Europe targets self-hosted bitcoin wallets and financial privacy
As inflation and economic disruption increase around the world, seemingly stable governments are looking to tighten controls on cryptocurrency. In particular, states hate what they call “unhosted wallets”, i.e. cryptocurrency that is wholly owned and operated by an individual, as opposed to a regulated business that they can control. .
The European Union is taking action to crack down on these self-hosted cryptocurrency wallets. What they’re proposing would be tantamount to forcing companies to keep records of whoever chooses to pay cash. It is an incredible ratchet in financial surveillance and an unjustifiable attack on the privacy of individuals.
At the end of March, the Committee on Economic and Monetary Affairs of the European Parliament approved a new rule to the existing Funds Transfer Regulations this would prevent regulated entities (providers of services like exchanges) from interacting with self-managed wallets, propagandically referred to as “non-hosted”, without first undertaking invasive “know your customer” data collection. The rule will go to a legislative vote later this year, after which it could go into effect in nine to 18 months.
EU said that these rules “will ensure that crypto-assets can be traced in the same way as traditional money transfers”. But cryptocurrency transactions already can be traced in the same way as normal bank transfers. These rules go far beyond the status quo.
Generally, these data collection and anti-money laundering regulations only apply to transactions handled by regulated entities. When you send a large sum of money from one bank to another, for example, both banks will know who you are and the details of your transaction. Governments require these banks to collect and retain this information in an attempt to combat financial crime, even though this financial monitoring system is very inefficient.
But these rules don’t traditionally apply to most cash transactions. Individuals and businesses are generally not required to keep this information every time someone wants to pay cash. It’s not that governments wouldn’t like to have this information, but they were thwarted for several reasons.
First of all, it’s just not feasible. One of the reasons financial institutions are expected to keep financial records for businesses is that they much need this information anyway to complete the transfer. This is not the case for cash transactions.
It would then be noticeably invasive. Financial surveillance is so insidious precisely because it is so transparent. Governments have piggybacked on daily business activities to tap into a rich vein of data with little notice or comment. If we were to write down this information every time we interact with money in some way, our discreet financial monitoring system would be much more obvious. We could start asking questions.
The EU has realized that so-called “non-hosted” wallets are a way to extend the ratchet of surveillance. Relatively few people use cryptocurrency, and an even smaller portion of them store their own keys and host their own wallets. If governments can secure these controls over sovereign transactions today, they can exercise them in the future when many others might turn to cryptocurrency.
This is not to say that compliance would be easy for regulated exchanges. Cryptocurrency transactions can be quite complicated, with many parties and jurisdictions involved. The provenance of some of the inputs to the transaction may be more difficult to determine than others. And some parties may just not want to dox to the European Union just to send a transaction.
Exchanges may decide not to do any business with a self-hosted wallet. It wouldn’t prohibit self-hosting, but it would cut off much of the crypto economy to those who wish to store their own keys.
That’s probably the point. Consider the protest of Canadian truckers. The government could not prevent anyone from receiving funds from a self-hosted wallet. But he could, and did, lean against regulated entities to cut off the activities of wallets associated with the protest. It is a way to exercise as much control over the cryptocurrency as possible.
Unfortunately, it’s not just about ‘Europe gone wild’ either. The United States has tried to tackle self-hosted wallets through Treasury rulemaking in the past. The Department of Justice also considers the use of sovereign cryptocurrency techniques a “high risk” activity. The Financial Action Task Force, a global standard setter for financial supervisory rules, also opposes the widespread use of self-hosting.
Bitcoin critics point to rules like this and argue that the pursuit of financial sovereignty through technology is futile. Governments will only crack down on the tools of freedom, so you shouldn’t bother to learn enough about them to use them competently, they say.
But note that these rules are imposed on already regulated entities, not individuals who house their own data and money. This is because these individuals cannot really be targeted, at least not effectively.
Governments know that cryptocurrencies impose parameters on their levels of financial control. They would very much like to suppress them as much as possible before financial privacy technologies take off even more than they have already. But they are largely limited to adding new rules on entities that already follow their rules.
In other words, governments will be mostly powerless to stop large numbers of capable and motivated users of strong financial privacy techniques such as self-hosting and good hygiene address.
Right now, we have a window of time where we can use the existing bridges between the crypto and fiat economies to learn more about these tools and prepare. The more people who do this, the less effective the existing government controls on centralized platforms will be.
As inflation, financial surveillance and shortages continue largely unabated, the need for a reliable and independent monetary and payments system, free from government control, will only become more pressing. We can expect governments to target cryptocurrencies even more as they scramble for control. Fortunately, freedom-minded people have the tools and the time to protect their values by using these technologies for financial freedom.