Will US crypto regulations return Bitcoin to its digital cash origins

01/20/2021

FinCEN (United States Financial Crimes Enforcement Network) recently proposed a series of new regulations applying to financial institutions dealing with digital currencies, such as Bitcoin (BTC) and other digital currencies. As per the regulations, exchanges are required to file a report with FinCEN when a customer makes a purchase in excess of $10,000, and gather Know Your Customer (KYC) information any time a transaction of $3,000 or greater is conducted using a non-custodial wallet.

Hence, if any customer buys $3,000 worth of Bitcoin and withdraws it through a wallet they control, they are not only required to prove ownership of that wallet but also provide their name and physical address, along with additional identifying information.

The newly proposed regulations are putting a significant friction point on deposits and withdrawals. At present, a user signs up to an exchange, submits KYC documents for approval, and can buy and withdraw Bitcoin to a wallet they control, including a hardware wallet for cold storage. When they wish to realize gains, they can then move the funds back onto the exchange and sell for spending money in the bank.

But with these regulations, in the future they are required to prove ownership of the wallet to withdraw, including providing their physical address, and similarly, prove the origin of the funds when moving back on to an exchange. This may lead many users, affect privacy- and autonomy-conscious (of which there are many in the Bitcoin world).Many of the Bitcoiners have opted to stay inside this closed loop for exactly the same reason they may soon seek to exit it — avoiding friction.

Bitcoin was born and bred for decentralized digital payments. Bitcoin chose to pursue off-chain scaling solutions (Lightning Network) and on-chain transaction optimizations (SegWit). Both of these have seen lackluster development over the past several years, with SegWit transactions making up less than half of daily transactions over three years, and Lightning Network growth similarly stagnating, with very few exchanges or other major ecosystem players having integrated it at this point. As noted above, this hasn’t been that much of an issue with the current state of things.

However, when the average user gets direct exposure to the Bitcoin network as it functions today, they’re in for a rude awakening that will either prompt them to disengage entirely or will place pressure on wallets and service providers to prioritize SegWit and Lightning. The new U.S. regulations regarding non-custodial wallets may push more cryptocurrency users to skip the exchanges altogether and use their coins to directly buy and sell goods and services.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the future

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