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Monday, October 3, 2022

Cryptocurrency Exchange Regulations in the US

Our next question comes from “Donald Trump?” What is your opinion about the rumoured burdensome crypto wallet rules that I, Donald Trump, may rush out soon? Thanks! [Answer] You’ve probably heard about this. There is a rumour going out that Stevie Mnuchin, Secretary of the Treasury [of theUSA] is about to release some regulations that apply to so-called “self-hosted wallets.”Also known as wallets. 

Self-hosted wallets are the wallets you should be using. Self-hosted wallets are what we call “non-custodial wallets” which are wallets where you control the keys. And in the financial industry, both here in the USA but also in Europe and many other countries around the world, financial regulators are getting very nervous about this general idea of…

Um, what should we call it sovereignty, independence, civil rights, self-expression, freedom of association, assembly, and speech?[Exasperated gasp] Burdensome civil liberties and freedom. So what they’re trying to do is regulate the use of self-hosted wallets. 

Most recently, last week, the CEO of Coinbase, Brian Armstrong did a whole tweet thread about how concerned he was and how much he objected to the possibility of there being regulations of self-hosted wallets and how burdensome these would be on Coinbase. But here’s the interesting thing — because all of these regulations — they’re not about banning the use of self-hosted wallets.

They’re not even about regulating how you use your self-hosted wallets because, of course, you can regulate the use of self-hosted wallets. It’s not possible to tell people what software they can or can not run on their own computers. Although okay, strictly speaking, it is possible to tell people — not many will listen. It is not possible to enforce what software people run on their own computers. 

And therefore, as long as we have free and open computing devices, which I believe we will continue to have, indefinitely, that cat is out of the bag! We will be able to run whatever software we want. People can make it difficult for you to get the software. They can make it illegal for you to use certain types of software. But they can only really do that in countries that have a tendency towards dictatorship and draconian attitudes towards civil liberties. 

So what are we talking about when we talk about [these] regulations on crypto wallets? In the USA, what they’re talking about is requiring you to prove, when you withdraw from an exchange, that the address you’re withdrawing to belong to you.

And this is one of those classic regulations that have been thought up by people who really really don’t understand how this technology works. Because of course there isn’t really a way to do that and it’s kind of pointless. 

But the general idea is this: in order to prevent people from withdrawing to addresses controlled by dangerous criminals terrorists and other things like that, especially since exchanges have various blacklists of addresses etcetera, what they’re trying to do is impose regulations whereby you have to prove to your exchange (or perhaps simply testify to your exchange) that the address that you’re withdrawing to belong to you. Now Brian Armstrong and people who run exchanges are notably worried about this.

And the reason they worried about this is NOT that they great proponents of freedom, of course, but because this would really cause a problem for exchanges. You see right now, if people have money in an exchange wallet, they use that to make payments to all kinds of different places. They use it to buy stuff on the web. They use it to transfer money to their friends. 

They use it to send it to gambling sites and various other places. And they do a lot of that under the guise of a withdrawal because as long as the exchange can kind of look at these addresses and say well it’s not on our blacklist so we’re okay and there’s no further requirement, they can turn a blind eye to the fact that the address you’re always withdrawing to is basically an address on a competing exchange ora gambling site or a porn site or the address of your pot dealer or whatever else may be the case. 

Of course, the regulations that we’re talking about here don’t change any of these capabilities for those who have self-hosted wallets.

Because here’s the thing — so you need to prove that the address you’re withdrawing to is yours and not the address of some undesirable third party — so how much of a burden does that create? Okay, I prove that it’s my address. In fact, I use one of my own addresses. 

I withdraw from the exchange and then I do another transaction and send it to, let’s say, my pot dealer. So instead of withdrawing directly from the exchange to my pot dealer, I first withdraw to my wallet and then I send it. Okay, I don’t have a pot dealer. 

And I certainly wouldn’t spend my beautiful bitcoin on that. But some people do. And so this is terrifying to the financial regulators that want to control the endpoints of every transaction. But you can’t actually do that on a decentralized open network such as bitcoin. And the reason you can’t it is because I can generate as many addresses want on my wallet. 

So, can every other recipient who is trying to transact with me. And if I need to do an extra transaction, to add another hop, to put one-hop distance between me and the exchange withdrawal, I can easily do that. So can everybody else. So this regulation is kind of pointless. It’s pointless because you’d enforce it. {What if] you ask me to testify that it is in fact it is my address? First of all, a lot of people will simply lie and then they ‘withdraw directly from the exchange to an address that belongs to someone else even after they ‘testified that it’s theirs. 

Some [regulators] have come up with some more elaborate schemes, “how about we make users take a screenshot?”Seriously?!? Some days I really doubt whether any of these legislators have ever tried to float some of these ideas with their 14-year-old child and seeing how long it takes that 14 years old to bypass the incredible regulatory edifice that they’ve come up in their brilliant (senile) minds.

A screenshot? Really?? Alright, so have you heard of this thing called “Photoshop?”Okay, not only is the screenshot pointless but you can’t even do that with even more elaborate technical measures. So instead of a screenshot, let’s get sophisticated! We’ve heard of bitcoin. 

We know a bit about it. Let’s ask the recipient to sign a message that we generate on-demand that proves that they control that address. Great. So you put that regulation in place and now when you send me the challenge message I have to send it to my pot dealers for them to sign to prove to you that it’s actually my address. It’s pointless. 

You see the problem is — no matter where you put that barrier, you only have to go one step beyond in order to bypass that barrier. Here’s what the exchange CEOs are really worried about. If you area user and these regulations come into practice, you will very quickly realize that in order to get the full power of your bitcoin you going to have to do two transactions.

You’re gonna have to do one transaction from the exchange to a self-hosted wallet that you control and from there you now have the freedom to send it wherever you want. 

Which then begs the question, why the hell would you leave it on the exchange in the first place? If the self-hosted wallet actually gives you all of the power, but every time you have to move it out of the exchange you have to pay an extra transaction fee, why not do one transaction to move everything out of the exchange onto your ownself-hosted wallet? And then you are actually in control of your own money: Not Your Keys Not YourCoins becomes a reality.

You see, the problem is financial regulators can regulate financial services. They cannot regulate the operation of the software on your computing device. If they regulate financial services, those financial services become less useful as compared to the free software that you’re running on your own device. 

And of course none of the exchange CEOswant you to realize that their system, which is custodial, is the only thing that’s actually subject to regulation and can be regulated. 

And therefore is an inferior product in which you have more fees for less control. And THAT’S why they object to these regulations. What is the impact of these regulations is to drive more people to self-custody and control over their funds.

Because they realize that exchange wallets are a poison chalice. Hi! Thanks for watching the video. I’m Andreas M. Antonopoulos. I’m the author of Mastering Bitcoin, Mastering Ethereum, and TheInternet of Money series.

If you’d like to support my mission of bringing education about bitcoin and open blockchains to as many people as possible, under open free creative commons licenses, please consider subscribing to my channel and supporting me on patreon.com/aantonop. Thank you!.

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