Regulation: it was always going to come to Bitcoin and the digital asset industry, and we’ve known it for a long time. While some still cling to myths of a financial free-for-all, those in the Bitcoin (BSV) ecosystem are realists—Bitcoin must work within regulations to exist. 2020 saw new rules for KYC/AML continue to emerge, “privacy coins” gradually becoming more taboo, and enforcement actions that eventually reached XRP, one of the world’s most traded assets.
Almost every week in 2020 brought news of new or intended regulations concerning the digital asset industry in some part of the world, from Argentina to Kyrgyzstan. Most concerned issues surrounding identity and investments. There are too many of them to mention in one article, so here are some of the highlights.
But first, a reminder of why regulation exists
When Bitcoin first appeared, many were enticed by the “freedom” it purportedly offered. Near-anonymous payments to anywhere in the world! Censorship resistance! No taxes! Route around laws you don’t like! Sell shares in anything you want, to anyone who’ll buy them! The end of banks and fiat currencies!
If you were among those who thought those promises were true, or could last, you may have been naive, or simply inexperienced in the realities of finance and politics, or fooled by charming characters with sinister motives.
Most who experienced the blockchain industry first-hand for a year saw quickly that the above scenarios were unrealistic, or at best unlikely to last. Scams, hacks and thefts began even before Bitcoin reached mainstream ears, and it only got worse after that. The wiser and more experienced could see what was coming, and warned the still starry-eyed (with varying degrees of success). Even the formerly-naive soon realized that a financial wild-west for everyday individuals offered the same “freedoms” to international crime rings, hackers, terrorists, shady investment schemes, and even corrupt government officials.
Few these days can seriously claim government regulation of digital finance can—or should—be avoided. Governments won’t tolerate such a loss of policy control, or an inability to investigate crimes. Whatever your personal ideology or view of how people might act in a perfect world, this is the ultimate reality. People like Dr. Craig S. Wright have been telling us of this need to coexist for several years now, and those who refused to listen are beginning to find themselves in a precarious position.
KYC stands for “Know Your Customer,” and refers to the process of verifying the identities of those a financial service is transacting with. It doesn’t take deep thought to understand why this is important, even if the requirements are burdensome. 2020 saw an acceleration in the level of identity verification requirements for digital asset service providers—these mostly impacted exchanges, given they’re the main off-and-on-ramps between the fiat currency and digital asset worlds.
Both the U.S. and E.U. members began to implement or propose new KYC rules that impose identity verification not only on exchange wallets, but also external wallets their customers might withdraw to. In the U.S., FinCEN proposed KYC requirements for transactions above US$3,000, while France has floated the idea of digital currency transactions between anyone, of any size, needing proof of identity.
The EU’s fifth anti-money-laundering directive (or “AMLD5”) continued to become actual law in 2020. AMLD5 (and another update, AMLD6) were first published in June 2018, based on guidelines set by the international Financial Action Task Force (FATF). EU member states were given deadlines in January and December 2020 to prepare domestic laws that match the directives. Though not specifically aimed at digital asset exchanges, the directives do impose strict new obligations on them to identify customers with balances of more than EUR150, and report any suspicious activity.
‘Privacy coins’ feel the heat
For all the reasons given above, it’s hard to see how a digital currency specifically designed to mask the identity of its users or the sizes of their transactions could survive in the mainstream. Those who have at some stage or another claimed to offer such ‘privacy coin‘ features include Zcash, Monero and DASH—and in 2020, more exchanges began to delist these assets citing regulatory pressure as the reason. Some jurisdictions have suggested they should be banned altogether.
Even ShapeShift, founded in 2015 by prominent Bitcoin libertarian Erik Voorhees on the promise of wallet-to-wallet asset swaps, announced in November it would delist the three. Meanwhile, government agencies such as the IRS ramped up programs to develop new forensic methods to trace Monero and even “Layer Two” payment networks, like BTC’s Lightning Network. Blockchain forensics firms like Chainalysis have seen a boom in revenues thanks to these efforts.
Investments and securities laws: none too large to target
A November report revealed that, since 2017, the SEC has brought cases against 56 companies and participated in 2,750 enforcement actions in the blockchain/digital asset industry. The actions come mainly from the “ICO craze” of around that time, which saw a proliferation in the number of digital assets being traded thanks to easy creation via the ERC-20 token protocol. Apparently the idea of pumping and dumping new tokens, loosely attaching them to business ideas that rarely made it past the drawing board, and cashing out with millions wasn’t so awesome after all—failed ICO projects paid a quarter of all SEC fines in 2020.
Again, the biggest news of 2020 came right at the end of the year: Ripple, the company that created top-five market cap digital asset XRP, announced it was in the SEC’s sights with a new suit targeting the company and two of its most senior executives. XRP is an “unregistered security,” alleged the SEC and Ripple (the company) had violated investor protection laws by issuing it… in 2013. The SEC’s action has ramifications not only for Ripple and current XRP holders, but also exchanges that listed the asset. Coinbase was among those who announced it would delist XRP while the SEC’s action continued, but it hasn’t stopped disgruntled customers from targeting the exchange itself—Coinbase has been served with a class action suit by traders claiming it sold unregistered securities with full knowledge of what they were doing.
This is the world Bitcoin and the wider digital asset industry now finds itself in, and regulation is unlikely to get lighter in 2021… or ever. The kicker is, anyone should have been able to predict this, and act responsibly—but so many chose not to. It’s important to remember that blockchain records are public and permanent. Investigative and enforcement agencies may take years to catch up with the technology and methods, but eventually they will. In the meantime, governments will do whatever they can to bring order to the wild west. Bitcoin BSV thought leaders are foremost in stressing this to participants in their ecosystem, and it’s advice everyone should heed.