Today, Brian Armstrong (CEO of Coinbase) tweeted out about some new regulations that the U.S. may impose – that is, the regulations would require Coinbase and other centralized crypto institutions to verify the recipient/owner of self-hosted wallets (aka your own crypto wallets) before a withdrawal could be sent to them. This is obviously not a very good idea.
Last week we heard rumors that the U.S. Treasury and Secretary Mnuchin were planning to rush out some new regulation regarding self-hosted crypto wallets before the end of his term. I’m concerned that this would have unintended side effects, and wanted to share those concerns.
November 25th 2020
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Brian does a great job of breaking down why this isn’t a great idea in his thread so I won’t delve too deep into it today. What I do want to discuss is the broader implications here and what it’d look like if a government was to actually just outright ban self-hosted wallets so that everyone had to use centralized and regulated institutions to do any sort of crypto-related activity.
Let’s say that the U.S. decides to outright ban self-hosted wallets – this would obviously be disastrous . Now, why would they do this? Couldn’t they just outright ban crypto instead? Well, they could but it doesn’t really make much sense since governments are all about control – they would rather let crypto exist and money flow into their countries economy. By banning self-hosted wallets, it’d just force everyone to store and trade all of their crypto on centralized exchanges where the governments can monitor all the activity which is exactly what they want.
There is still a light at the end of the tunnel if the above scenario were to play out. That light is, of course, decentralized finance on Ethereum. For the truly decentralized DeFi apps like Uniswap, no one can stop them which means even if a government decided to ban self-hosted wallets, people could simply ignore that ban and continue using Uniswap. Yes, you’d technically be breaking the law by doing this, but this law would be unenforceable just like most copyright infringement is unenforceable – the scale is simply too large. Though, I’d expect DeFi growth to slow considerably and maybe even reverse because a lot of DeFi liquidity relies on CeFi players (individuals and institutions) and CeFi is the fiat on-ramp into crypto for almost everyone.
One more thing to consider in all of this is that not all governments are in alignment or are allied with eachother. The U.S. is strongly allied with a bunch of other western countries but it has weaker allegiances with some eastern countries. So if the U.S. was to ban self-hosted crypto wallets, these eastern nations could basically hit back and say that they won’t be banning them. This would mean that economic activity, companies and individuals would potentially flock to the eastern countries and any other nations that haven’t imposed this ban. In turn, this would also greatly limit the ability for the U.S. government to track and monitor this activity which is their main intent with these regulations anyway!
We still have a very long way to go in building out this parallel financial system on Ethereum and I do worry at times that we may not get there before harsh regulations come for us. Governments tend to move slowly but at some point they do move and when they do, it can be either very favorable or very bloody.
The question then becomes, do you dare to DeFi?
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.