The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
There are shifts at ShapeShift and not everyone’s proud of them.
When the token exchange recently announced a replacement “membership” model with mandatory account identification, there was outrage from certain members of the cryptocurrency community who felt it had been abandoning its pledge to privacy and destroying its core value proposition.
Bitcoin developer Peter Todd, for one, was brutal:
ShapeShift described the move as how to supply added perks to loyal customers and to explore approaches to tokenizing that loyalty. But it had been clear that the threat of action by regulators played an enormous hand within the move.
In a blog post announcing the move, CEO Erik Voorhees, a prominent crypto libertarian and vocal proponent of individuals’ rights’ to non-public value exchange, acknowledged to his customers that the mandatory aspect of the new model “sucks.” And during a reply to crypto developer Greg Slepak’s suggestion on Twitter that he write an “honest blog” about what happened, Voorhees responded by saying “What I write is being watched very closely. Please give us time.”
But during a statement provided to CoinDesk, Voorhees offered further explanation for ShapeShift’s policy shift. He said a politician know-your-customer (KYC) identification system “was not added a results of any enforcement action, but rather a proactive step we took to derisk the corporate amid uncertain and changing global regulations.”
“We remain committed to the struggle for financial privacy and sovereignty for all humans,” he said, but added,
“Ultimately, ShapeShift may be a corporate entity, and that we need to abide by laws round the world. “
New York’s AG Office Enters the Fight
Now, with the ny Attorney General’s office releasing a report accusing various crypto exchanges of doing insufficient to stop market manipulation, one could conclude that regulators are gaining the whip hand in their ongoing battle with the crypto industry’s more anarchic elements.
Along with the capitulation at ShapeShift, long viewed as a model for those eager to conduct exchanges outside of the state surveillance ingrained in KYC identification regimes, it does look as if officialdom is striking some heavy blows immediately .
But this may be an extended struggle, a match , if you’ll , that also has many rounds to travel . New technologies, the dynamic development of token-based business models and an evolving regulatory landscape will still create avenues for blockchain and cryptocurrency developers to guard privacy and challenge government intervention.
That, in turn, will spur regulators to pursue new enforcement approaches to take care of their power, which can be followed by new solutions from the crypto side to affect those efforts. It’s hard to mention who will win within the end. Perhaps it’ll never be resolved.
Some of the battle comes right down to defining and managing jurisdictional boundaries — which doesn’t necessarily enter favor of the regulators.
Crypto technology is, for instance , ensuring that the ny Department of monetary Services not has the de facto global reach it wielded under the previous assumption that any decent financial entity had to work within the ny market. the rationale old-style financial companies felt compelled to undergo NYDFS rules was that the foremost important financial intermediaries — the investment banks, the correspondent banks, the custodians then forth — were based within the state. But crypto technology is explicitly intended to bypass those intermediaries and make peer-to-peer exchange.
This is why exchanges like ShapeShift and Kraken felt comfortable opting out of the ny market once they decided that NYDFS’s BitLicense was too onerous. they might simply choose to not affect residents of the state — much to the chagrin of the ny Attorney General’s office, which called the exchange’s refusal to cooperate with its request for information “alarming.”
We’ll need to see if there’s any negative fallout for Kraken CEO Jesse Powell, who mockingly skilled the NYAG’s report by comparing the state to “that abusive, controlling ex you broke up with 3 years ago but they keep stalking you, throwing shade on your new relationships, unable to simply accept that you simply have happily moved on and are more happy without them.” However, Powell’s bravado suggests Kraken is confident it’s successfully shut itself faraway from ny residents then can, effectively, tell the state’s officers to require a flying leap.
Ironically, Kraken is in a position to derive that confidence due to sophisticated technological new tools for managing customer accounts that KYC compliance officers involve — like monitoring IP addresses, which may indicate if someone trying to trade on the exchange’s site is in ny .
New Pro-Privacy Tools
Meanwhile, advances in cryptographic privacy are coming thick and fast, with blockchain developers making strides with tools like zero-knowledge proofs. Cryptocurrencies like zcash, monero and dash all enjoy these qualities.
And within Bitcoin Core, work is being done to form it near impossible to trace transactions — a goal that’s critical, not in order that criminals can exploit cryptocurrencies, but in order that enterprises which may want to use these technologies don’t expose corporate secrets to their competitors.
“Layer 2” solutions like the Lightning Network, which permit for transactions to occur “off chain” also will enhance the privacy of cryptocurrency users. Meanwhile, related solutions like discreet log contracts, which essentially blind information oracles from information about the contracting parties they serve, will create extremely private smart contracts and will encourage crypto “dark pools” whose transactions are invisible.
And in fact , there’s an enormous push toward decentralized exchanges. Lawyers often means that these models are still susceptible to regulatory oversight, since the developers of the software are often held accountable. But once powerful price discovery systems, atomic swap mechanisms and safe custody models are built in order that buyers and sellers can find one another without intermediaries, what’s to prevent a replacement “Satoshi Nakamoto” from anonymously bequeathing such a system to the planet and avoiding the clutches of the law?
The Law is that the Law, Though
Still, it’s naïve to suggest that government doesn’t have powerful weapons. If activities that happen on these systems are deemed illegal, then participants must engage them fully knowledge that they’re breaking the law. And if they’re caught doing so, prison is usually an opportunity . That threat are often a robust , moderating force on behavior.
The powers of the state are far-reaching. With the implicit threat of jail time or fines, it can force businesses to spend heavily on legal fees and compliance costs without even taken any action. Voorhees told CoinDesk that ShapeShift spent “over 1,000,000 dollars of legal expenses on this topic” before making the choice to vary policy.
So, actually , we don’t know who the last word winner is during this crypto-versus-regulators fight.
But perhaps this back and forth can have a positive outcome if it sparks a dialogue round the best thanks to permit innovation and therefore the degree to which privacy must be protected. As I’ve argued elsewhere, privacy should be viewed as a key element of an efficient system of exchange, without which money can cease to fungible.
That’s why it’s encouraging to ascertain policy makers in various jurisdictions attempt to give more leeway to innovators during this industry.
On Friday, Rep. Tom Emmer of Illinois, a replacement co-chair of the Congressional Blockchain Caucus, announced he would introduce three new bills providing shark repellent protections with lightweight regulatory models for blockchain startups. And we’re seeing jurisdictions like Singapore open up a constructive global dialogue on the way to encourage innovation in areas like utility tokens without leaving developers to fall afoul of securities laws.
Such frameworks can provides a lease of life to those building a more frictionless, liberal system useful exchange. It could even provide opportunities for ShapeShift, whose new accounts model includes some interesting opportunities in tokenized membership, which could facilitate experiments in disintermediated and decentralized exchange, even within the confines of a KYC regime.
So, grab yourself some popcorn. this is often getting to be an extended one.