Treasury Proposal for Non-Custodial Wallets Is Finally Here
PowerKee’s “Bastion of Privacy” #5
A passage from the "Sovereign Individual", a prophetic book written in 1996 by James Dale Davidson and William Rees-Mogg, talks about the desire of wealthy governments to control their citizens and businesses. To achieve this, they turn to regulation, taxation, and as a consequence, infringement of our privacy.
The US Treasury's recent proposal to apply stringent know-your-customer (KYC) measures to transactions involving self-hosted wallets is an example of such infringement. In the latest “Bastion of Privacy”, we cover the proposed rules in some detail including the privacy implications. We also discuss Pornhub's adoption of cryptocurrencies, including privacy coins, to escape Visa and Mastercard pressure.
Before progressing with this week’s release, we wish to provide an update on the progress of PowerKee. PowerKee will have its first listing in early January. In the meantime, the code underpinning the network is currently being reviewed by an auditor. PowerKee is committed to ensuring that flawless technology underpins its network when it launches. The auditor will review the C++ code and generate reports based on the analysis. The test network for PowerKee is also being put through rigorous testing.
Long-Awaited Non-Custodial Wallet Regulations
Last week, the Treasury Department finally released their proposal targeting self-hosted wallets. According to the Treasury's Financial Crimes Enforcement Network, or FinCEN, registered exchanges will have to apply stringent know-your-customer (KYC) requirements for users who want to withdraw their funds from an exchange address to a self-hosted wallet. Let's dig into the proposed rule and what it means.
In traditional finance, banks have to file two types of reports to the FinCEN – SARs and CTRs. Suspicious activity reports (SARs), often include granular personal details and record anything that a bank may consider unusual. A currency transaction report (CTR) is created for any cash deposit of $10,000 or more. FinCEN has been receiving more and more data from the banks over the years and doesn't have a particularly good track record securing it. In fact, we have seen three high-profile leaks of SARs since 2017. With that in mind, it doesn't make too much sense giving FinCEN more sensitive information, potentially including blockchain addresses tied to real identities.
The proposed rule will require exchanges to record the name and physical address of the wallet owner, for all deposits and withdrawals of $3,000 or more from an exchange to a non-custodial wallet. Virtual asset service providers (VASPs), like exchanges and custodians, will also have to file a CTR to the FinCEN for any transaction above $10,000.
It is unclear what information will be included in a CTR. For example, including a blockchain address along with the legal name and physical address will allow an unprecedented level of surveillance.
Due to the public nature of blockchain transactions, inclusion of the blockchain address in the CTR would give the government real-time access to fund flows from that address. This level of surveillance, without consent, doesn't exist in the current financial system. The proposal also doesn't address interactions between an exchange address and a smart contract address that has no owner.
The process for this rule is also out of the ordinary. Under the Administrative Procedures Act (APA), government agencies have to allow reasonable time for public comments, usually 60 days or longer. The FinCEN is only giving us 15 days, citing national security considerations. If this rule is forced through and made into law, we are likely to see legal challenges under the APA.
Pornhub adds Monero amid Visa and Mastercard ban
After Mastercard and Visa cut off payments to Pornhub, the company made crypto its default payment method for its premium service. It has been accepting Verge (XVG) since 2018 and allowing its entertainers to accept payments in Tether (USDT). In September, Pornhub began supporting Bitcoin and Litecoin. More recently, it also added support for privacy-focused coins like Zcash, Monero and Dash.
While crypto-only payments are available in select geographies, users can utilise a VPN provider. SpiderDAO, for example, is a new crypto project that is looking to facilitate unprecedented online privacy through its decentralised VPN service. The team is currently working on establishing its hardware-based DAO model, with more to follow.
We have seen centralised payment processors pressuring businesses that operate in contentious niches. However, cryptocurrencies and, privacy coins specifically, offer these businesses a route to carry on their operations with minimal disruptions.
Keep Calm and Use Privacy Coins
FinCEN’s proposed rule is a significant step back for personal privacy in the digital age. Such a development underlines the importance of privacy coins in facilitating digital asset users to maintain their anonymity.
In what could be a contentious regulatory environment in 2021, we encourage all crypto users to take privacy seriously by learning more about safely holding private keys, running a node, or researching services that support financial privacy and self-custody. As per previous releases, we also anticipate that privacy coins will take on a new echelon of importance in what will likely be a more stringent regulatory environment in 2021.