Don't Take Your Privacy For Granted As Regulators Get Anxious About Crypto
Global regulatory actions might be sending a worrying sign to the whole crypto industry and its players that are urged to stay vigilant and protect their right to privacy.
A regulatory change is coming, with governments globally looking to impose harsher restrictions on access to cryptoassets, according to Jake Chervinsky, General Counsel at Compound Finance.
When looking at the big picture of recent crypto regulation and enforcement news, what we have on our hands is "an ideological war over self-custody and privacy," said Chervinsky.
He argued 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 example is the 'Swiss Rule,' which he said "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.
As other examples, the Counsel noted numerous governments' statements naming financial privacy as a major 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 change coming, wrote Chervinsky. While converting fiat into crypto and withdrawing any amount to one's own 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 institution, to deputize so to detect transactions, identify counterparties, determine sources of funds, conduct censorship and seizure, etc. for the governments, so the governments are less able to perform these actions.
And while paper cash is less of a worry, as it's used for in-person transfers and is difficult 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 main 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."
All that said, 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 disagreed with this statement, arguing that central banks, in fact, do have a commercial interest there. Rohan Grey, Research Director at Digital Fiat Currency Institute, wrote that central banks are "being too cosy 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.
Alex Gladstein, Chief Strategy Officer at the Human Rights Foundation, meanwhile, commented on the recent news that the government of Chinese Shenzhen city begun a digital yuan (DCEP) airdrop, calling it a "hell of a way to kickstart a nextgen spyware currency."
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