is now offering privacy features for the Ethereum blockchain and 14 ERC-20 tokens.

According to a Secret Network blog post, the protocol launched its Secret Ethereum Bridge on the mainnet today, which is designed to allow Ether (ETH) and all ERC-20 token holders to create programmable versions of their assets with privacy features. The Secret Network compared these “secret” tokens to privacy coins like Monero (XMR):

“Secret Tokens combine the programmability of ERC-20s with the privacy of coins like Zcash or Monero. Interactions with Secret Token contracts are encrypted, viewable only to address owners or holders of their viewing key.”

Secret Network said that it would initially offer these privacy features to 14 ERC-20 tokens, including ETH, Yearn.Finance (YFI), Uniswap (UNI), Band (BAND), Compound (COMP), Chainlink (LINK), Aave (AAVE), Kyber (KNC), Synthetix (SNX), Ocean (OCEAN), Maker (MKR), Dai (DAI), Tether (USDT), True USD (TUSD), and wrapped Bitcoin (WBTC).

The latest Ethereum announcement is part of a broader plan from the Secret Network to bring privacy features to public blockchains. Developers can build and deploy the protocol’s “secret” smart contracts that use encrypted inputs, outputs, and states. These contracts reportedly allow a blockchain to utilize private data in decentralized apps without compromising users’ personal data.

The protocol said it was also planning on launching bridge mining rewards starting in January. Crypto users can earn Secret’s SCRT tokens for keeping their assets locked on the Secret Ethereum Bridge.

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Law Decoded: The war of the wallets, 12/4–12/11

Determining the future of who can and cannot custody crypto and how much you need to know about them remains a central topic of discussion.

Every Friday, Law Decoded delivers analysis on the week’s critical stories in the realms of policy, regulation and law.

Editor’s note

Last week’s Law Decoded sounded the alarm on threats to self-custodial wallets in the U.S. in particular. While such concerns have continued to take shape, nothing concrete has emerged from the U.S. Treasury, which was at the heart of last week’s conversation.

Though I don’t like to recycle themes, it seems a reasonable time to ask the question: What is a crypto wallet as far as a regulator is concerned?

While many people access their crypto through custodial solutions in which your “crypto” is yours on someone else’s ledger rather than on the underlying blockchain, real wallets are just means of managing private and public keys. They are analogous to bank accounts in that they let you transfer value in the form of Bitcoin or whatever else, which is where many regulators see their right to step in.

Bank accounts in most major economies require a fair amount of personal information as a means of preventing money laundering, but they are still involved in facilitating plenty of illicit activity. Exemptions for corporate entities, for example, have created notoriously difficult webs to untangle in investigations. And while regulators may be willing to look at crypto wallets as bank accounts to get more authority to reign them in, it’s disingenuous to say that bank accounts are the only analogy available. You can buy a real wallet and fill it with cash without ever having to pass a KYC check.

The regulatory counterargument is, of course, that it takes much more time to bring a real wallet full of cash to, say, a sanctioned person in Iran than to send the equivalent value to that person’s Bitcoin wallet. But, nobody at this point is really finding that Bitcoin, in its current state, is more likely to be caught up in illegal activity than cash or even bank accounts. So from a regulatory perspective, it seems odd to prioritize a hypothetical problem over existing problems of equal or greater scale.

Liberté, égalité, mais pas anonymité

France is looking askance at anonymous crypto accounts, per a recent order from several French ministries.

The order primarily reinforces that existing financial controls — especially those requiring accounts and assets to be traceable to beneficial owners — also apply to crypto. Effectively, this would mean that crypto addresses need to be traceable to specific customers. The order refers to this as a way of integrating crypto further into the regular financial system.

The most notable signatory to the order was Minister of Finance Bruno Le Maire. At the heart of the order are the usual suspects: Fear of money laundering and terrorism financing. Le Maire in particular has been critical of crypto as a means to unseat national monetary sovereignty.

However, the extent of this order’s application seems limited. It refers extensively to the Financial Action Task Force’s guidance, which concentrates on exchanges rather than independent wallets. Though the order specifies that crypto-to-crypto exchanges are within its purview, it’s also notoriously difficult for governments to be sure that such transactions are happening within their jurisdictions, which is a big part of why authorities tend to focus on crypto-to-fiat gateways. Nonetheless, such an order adds legal force to enforcers in one of the biggest economies in Europe and their ability to attack anonymous exchanges of crypto.

Congressional Blockchain Caucus beefs with regulators over crypto

This week saw two letters going from members of Congress, one to the Securities and Exchange Commission and one to the Treasury.

The two letters included overlapping members as signatories, especially those from the Blockchain Caucus. They also shared concerns with anticipated rulemaking, though the legislators were asking the Treasury to pump the brakes and the SEC to hit the gas.

The letter to the Treasury focused on a rumored ban on self-custody i.e. wallets that are not in the hands of exchanges or other financial institutions that can report on the details of the wallet owners. In other words, an attack on peer-to-peer, which seems impractical but also would undermine one of the foundational pillars of crypto.

The letter to the SEC was a request for clarity on who can custody security tokens — a major hold-up for potential broker-dealers trying to register with self-regulatory group, FINRA. Currently, there is a backlog of applications in limbo, seeing neither acceptance or rejection. Without clear guidance, nobody knows how to proceed.

Privacy wallets have skyrocketed in popularity this year

As self-custodial wallets fall under threat, wallets that specifically enhance privacy are gaining popularity among allegedly illicit actors.

Per analytics firm Elliptic, the overall proportion of Bitcoin transactions that involve illicit usage has dropped significantly over the past several years as mainstream investment has picked up.

While mixers seem to have gained some traction with criminal activity this year, privacy wallets — especially Wasabi — seem to have come out on top. The firm noted that illicit crypto made its first stop in such wallets in 13% of cases, compared to just 3% the year before. The firm further confirmed that they still generally can’t trace Bitcoin upon its departure from such wallets, which would seem to mean that the technology is working.

Further reads

AEI’s Jim Harper interrogates the logic of holding crypto programmers responsible in the same way as fiduciaries.

Despite delays in releases due to COVID-19, attorney Keith Letourneau argues that the pandemic has revealed more need for blockchain than ever.

Jason Razovsky of R3’s legal team advises other counsel on legal concerns of proprietary blockchain software.

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It’s not about data ownership, it’s about data control, EFF director says

She believes that by agreeing to certain “Terms of Service,” users abdicate a portion of their rights.

As technology advances, personal data becomes an increasingly relevant topic. Many in the crypto industry hold sovereign finance and data privacy in high regard. Participants’ best efforts may be undermined by centralized businesses and regulating bodies, however, according to Cindy Cohn. Cohn is the executive director at the Electronic Frontier Foundation, or EFF, a nonprofit entity focused on digital rights. 

Cohn joined a Web Summit panel on Thursday labeled “Internet: Who owns our data?” Pointing toward the title, she explained: “I actually think that’s the wrong question, I think the question is who controls your data.”

She continued:

“You already own your data most of the time in terms of some kind of a version of ownership, but often you don’t control it because you click it away in that clickwrap moment for most of the services that you use. So it doesn’t matter, the ownership is not making a difference, whether it’s there or it’s not, if you can just click it away.”

Clickwrap refers to the terms and conditions that act as a gatekeeper for most modern websites and services. Signing up for a service, such as Facebook or PayPal, requires agreeing to pages and pages of text, often consisting of confusing legal jargon. Not agreeing to the terms as-stated generally means not using the service or website.

Noting data control as a better descriptor of the current situation, Cohn said:

“Controlling your data means that we can put it beyond the scope of a simple clickwrap agreement, and we can say that there are some situations in which your control just cannot be rested from you, it can’t be taken from you. Sometimes maybe not at all, but certainly not with a clickwrap kind of agreement.”

Cohn said improvement may come from altering current legal and technological frameworks, as well as different actions taken by major companies.

One current law in the United States, called the third-party doctrine, effectively forfeits a user’s rights over data provided to services and websites. “All of the non-content data that those companies have, you’ve waived your constitutional protections for them because you’ve given them to a third party,” Cohn noted.

The U.S. Internal Revenue Service recently began a crackdown of the tech behind privacy coin Monero (XMR). The government agency hired Chainalysis and Integra FEC, two crypto analytics outfits, to help them in their efforts.   

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Cypherpunk Holdings becomes 9th largest public holder of Bitcoin

Canadian holding company dumped XMR and ETH to fund its acquisition.

Cypherpunk Holdings (CSE:HODL), a privacy-focused Canadian investment company, has upped its stake in Bitcoin (BTC). 

The company disclosed Thursday that it has added 72.979 BTC to its reserves since June 30, 2020.

Cypherpunk funded the acquisition by liquidating its holdings of Monero (XMR) and Ethereum (ETH), as well as through partial proceeds from a private placement of $505,000 CAD, or $388,000 U.S., closed on Aug. 27.

With the purchase, Cypherpunk now has 276.479 BTC in its reserves, making it the ninth-largest public Bitcoin holder. At current values, Cypherpunk’s stake in BTC is worth just under $4.8 million.

At the time of writing, at least 14 publicly-traded companies held Bitcoin on their books. Combined, their holdings amount to 66,896.59 BTC, or $1.2 billion. That’s equivalent to roughly 3.2% of Bitcoin’s circulating supply.

Cypherpunk Holdings, which trades on the Canadian Securities Exchange, has several privacy-focused businesses on its books, including Wasabi Wallet and Samourai Wallet. The company also invests in Hydro66, a green cloud infrastructure platform, and smart contract protocol Chia Network.

The company is run by Antanas Guoga, or Tony G, a Lithuanian businessman, politician and former professional poker player. He now serves as an elected member of the Seimas, the legislative branch of the Lithuanian government. Previously, he served as Member of European Parliament for Lithuania. 

It appears that more public companies are converting their cash holdings into Bitcoin as a more suitable store of value. MicroStrategy, which has converted most of its cash holdings into Bitcoin, is the most prominent example of this trend. The company now sits on 38,250 BTC after nearly doubling its holdings over the summer. 

Galaxy Digital is the second-largest public Bitcoin holder at 16,402 BTC, followed by Square’s 4,709 BTC.

Cypherpunk did not immediately respond to a request for comment.

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