March 19, 2024

Whose eyeing your wallet? Blind regulators



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Scanning this week’s news there were a few stories that caught my eye.The Central African Republic has adopted bitcoin as legal tender, becoming the second country in the world to do so after El Salvador. To say that this is big news is an understatement. Oddity, a D2C makeup company, is offering a security token tied to its upcoming IPO. Security tokens could unlock an opportunity for more people to invest pre-IPO, changing the way private companies fundraise.

The European Parliament launched the final round of discussions on the controversial “Unhosted Wallets” Regulation. The proposed law would require centralized crypto exchanges and custodial wallet providers to collect and verify personal information about self-custodial wallet holders. Trying to use rules from traditional finance in crypto, just shows how out of touch regulators are with crypto. Ilias Louis Hatzis is the founder and CEO of Kryptonio wallet. Africa is Embracing Bitcoin. Good Idea or Not? The Central African Republic is known for its valuable resources, such as diamonds and uranium, but despite all its natural resources, it is also known as one of the poorest countries in the world. Now it’s known as the second country to recognize bitcoin as a legal tender. Soon, people will be able to pay either in the existing currency (the CFA franc) or in BTC. There are about 14 countries in the area that use the African Franc, a French relic from colonial times when European powers occupied the region. The CFA franc is pegged to the old French franc and therefore to the Euro with a fixed exchange rate of 100 CFA = 0.1525 euro. This makes these countries effectively not sovereign and makes it difficult to plan their economic policies with a currency they have no control over.

Like the Central African nations using the CFA, El Salvador in 2001 abandoned its national currency and adopted the US dollar as legal tender. But in September 2021 when El Salvador made bitcoin the country’s official currency to compensate for the US dollar’s inflation, many were skeptical and some, including the IMF, came down hard on its decision. Eight months later, change is still slow. While you can use bitcoin to pay for a Big Mac in McDonald’s, buy a cup of coffee, or pay for groceries with a QR code, merchant penetration is still low and there have been some hiccups with El Salvador’s Chivo wallet. A report from the National Bureau of Economic Research showed that the usage of Bitcoin for everyday transactions is still low and is concentrated among the banked, educated, young, and male population. When Jimmy Song visited El Salvador back in January he wrote: “Bitcoin is incentivizing civilization-building behavior. This is not to say that everything is perfect. There are still lots of problems and many things that need work. But what’s clear is that things are getting better. ”Any country that does not have its own currency and suffers from high inflation could improve its situation by adopting bitcoin as legal tender. The Central African Republic has made a bold move, trying to regain control and improve people’s lives. Things may take time, but El Salvador and the Central African Republic are showing us what transitioning from fiat to sound money looks like. While a couple of small countries in Latin America and Africa might not seem important, we need to take a step back and consider the geopolitical and macroeconomic situation on our planet.

IPO security token conversion. A New Trend in Fund Raising? Oddity is a beauty company with a strong focus on technology. They have launched several innovative projects designed to revolutionize the online beauty industry. Now, Oddity has become the first non-crypto company to tie a security token directly to its equity ownership. They’ve created a crypto token tied to a future IPO, to incentivize interest in a future public offering. The token will convert into regular shares when Oddity goes public, at a 20% discount from the IPO price. Oddity’s tokens will go on sale on May 11 and only be available to accredited investors ($200K+/year or $1M net worth), through an SEC-registered blockchain platform called Securitize. Security tokens are a unique type of crypto asset designed to validate and ensure ownership rights and serve as value-transfer instruments for a specific asset, or set of rights. The concept behind security tokens became popular with ICOs in 2017, which were digital tokens sold by companies and used to raise capital, much like a stock offering. But without being regulated or registered and without any ownership stakes or dividend payouts, eventually, they fizzled out. Oddity might be onto something big. The ability to tokenize an unrealized asset in a regulated security is innovative. With so much of the crypto market still unregulated, security tokens are regulated assets similar to stocks and bonds, even though they’re created and traded like cryptocurrencies. Security tokens could become an important tool for private companies, changing the way they fundraise and unlocking an opportunity for more people to invest pre-IPO.

The European Union vs. Self-Hosted Crypto Wallets - A few days ago there was a big discussion in the European Parliament about new anti-money laundering (AML) rules. The new legislation would require crypto providers to collect and verify information about the beneficial owners of all self-hosted wallet owners and report suspicious transactions to the authorities. Self-hosted crypto wallets are software that lets individuals store and use their cryptocurrency, without relying on a third-party financial institution. But cryptocurrencies are not held in one’s actual wallet. On the contrary, their value never leaves the network. A user accesses and spends funds associated with a given address through the corresponding private key, an authentication code that verifies ownership. Private keys are stored in crypto wallets. You can think of wallets as keychains, rather than traditional wallets. Self-hosted wallets have a significant impact on the efficacy of AML rules, as they allow peer-to-peer transactions. In transactions from one self-hosted wallet to another self-hosted wallet, no third party can be held accountable for AML oversight. To circumvent this blind spot, regulators are trying to collect data about the ownership of self-hosted wallets when they transact with custodial wallets. They claim that these new rules will ensure crypto-assets can be traced in the same way as traditional money transfers. But cryptocurrency transactions already are traceable on public blockchains. Read “Inside the Bitcoin Bust That Took Down the Web’s Biggest Child Abuse Site” and you’ll understand that bitcoin’s anonymity is just a myth. Chris Brummer in his post, describes it spot on: “As a consequence, regulators no longer need banks, exchanges, or even crypto wallets to see the movement of digital assets. Governments, like everyone else, can follow bitcoins and Ether on the blockchain as they move from address to address and watch as they are used for illicit purposes. And they can employ in-house capabilities or commercial forensics firms to observe where bitcoins from multiple addresses are spent in a single transaction, revealing multi-input schemes with one individual having control over both spender addresses, allowing investigators to lump them into a single identity. De-anonymization can involve steps as simple as following the money until it lands at a wallet that can be tied to a known wallet, or one with an exchange where a simple subpoena strips away the myth of anonymization.”Money laundering is between $800 billion and $2 trillion, and only $8 billion was crypto-related. Regulators are proposing to keep records of every crypto transaction. Do they track $2 trillion worth of transactions in money that’s laundered every year, as they are now proposing to do with crypto?

The proposed legislation only shows that regulators are in the dark when it comes to this tech and how it works.To sum it up, restrictions to use self-hosted wallets:• Represent a disproportionate response to the risks posed by the illegal use of digital assets.• Hurt exchanges and drive people to decentralized platforms. It creates a bigger challenge of tracking activity, and even less visibility and control for governments.• Create a total surveillance mechanism of peoples’ financial lives.• Eliminate the unique features of digital assets that make them a catalyst for financial inclusivity.• Limit applications that extend far beyond the transmission of money.Image SourceSubscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve.