December 2020 – P2P.AI

Two very significant developments happened in Crypto this week: Coinbase filed in preparation for an IPO, and the US FinCEN released a new proposal effectively mandating KYC for unhosted wallets. Together, we believe these developments would have profound implications for the crypto space.

While Coinbase has always had high standards to list coins on its platform, as a public company, such a key revenue-generating activity for the company could see meaningful changes. The “Coinbase pump” could get a totally new meaning in the Crypto space – the extreme scenario could be that the “pure crypto” world – coins and teams that uphold privacy and censorship resistance as the key values that blockchains stand for – could move away from the Coinbase world altogether. The scenario at the other extreme, where most coins do what it takes to move over to the “official” side – also accelerated by Wall Street’s expectations on a newly public Coinbase – forcing the other coins fade into irrelevance – is also possible.

The other significant development is FinCEN’s proposal – that transactions from regulated exchanges to individual wallets not subject to regulation (as well as unregulated foreign exchanges) should be subject to an existing automatic reporting requirement – Currency Transaction Reports (CTR) for cash transactions (Source),

In summary, the proposed rules would

“Require banks and money service businesses (‘MSBs’) to submit reports, keep records, and verify the identity of customers” who make crypto transactions into unhosted (read: private) wallets.
Require that “convertible virtual currency” and “legal tender digital assets” be classified as “monetary instruments” and are therefore subject to the requirements of the Bank Secrecy Act (BSA).
Require that any transaction(s) totaling more than $10,000 in a 24-hour period be reported to FinCEN, a bureau of the US Treasury Department, and that customer’s identity must be verified; many transactions would require a lower threshold of $3,000. Know-your-customer (KYC) rules, then, apply to even private crypto wallets.

Source

These two developments, along with Facebook’s Diem could very well end up defining a “new Crypto” – at least for the US – a new asset class that is completely regulated, that looks like the “old Crypto” – but does not feel like it. But the new Crypto could be a fun new world – enabling a new generation that would clearly see digital assets as a category of things to own, along with physical and financial assets, and decentralized in the sense that it is not owned or operated by one party – and censorship resistance and privacy could become concepts that might just need to wait a lot longer.

As we enter this new era in Crypto, it would be helpful to remember this: A list of wallets with names and addresses, with Bitcoin balances that add up to 21 million, is probably not what Satoshi had in mind when he/she/they hit publish on that white paper in 2008. That said, a promising new era beckons the space, and crypto being crypto, it will be exciting!

Decentralization Deserves a Chance

“In crypto, the price is the news” said a smart person on Twitter. Today, it most definitely is. With Bitcoin blowing past 20K USD and folks in technology and finance struggling to fit narratives to price changes, it is important that in the midst of all the noise around price we don’t lose sight of a very significant and impactful paradigm shift that Bitcoin is an instance of: Decentralization.

The ‘Digital Gold’ narrative has given a very effective model for most of us to understand Bitcoin. But the simplicity of this model is also its curse – it mostly hides the actual promise that Bitcoin represents – that trust can indeed be decentralized, and a ‘hubless’ world is very much possible. In fact, in a digital world where we all increasingly understand that “we are the product” – a move towards such a hubless economy might be inevitable.

It will help to remember that Decentralization is not a discrete point in the space of how economies work, but a continuous spectrum. The most recent changes in economic models that we have witnessed (Hotel chains to AirBnB, Taxi companies to Uber) tell us that directionally, we are definitely moving towards a peer-to-peer (P2P) model for many economic functions – and while there might be attempts to decentralize most functions (very comparable to the Internet), the ones where a P2P model would be the best fit, the model will stick. Crypto (and the token model representing ownership/utility/governance) just happens to be the current transactional framework that enables such economies to function. There will be more.

Unfortunately, Bitcoin – the first instance of this shift – happens to address a very tricky concept: Money. The fact that many of the early cryptocurrencies that came after Bitcoin chose to just refine the concept – improving what Bitcoin did, on parameters like scalability, privacy and programmability, but still focusing on the concept of Money – brought a lot of skepticism and negative commentary to the space. Obviously, if you put anonymity and Money in the same sentence, the interpretations cannot be very positive. The 2017 ICO boom, where many players chose to ignore the regulations set by governments and organizations that oversee fundraising, added strength to the perception that decentralizing trust is not a good idea – and made many smart people both in technology and finance just stay away from Crypto.

So here is the one good thing that the price of Bitcoin does to the space: it brings the attention back. And while we have the attention, it is important for us to ask: If the Internet – with its promise of disintermediation – deserved a chance, if the sharing economy – with its promise of providing more economic opportunities to individuals – deserved a chance, then, with its promise of a P2P world with no hubs that might misuse our trust for profit – Decentralization Deserves a Chance?