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US crypto regulations will return Bitcoin to its digital cash origins

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1 month ago

The downside of using Bitcoin directly may soon be dwarfed by the headache of moving it from one exchange to another.


The United States Financial Crime Control Network, or FinCEN, has recently proposed a series of new regulations that apply to financial institutions that work with digital currencies, such as Bitcoin ( BTC ). To summarize the proposed regulations , exchanges would essentially be required to submit a report to FinCEN when a customer makes a purchase greater than $ 10,000, and to collect KYC information each time a transaction of $ 3,000 or more is made using a wallet. not guarded.

This means that if a customer buys $ 3,000 worth of Bitcoin and withdraws it to a wallet that they control, they would not only have to prove ownership of that wallet, they would also have to provide their name and physical address, along with additional identifying information.

Personally, my life changes very little. I have lived entirely on cryptocurrencies since 2015, I have not had access to banking since 2016, and I have never used a centralized exchange, receiving all my coins as compensation for goods and services. But no matter how few people live like me, we are likely to see a significant impact on the way most cryptocurrency users conduct their business. I would risk assuming that the majority of users have interacted with a centralized platform that requires KYC.

For the rest of the cryptocurrency users, the proposed new regulations would put a significant friction point on deposits and withdrawals. Currently, a user signs up with an exchange, submits KYC documents for approval, and can buy and withdraw Bitcoin to a wallet they control, including a cold storage hardware wallet. When they want to make a profit, they can move the funds back to the exchange and sell them to spend money at the bank.

However, in the future, they may be asked to prove that they own the wallet they are withdrawing to, including providing their physical address, and similarly, to prove the origin of the funds when they return to the exchange. . This can lead many users, including those with a privacy and autonomy awareness (which are many in the Bitcoin world), to seek other less intrusive ways to use their digital funds. Making payments directly for the goods and services they want, rather than selling them first for fiat currency, avoids the headache of going through the regulation-induced friction point every time.

The "closed loop centralized exchanges" experience from which Bitcoiners will wake up

There is a reason that relatively few people have engaged in regular transactions and purchases with Bitcoin - they have not needed to. The average user signs up for an account on an exchange, buys cryptocurrencies, and can sell for some profit. Some of the most demanding users can even buy a hardware wallet and transfer funds to it from an exchange, which could be an infrequent transaction of significant amounts with no real need for speed or especially low fees. The basic process of buying for investment purposes, and occasionally selling for profit or spending, is relatively easy with centralized exchanges, which is why very few have ventured out of this closed circle so far.

Many Bitcoiners have chosen to stay within this closed loop for exactly the same reason they will soon be trying to get out of it: to avoid friction. Sure, many will simply grapple with the additional regulatory measures, but many more, especially thought leaders and long-time community members, will choose to stay closer to the cypherpunk ethic.

Bitcoin adoption ecosystem will get the push it needs

Bitcoin was born and raised for decentralized digital payments. At some point, this use case took a back seat as a digital store of value , and the tools necessary to reclaim this purpose have not yet been adequately developed, the most important of which, of course, is scaling.

Bitcoin chose to pursue off-chain scaling solutions (Lightning Network) and on-chain transaction optimizations (SegWit). Both have seen mediocre development in recent years, with SegWit transactions accounting for less than half of daily transactions in three years, and Lightning Network growth has similarly stalled , with very few exchanges or other players. important ecosystem that have integrated it at this time. As noted above, this hasn't been a big deal with the current state of affairs.

However, when the average user is directly exposed to the Bitcoin network as it works today, they are faced with a rude awakening that will either prompt them to disengage entirely or pressure wallets and service providers to prioritize SegWit and Lightning. In a free market, which is largely the crypto universe, consumer demand drives innovation to meet their needs. If enough Bitcoiners start demanding that Bitcoin work smoothly to make small, efficient transactions (beyond just posting about it on Twitter), the market will put serious pressure on the ecosystem to develop to meet their needs.

Hungry competitors line up to take on the role of digital money

Of course, Bitcoin is not the only one competing to be the cryptocurrency of direct purchases. Since its transition to a more digital gold-focused role starting in 2016 or 2017, quite a few hungry competitors have emerged. At the forefront of people's minds are naturally the major Bitcoin hard forks, Bitcoin Cash ( BCH ) and Bitcoin SV ( BSV ). Both have pursued an on-chain scaling approach and have the ability to transact large numbers cheaply, but neither has yet achieved a compelling enough differentiator to capture Bitcoin's payments market share.

Bitcoin Cash has a clear advantage in terms of integration into valuable services like Purse.io but lost significant momentum due to repeated forks, each of which took a slice of the community with it. Bitcoin SV has quite a few innovations going for it, including social media platforms and rudimentary human-readable username systems. But with a market ranking firmly outside of the top 10 and with far fewer major integrations than Bitcoin Cash, there is certainly an uphill battle ahead. Additionally, Craig Wright's branding has soured the project in the eyes of many of the larger members of the crypto community, making partnerships and publicity difficult.

Litecoin ( LTC ) makes an interesting case as the Bitcoin alternative focused on longer-term payments, but so far, it has failed to become one. From 2014 to 2017, its transaction volume tended to decline, only to rebound significantly when Bitcoin's issues of scale began to emerge. Since then, it has served as something of a testnet for Bitcoin, as well as an off-chain scaling solution. Litecoin's own scaling trajectory appears to be uncertain, as its own Lightning Network implementation was even less successful than Bitcoin's, while its current capacity is 4 times greater on-chain compared to Bitcoin's still leaves plenty of room for growth. .Will Litecoin remain as a substitute until Bitcoin or another project evolves to fully assume the lead in payments, or will this be the opportunity you need to take on the role of digital cash? Either way, its fate appears to be inexorably linked to that of Bitcoin.

The dark horse of this division could well be Dash , whose name is literally an abbreviation for "digital cash" and has competed for this use case longer than any other alternative except Litecoin. And despite the steady growth in the number of transactions, regardless of a bull or bear market, it has largely been lost in an increasingly cluttered field of payment currencies, some backed by celebrities from the crypto ecosystem, especially after the realignment from a privacy approach to a day-to-day payments approach.

However, unlike its competitors, Dash has spent years working on a few real improvements to the payments experience, including instant transaction settlement and protection against 51% attacks, making a Dash transaction possibly more secure in seconds than what your competitors could achieve in minutes or even hours, an experience that's particularly useful for in-person retail payments. This, combined with the recent release on the testnet of the long-awaited "Evolution" update.Providing not only human-readable usernames and contact lists, but fully decentralized digital identities as well, it could make 2021 an interesting year for the cryptocurrency payments space. It remains to be seen if the combination of instant payments with protocol-level ease of use will be enough to capture the attention of an industry with a notoriously short attention span.

New US regulations regarding non-custodial wallets may push more cryptocurrency users to bypass exchanges entirely and use their coins to directly buy and sell goods and services. Will this be enough to push Bitcoin to reclaim its peer-to-peer digital money purpose by finally getting scaling solutions, like the Lightning Network, developed enough to be easily usable by the average person? Or will one of your children choose this moment to shine, taking over the payments space while Bitcoin maintains the investment use case?

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