The United States Financial Crimes Enforcement Network (FinCEN) recently proposed a number of new regulations that apply to financial institutions dealing with digital currencies such as Bitcoin (BTC). To summarize the proposed arrangements, an exchange would essentially be required to file a report with FinCEN when a customer makes a purchase over $ 10,000 and to collect Know Your Customer information when a transaction over $ 3,000 or more more is carried out with an unprotected wallet.
This means that if a customer buys $ 3,000 worth of Bitcoin and withdraws it into a wallet they control, they will not only need to prove possession of that wallet, but also provide their name and physical address, as well as additional identifying information.
Personally, my life will hardly change. I’ve been living entirely on cryptocurrency since 2015, without bank details since 2016, and have never used a central exchange to receive all of my coins in exchange for goods and services. But as few as I live, we are likely to have a significant impact on how most cryptocurrency users run their businesses. I would venture a guess that most of the users have interacted with a centralized platform that requires KYC.
For the rest of the cryptocurrency users, the newly proposed regulations would mean a significant point of friction when making deposits and withdrawals. Currently, a user logs into an exchange, submits KYC documents for approval, and can purchase and withdraw Bitcoin in a wallet under their control, including a hardware wallet for cold storage. If they want to make a profit, they can put the money back on the stock market and sell it to spend money in the bank.
However, in the future, they may need to prove ownership of the wallet they are withdrawing to, including their physical address, and similarly prove the origin of the funds when they return to an exchange. This can lead many users, including the privacy and autonomy conscious (of which there are many in the Bitcoin world) to looking for other, less intrusive ways to use their digital funds. By paying directly for the goods and services you want instead of selling them in fiat currency first, you avoid the headache of passing the regulatory friction point every time.
The “closed loop centralized exchange” experience that bitcoiners will wake up to
There’s a reason relatively few people have made regular transactions and purchases using Bitcoin – they didn’t have to. The average user signs up for an Exchange account, buys crypto, and potentially sells for some profit. Some of the hardcore users might even buy a hardware wallet and transfer money to it from an exchange. This can be an infrequent transaction of significant amounts without the need for real speed or particularly low fees. The basic process of buying for investment and selling occasionally to make a profit or spend is relatively smooth in centralized exchanges, which is why so few have ventured out of this closed loop.
Many bitcoiners have chosen to stay in this closed loop for the exact same reason that they may soon be trying to get out of it – to avoid friction. Sure, many will simply dig into the additional regulatory steps, but many others, especially thought leaders and longtime community experts, will choose to stick closer to the Cypherpunk ethos.
Bitcoin’s adoption ecosystem will get the boost it needs
Bitcoin was born and raised for decentralized digital payments. At some point, this use case took a backseat to a digital store of value, and the tools needed to reclaim that purpose are not yet sufficiently developed – especially scaling.
Bitcoin opted for off-chain scaling solutions (Lightning Network) and on-chain transaction optimization (SegWit). Both have developed only weakly in recent years. SegWit transactions accounted for less than half of the daily transactions over three years, and Lightning Network’s growth similarly stagnated, with very few exchanges or other major ecosystem players integrating it at the time. As mentioned above, given the current state of affairs, this wasn’t such a big problem.
However, when the average user comes into direct contact with the Bitcoin network as it works today, they are faced with a rude awakening that will either cause them to relax completely or put pressure on wallets and service providers to be granted SegWit and Lightning prioritize. In a free market that is largely cryptoverse, consumer demand drives innovation to meet their needs. When enough bitcoiners require bitcoin to work seamlessly (beyond simply posting on Twitter) for small and efficient transactions, the market will seriously push for the ecosystem to evolve to meet its needs.
Hungry competitors line up to take on the role of digital money
Of course, bitcoin is far from being alone in the competition for cryptocurrency for direct purchases. Since moving to a more gold-centric role in 2016 or 2017, some hungry competitors have popped up. In the foreground are of course the most important Bitcoin forks, Bitcoin Cash (BCH) and Bitcoin SV (BSV). Both have taken an on-chain scaling approach and are capable of handling large numbers of transactions inexpensively, but neither has achieved a compelling differentiator to fully take over Bitcoin’s stake in the payments market. Bitcoin Cash has the clear advantage in terms of integrating with valuable services like Purse.io, but lost significant momentum due to repeated forks that each brought part of the community and mindshare with it. Bitcoin SV brings a few new features, including social media platforms and rudimentary human-readable username systems. But with a market ranking outside the top 10 and with integrations far less important than Bitcoin Cash, an uphill battle is certainly ahead. Additionally, Craig Wright’s brand has tainted the project in the eyes of much of the larger crypto-overseas, making partnerships and advertising difficult.
Bitcoin Cash has the clear advantage in terms of integrating with valuable services like Purse.io, but lost significant momentum due to repeated forks that each brought part of the community and mindshare with it. Bitcoin SV brings a few new features, including social media platforms and rudimentary human-readable username systems. But with a market ranking outside the top 10 and with integrations far less important than Bitcoin Cash, an uphill battle is certainly ahead. Additionally, Craig Wright’s brand has tainted the project in the eyes of much of the larger crypto-overseas, making partnerships and advertising difficult.
Litecoin (LTC) makes an interesting case as the longest-running payment-oriented Bitcoin alternative, but it has not yet managed to hold its own. From 2014 to 2017, the transaction volume trended downwards, only to recover significantly when Bitcoin’s scaling problems emerged. Since then, it has served as a test network for Bitcoin as well as an off-chain scaling solution. Litecoin’s own scaling path seems uncertain, as the implementation of Lightning Network was even less successful than that of Bitcoin, while the current 4x on-chain capacity still leaves a lot of leeway compared to Bitcoin. Will Litecoin remain as a replacement until Bitcoin or some other project develops to fully take over payment management, or will this be the opportunity to take on the role of digital money? In any case, its fate seems inextricably linked to that of Bitcoin.
The dark horse in this department could very well be Dash, whose name is literally an abbreviation for “digital money” and has competed for this use case longer than any other alternative besides Litecoin. And despite the steady growth in transaction numbers, regardless of a bull or bear market, it has largely been lost in an increasingly crowded field of payment coins, some with supporters of crypto celebrities, especially after the realignment from a privacy focus to an everyday payments focus.
However, unlike its competitors, Dash has worked on some real improvements to the payment experience for years, including instant transaction processing and anti-51% attack protection, making a Dash transaction more secure in seconds than what its competitors could do in minutes or even hours – an experience especially useful for retail in-person payments. Together with the recently released version of the long-awaited upgrade “Evolution” to testnet, which not only contains readable user names and contact lists, but also completely decentralized digital identities, this could make 2021 an interesting year for the crypto payments space. It remains to be seen whether the combination of instant payments with ease of use at the protocol level is enough to grab the attention of an industry with a notoriously short attention span.
The new U.S. regulations on non-custody wallets could see more cryptocurrency users skipping exchanges altogether and using their coins to buy and sell goods and services directly. Will that be enough to get Bitcoin to reclaim its peer-to-peer purpose for digital money by finally developing scaling solutions like the Lightning Network that are designed to be easily usable by the average person? Or will one of his kids choose this time to shine and take over the payment room while Bitcoin withholds the use case for investment?
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Joël Valenzuela is an experienced independent journalist and podcaster who has lived without cryptocurrency since 2016. Previously he worked for the decentralized autonomous organization Dash and now writes and podcasts mainly for the Digital Cash Network on the decentralized LBRY content platform.