The United States Financial Crimes Compliance Network, or FinCEN, recently introduced a set of new rules for financial institutions dealing with digital currencies, such as Bitcoin (BTC). In order to summarise the new rules, exchanges will, in effect, be forced to file a report with FinCEN anytime a customer orders more than $10,000 and receive details from Know Your Customer at any time that a sale of $3,000 or more is made using a non-custodial wallet.
This means that if a customer spends $3,000 worth of Bitcoin and withdraws it to the wallet they manage, they will not only have to claim ownership of the wallet, but would also have to include their name and physical address, along with additional identity details.
Personally, my life is going to change very little. I have been living entirely off cryptocurrencies since 2015, unbanked since 2016, having never used a centralised market, earning all my coins as payments for goods and services. But as few live as I do, we’re likely to have a big effect on how most cryptocurrency users operate their company. I would be in danger of guessing that most people communicated with a centralised portal requiring KYC.
For the majority of the cryptocurrency customers, the recently introduced legislation would place a major friction point on deposits and withdrawals. At present, the customer signs up for an exchange, submits KYC documents for acceptance, and may purchase and remove Bitcoin from the wallet they run, including a cold storage hardware wallet. If they continue to make profits, they will transfer the funds back to the exchange and sell for the money they pay in the bank.
In the future, however, they will be asked to prove possession of the wallet to which they withdraw, including giving their physical address, and, in the same manner, to prove the origin of the funds before going back to the exchange. This of lead many consumers, especially the privacy-conscious and self-conscious (among whom there are many in the world of Bitcoin), to search for other, less invasive ways to use their digital tools. Making purchases directly for the goods and services they want, rather than first selling for fiat currency, removes the hassle of going through the regulation-induced friction point every time.
The “centralized exchange closed-loop” experience Bitcoiners will wake up from
There’s an explanation why very few people—they didn’t need to—have participated in daily exchanges and sales with Bitcoin. The regular user signs up for an exchange account, buys crypto, and can sell to make any profits. Some of the more hardcore users could also purchase a hardware wallet and send funds to it from an exchange that may be an infrequent transaction of large sums with no real need for speed or especially low fees. The simple method of buying for investment purposes, and sometimes selling for earnings or spending, is surprisingly smooth with centralised markets, which is why very few have so far gone far out of this closed loop.
Many Bitcoiners have opted to stay inside this closed loop for exactly the same reason they may soon seek to exit it — avoiding friction. Sure, many will simply deal with the extra regulatory steps, but many more, particularly thought leaders and longtime community staples, will choose to stay closer to the cypherpunk ethos.
Bitcoin’s adoption ecosystem will get the push it needs
Bitcoin was born and raised for anonymous digital transfers. At some point, this use case has taken a back seat to a digital store of value, and the resources required to retake that function have not yet been properly developed—most of which, of course, is scaling.
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, as the regular person gets clear exposure to the Bitcoin network as it works today, they’re in for a rude wake-up call that either causes them to disengage completely or places pressure on wallets and service providers to prioritise SegWit and Lightning. In a free market that is largely the cryptoverse, customer appetite pushes creativity to satisfy its needs. If enough Bitcoiners continue to demand that Bitcoin function smoothly for tiny and effective transactions (beyond merely posting on Twitter), the market would seriously pressure the ecosystem to evolve to suit its needs.
Hungry competitors line up to take over the digital cash role
Of note, Bitcoin is far from alone in the blockchain competition for direct transactions. After its shift to a more digital gold-focused position in 2016 or 2017, quite a few hungry competitors have appeared. Naturally, the two Bitcoin forks, Bitcoin Cash (BCH) and Bitcoin SV are at the forefront of people’s minds (BSV). All have followed an on-chain scaling strategy and have the potential to market a vast amount of transactions cheaply, but none has achieved a persuasive enough differentiator yet to truly take over Bitcoin’s market share of payments. Bitcoin Cash has a distinct edge in terms of integrations with important utilities, such as Purse.io, but has lost considerable traction due to repeated forks, each bringing a portion of the community and mindshare with it. Bitcoin SV has a range of developments, including social media sites and simple human-readable username schemes. But with a consumer rating squarely out of the top 10 and even less big integrations than Bitcoin Gold, there’s definitely a difficult fight ahead. In comparison, the Craig Wright name has soured the project in the minds of many of the broader cryptovers, making alliances and advertisements impossible.
Bitcoin Cash has a distinct edge in terms of integrations with important utilities, such as Purse.io, but has lost considerable traction due to repeated forks, each bringing a portion of the community and mindshare with it. Bitcoin SV has a range of developments, including social media sites and simple human-readable username schemes. But with a consumer rating squarely out of the top 10 and even less big integrations than Bitcoin Gold, there’s definitely a difficult fight ahead. In comparison, the Craig Wright name has soured the project in the minds of many of the broader cryptovers, making alliances and advertisements impossible.
Litecoin (LTC) poses an intriguing scenario as the longest-running bitcoin-focused option, but so far it has not been able to come to its own. From 2014 to 2017, the transaction volume trended downward, only to recover dramatically when Bitcoin’s scaling problems started to surface. Since then, it has acted as a testnet for bitcoin sorts, as well as an off-chain scaling solution. Litecoin’s own scaling future continues to be unpredictable, as its own Lightning Network implementation has seen far less traction than Bitcoin’s, although its present 4x on-chain capability relative to Bitcoin still leaves plenty of space to develop. Will Litecoin remain a replacement until Bitcoin or another project emerges to completely take over the lead in payments, or will this be the chance it needs to take over the digital cash role? Any way, his destiny appears to be inexorably mixed up with that of Bitcoin.
The dark horse in this division could well be Dash, whose name is simply an abbreviation of “digital cash” and has fought for this reason longer than any other alternative but Litecoin. And despite steady growth in transaction numbers, regardless of the bull or bear market, it has largely been lost in an increasingly crowded field of payment coins, some with crypto celebrity backers, particularly after realignment from anonymity to the emphasis of regular payments.
Unlike its rivals, however, Dash has spent years focusing on a range of real enhancements in payment experience, including instant transaction settlement and anti-51% attack security, rendering the Dash transaction safer in seconds than its competitors might manage in minutes or even hours—an experience that is especially useful for in-person retail purchases. This, together with the recent release on the Testnet of the long-awaited “Evolution” update, which not only offers human-readable usernames and contact lists but also completely decentralized digital identities, could make 2021 an interesting year for crypto payment space. It remains to be seen if the combination of instant payments and protocol-level ease of use would be adequate to draw the interest of an industry with a famously low attention span.
New US regulations on non-custodial wallets can cause more cryptocurrency users to bypass exchanges altogether and use their coins to purchase and sell goods and services directly. Will this be enough to propel Bitcoin to recover its peer-to-peer digital cash target by eventually getting scaling options, such as the Lightning Network, built enough to make it convenient for the ordinary citizen to use? Or would one of his children want to shine this time, taking over the payment space while Bitcoin is locking down the investment use case?
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