88% of all BTC transfers are overpaying transaction fees

Three and a half years after the activation of SegWit, adoption of the space-saving transaction format is still far from ideal.

According to analysis by Mark “Murch” Erhardt of Chaincode Labs, 88% of all Bitcoin transaction inputs pay higher fees than are necessary. Erhardt bases his conclusion on data showing just 12% of transaction inputs use the SegWit format, which is less fee intensive than transacting with legacy inputs.

Erhardt believes that a reliance on legacy transaction fees keeps Bitcoin blocks smaller than they could otherwise be, contributing to a seemingly growing backlog of unconfirmed transactions.

A clogged up Bitcoin mempool containing 107 blocks worth of transactions at one point yesterday serves as a reminder that it is possible to save money on fees by creating less costly transactions. The easiest way to do this, according to Erhardt, is by adopting SegWit for all future transactions.

Erhardt pointed out that switching from legacy to data efficient SegWit transactions is necessary to minimize bloating of the blockchain:

“The longer less efficient output formats are prevalent, the more future blockspace debt we accumulate.”

Erhardt believes that integration of SegWit into major wallet provision services is long overdue, contributing to unnecessary mempool and blockchain bloat. “It’s been almost 3.5 years since SegWit activated,” he noted at the end of a thread about the state of the mempool.

“At what point is it acceptable to consider wallets that cannot send to native SegWit addresses outdated?”

Employed for years as a cryptocurrency wallet developer before being hired at Chaincode Labs in 2020, Erhardt is a specialist in UTXO management for commercial Bitcoin wallets, helping them save money on business-related transaction and maintenance costs in a variety of ways.

SegWit transactions currently account for approximately 51% of all Bitcoin transactions; a statistic that is deemed likely to grow in size as commercial wallet providers face rising demand for SegWit address support.

The estimated minimum fee for inclusion into the next block is currently 149 sat/byte, which equates to a fee of $14.97 at a price of $44,870 per BTC.

How using SegWit saves on transaction fees

While SegWit transactions are technically no smaller in size than legacy transactions, the components of their data are weighted differently when it comes to including them in a block.

Data pertaining to the witness component of a transaction is considered to be non-essential to a functioning blockchain and therefore discounted when totaling a transaction’s size. This makes SegWit transactions appear smaller and therefore require less of a fee to process — they are quicker to confirm than a legacy transaction with the same fee

How to start using SegWit now

After finding a competent and trustworthy wallet that supports SegWit transactions, the most important component to using SegWit is moving funds designated to be spent from legacy addresses (begins with a “1” or “3”) to SegWit addresses (begins with a “bc1”).

One of the most popular and battle-tested Bitcoin wallets with SegWit support is Electrum, which also supports multi-signature transactions and the import/export of private keys. A growing number of major exchanges are adopting SegWit support, including Bitstamp, BitMEX, and most recently, Binance. This means transactions to exchanges can also be made cheaper by sending them from a SegWit address.

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A Look at Facebook’s Diem Wallet- Token Sale Accepts 3 Cryptos, Strict KYC, Hefty Data Collection

A Look at Facebook's Diem Wallet- Token Sale Accepts 3 Cryptos, Strict KYC, Hefty Data CollectionDuring the last two years, there’s been a lot of interest in Facebook’s cryptocurrency diem (formally libra) and rumors of a nearing launch date went viral last November. Now the social media giant is advertising the crypto asset’s pre-sale heavily on the platform, as people can now purchase diem with U.S. dollars and three different […]
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File comments against new crypto FinCEN rule, Coin Center leader urges

The crypto space needs your help to impact the outcome of the United States’ Treasury’s crypto wallet proposal.

With the two-week commentary period winding down, Jerry Brito, executive director of non-profit crypto policy advocate group Coin Center, says comments could make a difference in the ultimate outcome of the self-custodied wallet ruling recently proposed by the U.S. Treasury. 

“Coin Center is working with folks in Congress to get some letters sent to Secretary Mnuchin requesting an extension to the rushed comment period,” Brito said in a Dec. 28 tweet, adding:

“Everyone in the cryptocurrency ecosystem should file a comment with FinCEN explaining how this rule would affect them and pointing out the unintended consequences. Filing a comment really does help.”

With his likely exit from office looming next month, U.S. Treasury Secretary Steven Mnuchin dropped a regulatory proposal on the crypto space on Dec. 18. If passed, the new law would essentially mandate that U.S.-based crypto services must check users’ identities and their respective wallets whenever they withdraw over $3,000 to a self-custodied wallet, or if they move more than $10,000 to another platform.

Rather than the normal 60-day period, the regulatory body only left the crypto industry with a 15-day window for feedback on the proposal. Brito posited feedback from the crypto industry could help the situation by pushing back the deadline.

“Mnuchin wants to get this rule finalized before he leaves office on Jan 20,” Brito tweeted. “But FinCEN is required by law to consider every comment before finalizing the rule,” he added. “If there are a lot of substantive comments filed, they won’t be able to finalize the rule before Jan 20.”

Pushing the proposal’s decision date past Jan. 20 would leave the law undecided until after government leaders change seats. Delaying the proposal through that date would likely lead to a more thought-out legislation, according to Brito.

“Ideally you should write a unique, substantive letter that describes how the rule will affect you or your firm,” he added, pointing toward an example proposed on Twitter by Jake Chervinsky, general counsel for crypto project Compound. Comments need to be in to the Treasury by Jan. 4. Industry folks can also send in shorter remarks via a digital rights entity called Fight for the Future.

U.S. regulatory bodies have ramped up their engagement in the crypto space in 2020, evident in a number of headlines throughout the year.

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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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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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