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Crypto News Updates

The Utter Futility Of A Bitcoin Ban

In recent days and weeks, U.S. Treasury Secretary Janet Yellen has been raising the alarm about what she perceives to be a rising “misuse” of cryptocurrencies, which she argues are used mainly “for illicit financing” by unsavory groups. During her confirmation hearing, Yellen provided some ominous foreshadowing, saying, “I think we really need to examine ways in which we can curtail their use and make sure that money laundering doesn’t occur through those channels.” Back in December 2020, former Acting Comptroller of the Currency Brian P. Brooks warned consumers to expect more crypto regulations before the end of former President Donald Trump’s term. 

Those regulations never came to pass, but Yellen’s interest in curtailing cryptocurrencies proves that the government’s fascination with the heretofore unregulated monetary system has not faded with the change in presidential administrations. Elsewhere in the world, full and partial restrictions have recently been placed on Bitcoin and crypto usage. 

Bolivia attempted a total ban on Bitcoin as well, and here’s how that’s going

From partial to full bans, the record is not especially encouraging for would-be crypto prohibitionists. The historical record bears repeat, indeed virtually constant, witness to this. 

Bans Beget Workarounds

In July 2020, the popular short-form video app TikTok announced that it would be suspending operations in Hong Kong following China’s imposition of a new security law on the city-state. The announcement was followed by three frantic days for the Hongkongers of the platform, until the app was eventually removed from the app store. But clever consumers quickly found workarounds to continue using TikTok. They made use of virtual private networks (VPNs), which gave Hongkongers foreign IP addresses to “trick” the app into operating within the city-state’s borders (much the same way that people circumvent the Great Firewall of China). They also began using non-Hong Kong SIM cards, once again masquerading their activity as taking place elsewhere in the world. 

The failure of the War on Drugs is apparent. But the staunchless flow of not only drugs but weapons (including guns), cell phones and other restricted items into prisons bears simultaneous testament to both human inventiveness and state ineptitude. 

(A fascinating side element to these stories of prisoners circumventing bans is the periodic appearance of cats. Presumably, inmates being held at a prison in Brazil trained a cat to smuggle escape tools into the facility. Officers reported that the cat was seen walking in and out of the prison gates, and on New Year’s Eve in 2012, it was caught by a guard with “two saws, two drills for concrete, a headset, a memory card, a cell phone, three batteries and a mobile phone charger” strapped to its body. Oddly, this happened in Russia too — a cat was smuggling cell phones and chargers into a prison there. And an even better twist involves a prisoner-assisting cat in Sri Lanka which, after being captured, “released itself” — presumably on its own recognizance.)

More similar to the case of Bitcoin is the example of the East German mark and the black market that emerged around currency in a divided Germany. Formally known as the Mark der DDR — the mark of the German Democratic Republic — the East German currency could be exchanged with West German notes at a rate of five to one through official channels (and up to 20 to one on the black market). The German Democrtic Republic (GDR) strictly forbade the import of other currencies, fearing the rise of a parallel currency. Such efforts were futile; East Germans who were desperate for the strong West German mark found ways to acquire it. By 1979, up to a quarter of East Germans had received money from their friends and relatives in West Germany.

The very idea that the government would even attempt to prohibit the development or use of something as sophisticated and ephemeral as a virtual, peer-to-peer currency is beyond ludicrous. It is only in an Orwellian security state that such a thing could be attempted, and even then, it’s unlikely to succeed over time. 

The SOES Wars

Now largely forgotten, the Small Order Execution System (SOES, rhymes with “Moe’s”) Wars exemplify the one-upmanship cycles that arise in regulatory attempts to quash certain activities: often, as the case was here, worthy of the old MadSpy vs. Spy” comics.

SOES was an electronic stock trading system created in 1984 by Nasdaq, and one which attained particular importance after the 1987 financial crash. It was introduced in response to the assertion that during the severe plunge in stock prices, certain stock dealers “backed away” from their trading responsibilities, which include providing firm (non negotiable) quotations even when prices are collapsing. SOES permitted execution of up to 1,000 shares of a given stock from any dealer at the inside market (highest bid or lowest offer) at a given time. 

Not long after its introduction, a handful of traders discovered that SOES was useful for “picking off” other traders not paying close attention to their markets, thus delivering fast and sometimes profitable transactions. The dealers on the receiving end complained to the regulators, saying that SOES was created for use in emergency market conditions, not for everyday use. 

In response to a regulatory mandate that SOES only be used for retail customer orders, traders adept at using SOES — some of whom began opening brokerage firms dedicated to the activity — solicited individual client accounts, arranging to split the profits with them. In response to the restriction that orders be limited to trading on one side (buy or sell) per individual stock per day, SOES traders opened hundreds of accounts: buying in one, selling in another throughout the day, rearranging trades before sending them to their clearing firm after the market closed. And when, in 1997, the Order Handling Rules seemed to defang the SOES system by making the maximum automatic execution size 100 shares, it hardly had an impact. By that time, SOES trading firms had morphed into proprietary trading firms, bringing a wide variety of other electronic trading systems in-house: SelectNet, Electronic Communication Networks (ECNs), crossing networks and even, in some cases, Instinet.

Why, an inquiring reader might want to know, didn’t the securities regulators simply ban the Small Order Execution System outright at some point? It’s difficult to say, but likely because in the event of a market crash or crisis, the optics of having eliminated a method for retail traders and brokers to get out of positions quickly would have been decidedly negative. 

A common expression at that time was that the SOES traders were “bandits,” taking advantage of systems intended for other, more proscribed uses for profit. Others held that with a history of not honoring their own quotations during periods of duress in markets, the Nasdaq dealers had brought the headaches of SOES upon themselves. The same can be said of the global orchestrators of monetary and banking policies of their attempts to decry Bitcoin as an instrument of criminals. 

One would expect at least the same tit-for-tat dynamic to follow a Bitcoin ban. And who can say what will take the place of Bitcoin if a partial or full ban were effective, even temporarily? It seems likely that a new cryptocurrency, improving upon the handful of small problems Nakamoto’s design has, would quickly fill the gap.

Conclusion

As the overplayed adage goes, “where there’s a will, there’s a way.” Throughout history, governments have identified emerging threats and sought to eliminate them through heavy-handed bans, or regulations so stringent that they are effectively bans themselves. But the only thing that is guaranteed through these actions is certainly not the eradication of the “undesirable” product or behavior — it’s the human tendency to find new and innovative workarounds in the face of obstacles. Not least of which have been solutions to government intrusions upon individual liberty. 

This is a guest post by Peter C. Earle. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post The Utter Futility Of A Bitcoin Ban appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

“Your Expectations of Privacy Are Too High” (But They Shouldn’t Be)

Bitcoin mixing, the practice of scrambling one’s bitcoin with others in order to obscure the connection between an individual’s identity and coin address information, has seen a number of innovations over the last decade. Some of the early mixing efforts took the simple form of two coin holders privately agreeing to swap coins in like amounts and led to the formation of transaction aggregation services, crypto tumblers, Lightning, and the practice of moving coin balances through interim coins like Dash or Monero, or others. There are also logless VPNs, Tor, and using HD (“Deterministic”) wallets. Each of these practices comes with a set of costs and benefits, and none are perfect; thus, many cryptocurrency users and devotees employ several or all of these means to maintain their anonymity. 

And so it is that the recent arrest and indictment of DropBit CEO Larry Harmon several weeks back sent a chill down the spines of crypto users and privacy entrepreneurs alike. 

Between 2014 and 2017, Harmon operated a custodial tumbler service, Helix, a sidecar to a darknet search engine called Grams and eventually to the darknet marketplace AlphaBay (among others). This service allowed users to search, buy and sell on the unindexed deep web with new addresses generated for each transaction. 

The indictment against Harmon claims, among other things, that over 350,000 BTC was received into custody, tumbled and then transmitted by Helix without a license from the Superintendent of the Office of Banking and Financial Institutions of the District of Columbia (some of his customers having been located there), without being registered with FinCEN (the Financial Crimes Enforcement Network), and in violation of a number of federal laws. 

Tired Tropes

It’s worth remembering that right about the time that Harmon was arrested — in fact, the day before — U.S. Treasury Secretary Steve Mnuchin spoke before the Senate Finance Committee. Applying such classic and time-worn euphemisms to cryptocurrencies as being a “crucial area” (translated: “a crackdown is about to begin”) and calling for increased “transparency” (translated: “your expectations of privacy are way too high”), his speech was capped off by words that many of us have long expected: that bitcoin, and cryptocurrencies more generally, pose a national security threat to the United States. 

The problem, of course, is that the putative threats mostly represent entrenched interests and institutions situated high in the edifice of state power. While one can understand that large firms and legacy institutions (a particular one of which is characterized by an intractable quasi-government ownership structure) would rent-seek to prevent their displacement by competing ideas, technologies and new institutions, that understanding takes a form similar to that which accompanies seeing nations go to war or watching a bully victimize a smaller, weaker person: It occurs, it may even be inevitable, but no one should stand aside silently.

Issues of KYC and AML

The implications of this newly reinvigorated push has implications for all bitcoin and crypto owners and users — the overwhelming majority of which have never transacted upon (let alone visited) the dark web. At present, individuals are not responsible for knowing the precise history of their coins. But if laws relating to the responsibility of a purchaser to ascertain whether their property has been stolen or not extends to crypto, or (more likely) if exchanges decide to include blockchain analysis in the measures they undertake to “reasonab[ly]” ensure that they are vigilant against money laundering, the fungibility of bitcoin will be damaged. There is no established standard against accepting coins with mixing in their histories; yet if it becomes the modus operandi, many coins will be rendered unusable. 

If one purchases, sells or even receives a coin which, unbeknownst to them, contains a “laundered” history or objectionable material (your imagination suffices), is legal culpability triggered? 

How much personal responsibility does one bear for knowing the recent (or, indeed, all) transactions a coin or other crypto asset in their possession has been party to? Can coins which have been mixed in the past or been part of illegal transactions be seized in the same way that funds and other sorts of property can in civil forfeiture proceedings? 

The particulars of the Harmon case also involve other issues which perennially plague the crypto community, and specifically that exceedingly important part of our community which seeks to broaden the commercial usage of crypto: KYC/AML. I personally believe that one can do far more to further the cause of liberty (of which crypto is a key component) from outside of a jail cell than inside one. Thus, however begrudgingly, not running afoul of existing laws is critical; indeed, anyone who truly understands the power of the state would and should counsel adherence to the rule of law. But parallels between the massive expansion of two nearly contemporaneous government initiatives, the “Bank Secrecy Act” (October 26, 1970) and the so-called “War on Drugs” (June 18, 1971) over half a century cannot be ignored. 

Personal Responsibility and Bitcoin Privacy — For the Greater Good

But every individual who has ever owned or used bitcoin has a responsibility to themselves, to fellow bitcoin owners and proponents, and to the many who would use bitcoin to establish the following precept: We are not guilty and do not concede any guilt whatsoever, by virtue of the simple fact that we own or transact in cryptocurrencies. We will not be accused, nor will we recognize suspicious overreach in the face of seeking to maintain privacy in our transaction histories. 

And we make no apology, whatever arguments are made or caveats flung, for seeking the rights to privacy which are enshrined not just in the Constitution but more importantly in the natural order. If there is indeed a “national security interest” at stake, it begins not with monetary innovation but vastly more fundamentally: with the predictable mobilization against technological, financial and social innovation by states and their factotums.

This is an op ed contribution by Peter C. Earle. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.

The post “Your Expectations of Privacy Are Too High” (But They Shouldn’t Be) appeared first on Bitcoin Magazine.

Source: Bitcoin magazine