- Self-custodial cryptocurrency wallets allow individuals globally to access essential financial services.
- The US Secretary of Treasury, Steven Mnuchin, is rumored to be working on a law to regulate self-hosted crypto wallets.
- Regulation of self-hosted wallets is likely to be counter-productive according to Coinbase CEO Brian Armstrong.
Since its inception, the blockchain industry stood out among other technologies because of the power it gives to the users while ensuring a consistent flow of data. The emergence of self-hosted wallets, also known as self-custody wallets, allows individuals to have complete control over their cryptoassets.
In other words, people can store and use digital assets on their own without the need for a third party. It also means that self-custody wallets are free of regulation, ensuring that the individuals enjoy the true nature of blockchain.
Regulators plan to crack down on self-hosted crypto wallets
The CEO of Coinbase, Brian Armstrong, brought to light rumors that the United States Treasuring and Secretary Steven Mnuchin are making a rushing to effect a law that will directly affect self-hosted digital assets wallets before the end of his term.
The outspoken executive raised his concerns via Twitter on Wednesday and pointed out some of the "unintended side effects' the regulation could carry along.
The importance of self-hosted cryptocurrency wallets
Self-custodial cryptocurrency wallets remain the backbone of blockchain and protect the original purpose of cryptoassets like Bitcoin. They allow everybody to utilize decentralized technology to access essential financial services. According to Armstrong, these wallets can be used "just like anyone can use a computer or smartphone to access the open internet."
Additionally, individuals can make transactions on a peer-to-peer (P2P) basis without interference from third-party institutions. Before blockchain, P2P transactions were a pipedream over the internet, according to the Blockchain Association. However, the notion that individuals can go ahead with transactions away from the financial watchdogs does not sit well with policymakers.
Why the need to regulate self-custodial crypto wallets
Regulators are spooked and concerned that individuals might engage in unlawful activities such as money laundering and financial support to terrorist groups. While their arguments hold water, not everyone in society has a primary goal to participate in criminal activity. Besides, the Blockchain Association published a report in 2017, saying that cryptocurrencies have for a long time become easy to blame for these illegal activities.
The report argued that the percentage of illegal tractions in traditional financial systems is far more alarming than that in the cryptocurrency industry. Therefore, the most pressing matter would be to crack down on the fiat ecosystems' illegal activity before going for self-hosted crypto wallets with guns blazing.
The impact of regulating the use of self-hosted cryptocurrency wallets
People worldwide are fast becoming digital savvy and are exploring ways to achieve financial inclusion away from the seemingly exploitative traditional financial system. Online transactions are taking root quickly.
Individuals are concerned about eliminating the third party, which gives them control over their financial assets. Hence, a law regulating self-hosted crypto wallets might bring total surveillance on peoples' financial lives, a move likely to be counter-productive. According to Armstrong:
The open nature of cryptocurrency is what makes it a powerful tool for innovation, and it is what levels the playing field globally. It is what is fueling innovation, such as in Defi. It has the potential to bring down the cost of financial services and improve accessibility.
This proposed regulation would, we think, require financial institutions like Coinbase to verify the recipient/owner of the self-hosted wallet, collecting identifying information on that party before a withdrawal could be sent to that self-hosted wallet.
Consequently, cracking down on these self-hosted wallets is likely to infringe on people's identity as they will be required first to provide information of where the funds are coming from, where they are going to, and for what purpose. Demand for such details would beat the concept of blockchain and would derail innovation, expansion, and its utility on a global scale.
Regulation of self-hosted cryptocurrency wallets is likely to drive users to unregistered foreign firms to access the essential financial services. On the other hand, the fear of giving out too much information to public institutions would lead to a decrease in the number of cryptocurrency transactions, in the end, affecting the entire blockchain industry.
Coinbase and other cryptocurrency firms have already sent a letter to the US Treasury, which highlighted most of the concerns. The letter's primary goal is to implore the regulator to take a more profound and critical look into what this new law would do to the United States and the rest of the world and, particularly, the fast-growing blockchain industry.
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