In case you didn’t notice. Bitcoin is having a resurgence.
At the time of writing, its value has surpassed USD$57,000. Citi Bank has projected the digital currency could reach as high as $318,000 by the end of 2021.
While analysts are still trying to pin down the true causes of Bitcoin’s bounce-back within supply and demand, it appears financial institutions and regulators have grown more comfortable with the coexistence of fiat and digital currencies since 2018. Thanks in part to improvements in anti-money laundering (AML), know your customer (KYC), and know your transaction (KYT) for digital wallets.
It is still difficult to know if governments and Bitcoin could have a productive future together. To understand this, it’s important to go back in time and explore the origins of Bitcoin’s revolutionary technology.
The wild west
In 2018, the world’s most famous crypto-currency tanked in value over the course of a few months. For many people, Bitcoin’s temporary demise resembled a return to normality. Crypto nay-sayers drew comparisons of the dramatic booms and busts of the Tulip Crisis in 1637, the South Sea Bubble of 1720, or the more recent Dot-Com valuations of the early 2000s.
And to some extent they were right. Crypto had become the new wild west.
During the peak of crypto-mania in 2017, anyone holding relative penmanship skills drafted white papers for initial coin offerings (ICOs) while raising millions for ‘R&D’, city power-blocks suffered under the strain of garage crypto-mining operations, and former Olympic rowing twins became billionaires. Unforeseen horror stories emerged with infamous cases of data ransom, enabling cyber-criminals with a new way to get paid off with no trace or recourse.
The world then witnessed a ‘correction’ in Bitcoin’s price when governments finally stepped in. The European parliament specifically adopted crypto-currency in to its existing AML governance standards, China placed a blanket ban on all ICOs in late 2017, and some countries, including Algeria, Bolivia, Morocco, Nepal, Pakistan, and Vietnam went so far as to ban crypto-currencies altogether.
Satoshi Nakamoto, the alias of Bitcoin’s founder, introduced the world to Bitcoin through an anonymous online forum post in February 2009 titled ‘Bitcoin open source implementation of P2P currency’. In this landmark announcement he/or they outline a structure for a new form of payment technology. Rather than relying on a ‘trusted’ financial institution to facilitate payments between parties, Bitcoin, in Satoshi’s own words, provides “an electronic payment system based on cryptographic proof instead of trust.” This is the genius of Bitcoin and its underlying blockchain technology which facilitates the exchange of digital currency through a peer-to-peer timestamp, spread across thousands of multiple and independent server ‘nodes’.
While ground-breaking, one can’t help but notice Nakamoto’s written insistence on Bitcoin’s ability to remove central ‘trusted’ institutions to facilitate peer-to-peer exchange.
Whoever Nakamoto is, it is safe to put him (or them) into the same group of ‘neo-libertarian’ thinkers known as ‘Cypherpunks’ who grew in ranks within the 1990s. This collection of technological gurus held strong views on smaller government and the role of central players within financial services. An early ‘Cypherpunk’s Manifesto’ from this era argues against the idea of what is now modern day KYC compliance, appealing to the right to remain anonymous behind financial transactions. As its author Eric Hughes points out, “when I purchase a magazine at a store and hand cash to the clerk, there is no need to know who I am…. when my identity is revealed by the underlying mechanism of the transaction, I have no privacy. I cannot here selectively reveal myself; I must always reveal myself.”
As well as the right for privacy, Cypherpunk ideas evolved further to bemoan the malpractice of central institutions to manipulate financial markets through ‘overreaching’ controls, a development of thought that Nakamoto appeared to firmly support. It’s no surprise then that Bitcoin arose out of the depths of the Global Financial Crisis of 2008/2009 where public disgust of banking or ‘trusted financial parties’ were at record highs. It’s also no surprise that Bitcoin’s first known transaction participants were the original Cypherpunk advocates from a decade before.
It is within this Cypherpunk rebellion that Bitcoin’s design can be fully realised, and that should not be understated. As Griffin Daughtry of fee.org suggests, the idea that Bitcoin can be separated from this libertarian philosophy is fundamentally wrong.
To governments, Blockchain is the baby and Bitcoin is the bath-water
Even within their initial hostility and scepticism of Bitcoin, governments began to see the opportunity with blockchain — the underlying distributed ledger that facilitated Bitcoin as a digital currency. The technology could transform the way exchanges of information are made across a variety of industries, speeding up processes and reducing costs.
While this technology is revolutionary, Bitcoin’s own freedom to operate on blockchain without the need for central and identity governance poses a problem. Without central KYC capability or any ability to assert control, the movement of Bitcoin currency goes dark.
While the movement of Bitcoin tokens are traceable to anyone on its distributed blockchain ledger, ‘payers’ and ‘recipients’ are simply displayed as an unidentifiable address. Knowledge of who holds real ownership over an address or a specific token is neither known to the blockchain or its observers. With this level of privacy, the unwanted potential to facilitate illegal trade, terrorism, laundering, human trafficking and tax evasion becomes possible.
In response, regulators still entertaining the existence of crypto-currency have enforced compliance on the opening of digital wallets through licenced crypto-platforms; allowing users to become identified and reconciled with tokens throughout the blockchain process. While this leads to a world where both regulators and Bitcoin can co-exist, it seems to be an uncomfortable compromise for Bitcoin advocates.
Perhaps a temporary truce.
The rise of the dark ecosystem
Since Bitcoin is run on an open blockchain, it can be accessed and participated in from anywhere in the world. This means that one can simply circumvent crypto-platforms and develop their own Bitcoin address with a private access key. No amount of regulation can change that. This possibility has already led to the rise of ‘dark eco-systems’ between criminals or privacy advocates (two very different groups) that operate outside of regulatory environments.
In order for these dark ecosystems to survive, they either need to become self-sufficient within themselves or require an outlet to exchange Bitcoin for tangible value, e.g. real USD or ‘clean’ digital tokens. In response, regulators have taken significant steps by making it unlawful for compliance wallets to interchange with dark Bitcoin addresses or those within unregulated countries. The G7 has gone so far as to adopt new measures to sanction states who do not conform to adequate AML or KYC financial standards. This may work to limit the effectiveness of underworld crypto-transactions; but whether it’s possible to bring the full scope of Bitcoin under the visibility of the law remains to be seen.
If Bitcoin’s original design and Cypherpunk roots are to be considered, war will remain between Bitcoin and financial regulators. Bitcoin’s own creator leads by a telling example — who is, at present, sitting on billions of USD worth of token and with seemingly no intention or temptation to cash in his chips to risk identity disclosure.
To Satoshi Nakamoto and his beloved Bitcoin, removing privacy was never part of the plan.