Crypto lobby defends self-hosted wallets and P2P from rumored gov’t crackdown

As everyone waits on new KYC and AML regulators, many speak out to keep unhosted wallets free of controls.

Major players in U.S. crypto lobbying are coming out in defense of non-custodial wallets.

On Tuesday, the Blockchain Association released a new report presenting policy options for self-hosted wallets to regulators. On Wednesday, Coin Center published an expert view by Jai Ramaswamy, also defending such wallets.

The Blockchain Association is a trade organization for the crypto industry, while Coin Center is a non-profit focused on defending decentralization before policymakers. Both are based in Washington, D.C.

Ramaswamy currently works on compliance for Celo parent company, C Labs, and was formerly the head of the Department of Justice’s anti-money-laundering (AML) division. His piece focused on the role of the Bank Secrecy Act in crypto and increased regulatory anxiety over decentralized finance and peer-to-peer (P2P) transactions. These areas lack the intermediaries that regulators pressure to keep financial data.

Ramaswamy and the Blockchain Association agree that efforts to enforce AML are best suited to crypto-to-fiat on and off-ramps — typically exchanges. Using the Financial Action Task Force’s term VASPs, or virtual asset service providers, the Blockchain Association points to them as the real area of concern:

“Because non-compliant entities that are already subject to the global AML/CFT regime — namely non-compliant OTC brokerages and exchanges — represent the greatest ‘hole’ in the AML/CFT regime in the digital asset ecosystem, additional restrictions on self-hosted wallets would not address the substantially greater risk posed by non-compliant VASPs.”

Ramaswamy predicted that any attempt to restrict self-hosted wallets in the name of AML would ultimately flounder:

“A sober review of the technology explains why such efforts are bound to fail and will only serve to undermine rather than enhance efforts to detect and disrupt illicit financial activity.”

The Blockchain Association’s report identified three potential policies that regulators could enact to combat P2P wallet transactions:

“Banning or denying licensing of platforms if they allow unhosted wallet transfers, introducing transactional or volume limits on peer-to-peer transactions or mandating that transactions occur with the use of a VASP or financial institutions.”

But, like Ramaswamy, the folks at the Blockchain Association are skeptical of actual technical implementation. Miller Whitehouse-Levine, the association’s policy manager, told Cointelegraph: “Limiting peer-to-peer transactions (self-hosted to self-hosted) would require changes to underlying protocols.” Executive director Kristin Smith followed up, saying “The fear is that the only way to implement them will be to cut off transactions to and from self-hosted wallets and hosted wallets.”

Right now, there are no active policy proposals taking aim at unhosted wallets, but rumors have circulated for some time regarding plans to demand the sort of “whitelisting” that Smith mentioned. Such a scheme would only allow crypto exchanges to interact with wallet addresses that come from other approved and regulated sources, leaving self-hosted wallet addresses out in the cold.

More broadly, crypto has been prominent on the radar of the U.S.’s AML watchdog, the Financial Crimes Enforcement Network. FinCEN recently made waves by releasing plans to reduce its reporting standards for international transactions from its longstanding threshold of $3,000 down to $250. They have also played a role in a growing list of recent enforcement actions against crypto firms.

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