Is Bitcoin Being Captured?

Hi everyone, and welcome to the Stephan Livera podcast. Today we're gonna be talking about this concept of whether Bitcoin is being captured, and what's the importance of privacy in Bitcoin, and what's going on with the relationship between government regulations and Bitcoin privacy, and what Bitcoin companies are being forced to do. So I've got some awesome guests, but firstly, I'm gonna introduce the sponsors of the show. So this show is brought to you by Swan Bitcoin. You know, Swan is the best place to auto-stack your Bitcoin in the US with incredibly easy setup and low fees. If you're in the US, absolutely get your auto-stacking on. It's so simple, even a no-coiner could do it. One, autofund USD from your bank account. Two, auto-stack your Bitcoin. And three, auto-withdraw to your cold storage. Swan don't, don't charge withdrawal fees. They want you to follow best practices and hold your own keys. Swan crushed Coinbase's fees for recurring buyers of These by up to fifty seven percent. So set and forget, enjoy your life, just swan and chill. Go to swanbitcoin dot com slash livera to start auto stacking with swan today. Next up is Unchained Capital, Bitcoin native financial services. Do you need a way to secure your Bitcoin using multi-signature? Well, Unchained Capital are making it easy for you to do that now with a two of three multi-signature setup. So you can, for example, you can get one Trezor and one Ledger, go to unchaineddashcapital dot com and create a

Up your keys and keep your Bitcoin a little bit more secure in that way. Unchained Capital also offer loans, so if you need support with that, go to unchained dash capital dot com and the guys can support you there. So go and learn more at unchained dash capital dot com. Alright, so I'm just gonna bring in my guests now, so Rafael, Alex, and Matt. So, I suppose, just very quick, introductions just for listeners who aren't familiar. Rafael, he's a partner of the Crypto Lawyers, and also a past guest on the show. Matt Adell, very well known in the space as a co-host of Tales from the Crypt and the Rabbit Hole Recap, and a well-known privacy advocate, and Alex Gladstein, the CISO of HRF, also well known as a Bitcoin advocate. And also discussing Bitcoin privacy also. So welcome to the show, everyone.

Thank you. Thanks for having us.

Great. So yeah, guys, so look, we've, we've seen some recent news around the- FATF Travel Rule and what's going on in terms of the exchanges and what Bitcoin companies are doing in order to try and comply with the government laws, and that can obviously have an impact onto our privacy. So perhaps if we could just start with you, Raphael, maybe you could, tell us a little bit about what FATF is, who are they, what's this Travel Rule?

Sure. So, the FATF, Financial Action Task Force, it's like an intergovernmental organization, right? So that means that there's a bunch of governments that cooperate on all kinds of things, probably like, you know, military, national defense, information sharing, things like that. And so this particular task force deals with Financial regulations, money laundering, things like that. And so it's, well, relatively unaccountable, I would say, right? They're not, they're not specifically elected by, you know, you're, you're not electing your direct representatives there, in your own country, but it's an intergovernmental organization. They do, you know, policy work which means they come up with Suggestions, suggestions, guidance, recommendations, and then if you want to be part of the FATF and stay part of the club, you need to do what they say at some point, and if you don't, then you end up on a gray list or a blacklist, things like that. that's the brief summary. And then the travel rule is, at least in the US, part of the Bank Secrecy Act and In short, it just says that if you're, if a financial institution is transferring funds to another financial institution on behalf of a customer, they're required to include a whole bunch of information, write the name, maybe a social security number, address, things like that. And so this applies, you know On transfers from, like, one bank to another bank. So the receiving bank knows where, you know, who sent the money from the other bank.

Excellent, thank you, Raphael. And, Alex, I know you had some comments around the FATF in terms of who are the members of this organization.

Yeah, so I think people should be aware that this is a multilateral organization, as Rafael said, and some of those key members are dictatorships like Saudi Arabia, Turkey, Russia, and China that may, you know, have a very particular definition of what is a good or bad transaction. And they've made their ambitions very clear that they want no transaction, essentially over a very minimal amount, to be outside the scope of their anti-money laundering controls. That's, that's in their mission statement. So they really want to set up this sort of omniscient, omnipresent, all-powerful, sort of like information sharing service to track not only the entire existing legacy financial system, but also all cryptocurrency and Bitcoin transactions as well.

Yeah. so Matt, let's throw it to you. what are some of the practices that, let's say a user might be wary of from an exchange perspective, what, like for example, flagging of, your Bitcoin? And could, could you elaborate a little bit on how that's being done currently?

So

we talk in the Bitcoin world, we talk a lot about not your keys, not your coins, about custodial exchanges and how you have to trust the exchange if they're holding your, your Bitcoin for you, you have to trust them with that Bitcoin, that it's an IOU, that you're not sure if you'll ever actually be able to redeem. I like to- Also frame it as there's, you, you have custodial, with your Bitcoin, you have custody, but you also have custodial privacy, and in that situation, you are trusting these services with your private information, and because of government regulation, a lot of times they're not even allowed to delete it if they wanted to. So you have the situation where every time you trust one of these services with your private information, and you're all-- you're trusting them potentially in perpetuity, and if not in perpetuity, you're trusting them for a large period of time, and that information can be stored insecurely, it can be shared, it could, it could leak, it could get hacked, it could be sold, And because of the way Bitcoin is set up, where, you know, there's, there's no privacy by default there, it's a transparent ledger that's gonna be there forever, that information can then be used to link to your financial transactions or Bitcoin transactions. Transactions that you might not have even made with that service specifically.

Right. And so I think one of the things that's important to note is in the earlier days of Bitcoin, it was designed to be a pseudonymous system. The idea is you generate new addresses for new transactions and Nowadays, some people will say, "Oh, Bitcoin is really transparent, "and yet it is only because of certain analysis and certain, like an insight into, the transactions that Some of that de-anonymization is occurring. Raphael, maybe you want to touch, touch on a little bit on what some of the exchanges are doing in terms of using Bitcoin surveillance company techniques. So could you elaborate a little bit on that and what they're doing, to try and, you know, comply with the FAF or FinCEN or regulator, demands?

Sure. Well, as far as the travel rule goes, I mean, it's kind of been, you know, it's been a hot topic where it seems pretty clear that it would apply to crypto. There's no reason particularly why it wouldn't. I mean, the, the regulations weren't written for crypto companies, they're written for regular banks, and, you know, then FinCEN kind of just sticks crypto companies in there, right? In 2013, they just said You know, that anything that substitutes for value is good enough, basic- basically. and so, you know, they've kind of-- it's been there, and the question was how to comply with it, if it, if it, if it even applied at all, which it does. And so- That's where the recent news comes in, where, you know, Coinbase and Bitcoin, some other large exchanges are coming up with a system where they can, you know, share xPubs or something and keep track of the addresses, and if you send to one of their-- you know, one of the other partner exchanges, they'll, they'll know and be able to share the information. but the key distinction is that this only applies when they're dealing between ex-- you know, between different financial institutions, right? It's something I mentioned to you guys the other day that if a company is Then this rule doesn't really change anything, at least not relating to that transaction, right? If you just buy Bitcoin from a company, there's no-- there's, they don't have to send you your own information, that would be the equivalent, right? If they, if you're the recipient, it wouldn't make any sense to receive your own information. I mean, I think one of the The main thing that I'm concerned about with this is that there's just gonna be a ton more information sharing between exchanges, and now whatever custodial privacy risk, like Matt mentioned, you have just like grew exponentially, right? I don't even know how many, how many exchanges will eventually be part of this network, and then if they're all sharing information, it's like you KYC'd once, and now everybody on the whole planet's got it. Or, you know, fifty exchanges in thirty countries or, I mean, it could be global, could be all the exchanges in every country eventually.

Yeah. And there would be certain pieces of information that they're required to give, and I think the terminology they use is, originator and beneficiary. And so I guess there'd be certain pieces of information, and most of this is applying in the context where people are using an exchange as a kind of hosted wallet, correct? Where the op-- the other case is more like I'm holding my own keys, I'm running my own Bitcoin node, I'm using my own software, I don't have to do any sort of travel rule stuff. This is more in the case where a user is using the exchange as their custodial wallet, correct?

Yeah, yeah. So if you're, if you're just withdrawing from the exchange to your own wallet, then this isn't an issue, right? And eventually they're gonna have to decide how they figure out, you know, what, what it is you're doing. So they could do that by asking you, they could do it by comparing the addresses with other exchanges, it could be like a dropdown menu, you know, certain exchanges, I think Coinbase and maybe others do this already, where they ask you What do you wanna label the address as? Right? Which is really a hint at like, just tell us what you're doing with your Bitcoin, you know? and so you, for now you can write whatever you want there. but Well, yeah, let's, let's end on that.

Yeah, right. And I, I think the, the difficult part here also is just like, not even just the travel rule, but just broadly the AML rules and sanctions rules, they- They require companies to do what's called an AML risk, or a, like a money laundering and terrorism financing risk assessment. And so then the, it, it sort of puts exchanges or financial institutions into this position where they have to try and justify to the regulator to say, "Yes, yes, look, Mr. Regulator, I've done X, Y, and Z risk assessment so that I'm stopping the money laundering risk." And then the regulator will come in and say, "Well, no, is that enough? I, I want you to do more. You need to document this Implement that, and that's potentially how this industry has, evolved, would you guys say? Definitely. Yeah. Yeah, and look, I guess, then the, the obvious, there's obviously some, privacy and human rights implications of this kind of behavior. If certain addresses are becoming flagged or if they are certain high-risk transactions, then that may impact the ability of people to use Bitcoin where it's really needed. And, Alex, I think you would probably be best to comment on this. where are some instances today where, let's say, a human rights activist in, under a, an oppressive regime? Regime, where might they be using Bitcoin today, and how could this kind of practice stop them?

Yeah, so I'll give you a, a, a clear example would be Hong Kong, right? So China's a member of FATF, so the Chinese Communist Party could say that, "Hey, these addresses owned, by Hong Kong democracy support groups, which we've identified through centralized payment processors, you know, something like BitPay, so HSBC could work with BitPay to help the CCP- Identify activists in Hong Kong, and they could go on a blacklist. and I, I think this is part of a larger under-- you know, understanding a larger picture that essentially this is a trade-off, a negotiation, a partnership between companies and governments, where the governments are saying, "Hey, you guys can, you, you guys can, you know, mess around with your cryptocurrency, Bitcoin stuff, in exchange you have to play by our rules, right?" And their, their goal is to essentially identify as much Bitcoin as possible out in the world Right? So it's a twenty twenty strategy. It's a strategy for the way that Bitcoin works right now. It may not work in the future if the privacy technology that I'm sure we'll dive into with Matt kind of takes off in the next few years. It's a bold move, it may fail, but, but it, you know, it could sort of work right now And I think the other important point to make is that these companies that are helping governments enforce these privacy violations are basically saying that they're good for Bitcoin because they're gonna help Bitcoin reach more people, but they're very bad for Bitcoin because Bitcoin's ultimate value proposition is diminished if it's not freely and openly accessible for everyone.

Great, yeah. Matt, do you wanna just chat a little bit about what are, what's kind of the current state of, you know, CoinJoin and, Bitcoin privacy techniques versus what you think might be available in the next, say, few years?

I'm just gonna sideline your question for a second, no offense. Go for it. Because I, I wanted to jump in earlier, but a combination of my Not really realizing my mic was muted and being polite, I didn't. to what Rafael was saying earlier, like in terms of what we're looking at with this FATFA, you know, and, and the travel rule, I see A couple things here. I see, first of all, I see regulated services potentially opting for the, basically getting their users to, to agree as per the terms of service that every, every single withdrawal they make is only to themselves and that they have full, full responsibility for that transaction. So, so you, you can't send from a hosted wallet to, to a-any address you want. Like right now, there's a little bit of plausible deniability. You send from- Cash App, you know, maybe I'm sending to Alex, maybe I'm sending to myself, but they say, "Nope, that's your address. You're agreeing that that's your address you're sending it to, and any kind of history or things that happen with those coins from that point forward is then the, the user's responsibility. And of course, it'll be backed up with them also reporting a bunch of, of data to, to governments and, and data sharing agreements and whatnot. The other thing is, you could take that a step further. And services that really wanna cover their ass could just not let you self-custody in the first place. they could say, "We will hold the coins for you, like Robinhood does, or like Circle used to. We'll hold the coins for you, and you, you can't, you can't ever withdraw." so both of those scenarios would obviously not be great, especially if, if you wanna accumulate Bitcoin and you wanna be self-sovereign about it, as, as we tell people to. But I, I, I can see both of those situations It's one of the assumptions that I've been operating under for years now, you know, because I, I just think like, depending where you live, and we've seen in some countries already, there are clamp downs that, that prevent you from getting your Bitcoin. and then the last thing is, I, I wonder There's like a middle ground here. Coinbase, for instance, has a, a non-custodial wallet that they call, just to confuse people, Coinbase Wallet, which is a completely non-custodial product, but it uses their node infrastructure, so they see every single transaction you make on that wallet. it supports all their, all their shit coins, but it also supports Bitcoin. so my, I, I wonder Like where, where do we see enforcement happening in terms of the travel rule, et cetera, in terms of a wallet like that, right? Where Coinbase is obviously, you know, very much in bed with regulators, they're selling products to the IRS and the DEA, and you have this travel rule, and they see all the transactions, how are they gonna handle that? How do we see that playing out?

Yeah, it's a tough question, and I think, it's like we've got this tension where the exchanges are living under fear of lo-losing their banking license or getting shut down, and so then they are playing this game of trying to appease the regulator, but then all of us, out here who want privacy are like, "No, we don't want that. We don't want this surveillance technology." And so I, I guess my, my question Question then is, it, how much of this is kind of shooting the messenger, right? Like, is it just that, you know, they've been like really the root cause is kind of these regulations that pushed, and gave so much power to the regulators in the first place, or FATF that is con-continually, trying to raise the, surveillance requirements, I, I guess that's one way to frame it. Another way to frame it might just be It's, it's like the Baptist and bootleggers thing, right? People, the chain surveillance companies are trying to say, "Yeah, yeah, where is-- you need to use us, everyone uses us," when perhaps there are other methods available for crime fighting. what are your views, guys?

Sure, sure. So just to add to what Matt said earlier about, the terms of service and agreeing to, to only withdraw to your own wallet, a lot of companies do that already, and they do it because they want to avoid having to get money transmitter licenses, right? Because in general, in the US, if you, if you accept money from someone and you're sending it to a third party, then you need to get a money transmitter license, right? But if you're just selling them Bitcoin, no money transmitter license. So, there's already reasons to do that. Really Solutions or limited custodial solutions. Like the more custodial it is, the more regulations there are, you know, the more loss of privacy there is, and so, well I guess that's one good thing about the incentives, right, that, that the law will punish you and punish your users and punish us all for, for not living up to crypto's ethos.

I forgot what the other thing was I was gonna say, but that was-- Can you give me a two-second summary of your last question? I apologize.

Oh, I was just getting to that point of, are, are people like, are we shooting the messenger? Right? Is it just like people getting angry at, you know, exchanges when-

Oh, oh, okay, okay, okay. Under

this, you know?

Okay, first of all, delete Coinbase. Okay? Delete Coinbase. Second of all I don't know that we're shooting the messenger com- completely, but, you know, some of them are very enthusiastic about this. You know what I mean? Just like a little bit too enthusiastic. You know? And none of them even- As far as I could tell, even give a nod to privacy, they don't even barely talk about. Maybe occasionally someone will mention, "Yeah, well, we care about that," but like You know, as far as FATF goes, they had their 2019 set of regulations, and I searched in there for privacy, or, you know, recommendations, right, about crypto, and the word privacy comes up Zero times in terms of talking about personal privacy for users, the only reference there is a reference to privacy laws, right? Not laws that actually protect your privacy, right? Just like, you know, regular privacy laws that theoretically might sort of protect your privacy in some circumstance. So they don't even weigh that. None of them seem to weigh that as, as a serious consideration, except in, you know, occasional public statements. so I think we can give them a hard time about that until we can see that there's real compromises being made, saying, you know, Sure, this extra piece of information might be helpful, but it puts users at a lot of risk, so we're not gonna do that, right? Or some kind of compromise, 'cause it doesn't seem like there's any. It's just, it's just ever-growing, you know, fear-mongering surveillance state increase, right? And ever-and it's broken incentives.

Raphael, to help illuminate for the listeners, the morality of these different companies, I remember you talking about the fact that there aren't necessarily forced sort of legal You know, there aren't necessarily laws that force American companies to use, for example, chain analysis, right? So what, what are these companies forced to do? And what would you say about their, basically their client rights, policies and how they treat their clients if they are, you know, using chain analysis if they don't have to.

Right. So they're not forced to use them, right? The law basically requires that they- Have a reasonably effective policy, right? And reasonableness is obviously subjective. So they have to do a good enough job, essentially, to prevent money laundering, whatever that means. And so because that Because that's kind of an open definition, then they're, they're given some freedom to choose what kind of strategies they wanna use, and this is the one that they've, you know, one of the ones that the larger exchanges have chosen to use. You know, partially because they believe it's effective, but i-- it also gives them a competitive advantage in that these services are expensive, and so it just is an extra significant barrier of entry for smaller companies to get into the space, right? The big companies are in favor of heavy-handed regulations. The more expensive the license, the less people can afford to get the license, the less competition there is, the higher fees can be.

Right, so, so we're not shooting the messenger. They are complicit, is what I wanted to sort of help people understand. They're, they're going above and beyond, you know, yeah, they're being, they're going above and beyond what they need to do, and they are complicit, and so we're not shooting the messenger, and we should be critical of them.

Yeah, absolutely. All of them, sure.

Yeah. And so, perhaps then it, it, this is also, to what you were saying, Raphael, it's a question of structure then. So if the exchange is structured in a way where you- You know, you don't, you only receive to yourself, then Bitcoin people can sort of prioritize or build services in a way that actually respects more the user's privacy by if they, if they try to encourage, going down that non-custodial pathway, correct?

Yeah, I mean, I don't know the tech- exactly how it will be figured out from a technical perspective. I mean, I think they, they'll have the, either you can agree just to only send to your own wallet or, you know, they'll have this bulletin board system, whatever they're doing, or they're gonna ask you what you're doing. but As long-- I guess if you're sell-- if they're selling Bitcoin, they have to get the Bitcoin from somewhere, which means at some point the one exchange is gonna interface with other exchanges, right? If it's not all users trading with each other, you know, there's some issues there, logistical issues, but, I think it's possible to build, you know, Bitcoin-specific services that can protect some- Some degree of privacy, at least if they try, and they also need to try and make an effort to, effort towards doing that.

Do you know if the travel rule that they're basing this on is the three thousand dollar one that is currently sort of in the legacy system, or are they going for this thousand dollar sort of, limit?

Sure. So FinCEN's rule is three thousand, and the FATF says one thousand, and FinCEN can do that or not do that. I mean, it'll be up to-- I think it'll be up to FinCEN if they want to revise the regulations, and then it's a matter of, you know, does Congress need to pass another law or pass an amendment to the regulations, or whether it's something that's delegated to FinCEN to just change spontaneously, and then there'll be, you know, public review process and comments and things like that.

So this is something it'd be great to hear Matt also talk about is like how powerful Lightning could be because, you know, at the end of the day, most Lightning, Lightning transactions will probably be less than that amount for now, so they might, you know, go totally under the radar, right?

Am I supposed to respond here? Yeah, we were just saying, what, what are your thoughts around using lightning? Yeah, I was, yeah, I was listening. I, I think, you know, lightning provides a lot of privacy, a lot, a lot of privacy. the, the privacy guarantees of Bitcoin are pretty much nonexistent. You have to go out of your way to use it privately. It is very difficult to use privately right now. it's way easier to use it privately than it was two years ago or three years ago. But it's still extremely difficult and you can shoot yourself in the foot a lot. Lightning improves that significantly, I think, on the sending side.

And there's obviously still work that needs to be done there in terms of just Lightning UX in general and building out the network. I mean, in terms of fiat value, Lightning capacity has gone up like twelve percent today. but, the, on the receiving side, it's very difficult to do so privately. We have these fixed pub keys, that are being used for the node identifier, so once that pub key is linked to your identity, you're, you're, you're pretty Pretty much screwed. So like if you're trying to use it privately to receive, you have to keep creating new lightning nodes and keep them isolated. most of the lightning implementations don't have coin controls, so a lot of times you can screw up on the on-chain side, which we, you know, know doesn't have great privacy guarantees. all your public capacity, if you're a routing node, is known, to the world and broadcast. This is how much Bitcoin that I am, I am staking on the, on the lightning network. so So you kinda have to run it through Tor if you wanna be a private routing node, if, if, if otherwise we end up with a bunch of lightning nodes that are run by big, big coin companies that are running from server farms that are controlled by Amazon and all these other big, you know, big companies in known places, and they could get pressured into handing over information relatively easily. So we need people to be running routing nodes themselves, but they're not gonna wanna give up their IP address because that's a personal, that's personal data that they- That can identify you, so they're gonna have to run it through Tor. And then when you run it through Tor, there's a lot of reliability issues, there in terms of having big lot- lots of channels. You can't compete with these, like the big refills of the world, in term- I mean, I've tried, you just can't do it. So, you know, that's a shortcoming of Tor. Hopefully we have, you know- You know, more tools available to us in the future, but it's, it's definitely an improvement. And then the other thing I just want to mention is, you know, I, I've been hesitant to like talk about this, but, you know, since it's so relevant right now, is because we have those pub keys On the receiving side that are known, that are fixed and can be known, it could very easily-- my framework basically is there's some people that like to petition and lobby regulators, I just assume regulators are just gonna fuck our privacy constantly, no matter what, and I think you have to build tools that, that, that make it more difficult and protect people. but- I see an end game where, like, regulated lightning companies have to, they have to know the pub key they're sending it to, right? And then you have all of a sudden whitelisting, blacklisting of pub keys, it becomes w- it's like way, it's almost way easier than doing it on chain. So there's, there's definitely some nuances there. Yeah. Yeah.

So I, I actually agree with Matt in that we need technical privacy, but there is also legal privacy, right? And in democracies, we may be actually able to have legal privacy. I'll give you an example. Look at something like what Jack Maers is doing with Strike. So if Strike is like successful, most of the volume on Strike might be for daily purchases, which might go under this limit, and therefore they may not have to report it to the government, right? So in a democracy, you could have like legally protected privacy for small transactions. Which would be a vi-- a big, major victory, I think, that groups like Coin Center are sort of pushing for, like sort of like treat Bitcoin like cash, right? And I, I, I hope they win, and I agree, I'm just skeptical that the government will sort of allow that long term, which is why techno-technological privacy is like the most important thing by far, right? And al-also very important is that people who live under dictatorships, four billion plus people, they don't have a shot in hell at having legal privacy. their only chance is techno Logical privacy, which is why that's so, so important.

Yeah. And I think, I guess for those users who really want privacy, they need to acquire Bitcoin without KYC, that's probably the most important part, and then use these coinjoin techniques or potentially Lightning privacy techniques. And as I understand so far, the surveillance companies have not really looked too much into trying to surveil the Lightning network, although currently there are some theoretical attacks that have been- disclosed in terms of ability to surveil, let's say, the amount of money in a channel, let's say. But I think the surveillance technology for Lightning doesn't, hasn't really been built out yet. It's probably fair to say. What, what do you, what do you think?

some of them have, like on-chain lightning analysis, so if it's connected to an, a suspected lightning open or close. but none of the big ones that I know of have active, lightning surveillance, which would basically what that would look like is, is, you know, running large routing nodes and basically Trying to be in between the payments is like on, on the most simple level. alternatively, as I said earlier, you could also presumably pressure, or pressure the big routing nodes to give you data so they don't have to run it. in that situation, you would see something like maybe, like we see right now, right, where you have an exchange and they're, they're feeling pressure from regulators, so they hire someone like Chainalysis and the data sharing happens, right?

I, I also think there's a scenario, Stefan, where, where they just ban the use of Lightning. Like FATF and the US government could just say, "Hey, Coinbase, Square, all these different companies, fine, you can do your thing with Bitcoin and with Ethereum or whatever, but if you use Lightning, you're out or you're gonna get fined." So this, again, this is why it's so important that we, we have this sort of Trojan horse theory about Bitcoin privacy, where, we need to keep working on on-chain privacy so much so that it becomes very difficult to track and understand what's what and do linkability tracing, because they won't be able to ban Bitcoin. I mean, that's gonna be the, the lifeblood of all of these systems. they-- but they could very well ban, you know, the use of Lightning or privacy coins or whatever. So this is why the work that, what Chris The Human Rights Foundation started a, a software development fund in this area is because we know, economically, financially, they're not-- they can't ban Bitcoin, so Bitcoin is the hope, right? Bitcoin is the way we can sort of force our way, right?

Why couldn't they ban Bitcoin?

Well, then, I, I just don't see a world where you could have like a, like a cryptocurrency, like, industry without having access to Bitcoin. Well, what if you, what

if, what if the ban look like that you like ban self-sovereign Bitcoin? So you, you say you can access Bitcoin, but you either have to keep it on a compliant exchange service, or if you do withdraw it, you have to constantly give us address disclosures and how much you have. so they, they could still like get their cake and eat it too. I'm not saying it would be easy to enforce,

but I'm al--

I, I also don't think it's that outside the realm of possibility to have that kind of regulatory regime come into play.

Look, that would be really stupid, I think, like for an innovation perspective, but they could do it. But look, if they do that in the United States, you could just go somewhere else, like some-- like it's not like all one hundred and ninety countries are gonna agree to that, right?

Yeah, I would just add that I think that that is

only thirty-seven countries.

Yeah, that, that, those kind of things seem pretty unlikely. But, but that being said, I just wanna add a point from earlier about political versus technical solutions. I feel like Bitcoin is a technical solution to a political problem, right? The monetary policy problem and, well, mainly the monetary policy problem. And so For anyone who's listening, I wouldn't count on political solutions, to what are political problems, right? That's just not a thing, or we wouldn't have Bitcoin in the first place. so the technical solutions are important and we should, you know, support and use and encourage those.

Right. This is why I think that organizations that care about financial privacy should be focusing on protecting Bitcoin as opposed to trying to convince regulators to make, central bank digital currencies that protect people's privacy, 'cause I just don't think it's happening. I mean, it's a nice dream, it's a nice little, you know, idea that we could have that in utopia, but it's not happening because these governments and corporations are so thirsty for your data and they wanna know everything that's happening. So our best bet is to just sort of use legal protections and democracy to prevent, them from regulating Bitcoin too much and to build the technology that makes mass global surveillance sort of not feasible. I

mean, that's our best case. Yeah. Using the Uber example, right, if enough people use Uber such that it just wasn't politically feasible for the government to ban Uber, is there a similar case with things like Bitcoin and privacy and trying to help people understand that it's not about, oh, helping, you know, the- The terrorists or whatever, it's more about financial freedom and kind of winning h-harts and minds. Do you, do you see that as, an important, thing that Bitcoin people have to try and promote? I, I,

I'll jump in on that really quickly. I think we're very, very, very far away from that because what you've seen over the last six months is that the government can literally put you out of business and destroy your life's work, and you're not gonna do shit about it. I don't know if we're allowed to curse, but unfortunately, there's just nothing that anyone can really do about it. Right? You can be upset and you can complain, and it's devastating, but if people are willing to let their businesses be shut down for months at a time You know, they seem to be able to put up with anything. And Bitcoin is just not that dear to-- it's dear to us, but it's like the majority of people, they care more than they care about their, you know- Probably small Bitcoin investment.

This is another reason why Bitcoin's historical development is so important and we're so lucky it, it sort of, grew in this way that a, a large percentage of Bitcoin is held in a sovereign way. I, I mean, I know there's a ton of people who have, Custody Bitcoin and people have exposure to things like Gbtc, but, but a, a large amount of Bitcoin is actually held by the people who own it. And because of that, even if governments decided to do what Mattis, is pointing out, where they could just basically remove your ability to withdraw, that would create a black market, that would create two bitcoins, right? And the Bitcoin that I would hold would have a premium, there'd be a black market price for that. It would be more expensive than Bitcoin that's trapped in the sort of US government's Right? And that over time, that economic financial pressure actually, I think, makes it really, really hard to enforce, even more so than a legal or political kind of, kind of pressure in that. You know, opinion.

Yeah. yeah, I mean, I don't think they could successfully ban it, partially because of this cultural reason, partially because- You'd have to go, you know, you'd have to actually enforce it and go person to person and try and, and try and claw back that Bitcoin. but I could just see like the criminalization of honest Bitcoin holders, and, and it will hurt in whatever countries that happens in. I'm not even saying in America necessarily, wherever this happens, yeah. and it will happen in some places, it will make honest people criminals, and it won't be the first time we've seen governments make honest people criminals before. So I really wouldn't be that surprised if that was to happen, and I think, you know, that's one of the reasons why I focus so much on education, is because You know, Bitcoin's a defensive technology, it's a defensive tool. It, it falls in the same subset as something like en-encryption or guns, and when you have more people that have those things It becomes more expensive and difficult to claw back your rights, and, and, and, and that's the hope, right? So, so every day that goes by where there's not a major state attack against Bitcoin is a day that I'm more bullish on Bitcoin. and fortunately, most governments seem to be very distracted. They've been very distracted for the last ten years, and they, they don't seem to be changing anytime soon. but it's just something that Bitcoin Owners should be vigilant about, specifically to their own situation, because I don't think it's that much of a risk to Bitcoin, the protocol, or the network, but it is a very big risk to the individual Bitcoiners.

Right, and, it may well be that, let's say, hypothetically, they go person to person or they look for a big, well-known person and make an example, right? arguably that is what happened with Ross Ulbricht, right? They found the creator of the first well-known darknet market and absolutely hit him with the book, and there were a lot of dodgy things about that case, But, I guess also given, you know, that hasn't stopped the creation of other darknet markets, they still exist today, and I think that is-- it brings up this question of compliant Bitcoin versus defiant Bitcoin, right? And if, if there were to be some kind of, What, network of kind of government compliant coins and coins that, where the history can be perfectly traced within that little pool of white-listed coins, but then you've got this whole unregulated side, how do you think that would play out? What would, what would happen in that scenario? W- do you think, Do you think it's likely that, that scenario just won't come to pass?

We, we would hope for like brave whistleblower types who would be at the back end of companies like Coinbase who would just empty these wallets into the open world, and we would celebrate them. Those people will be in our world if this, if this does come to pass, and we will, we will build statues of these people.

Rafael or Matt, do you have anything to add on that idea, compliant versus defiance Bitcoin, if you will?

I mean, I don't see It's hard for me to fathom how that plays out, but yeah, I mean, I, I, we just, I, I, I don't think it'll be as visible as that, as like two pools of Bitcoin, But, I mean, we kinda already see it, right? Like, do, do we think like the million Bitcoin that are in Coinbase? Like, Coinbase has done so much bad shit. Like, w- those million Bitcoin are like never coming out of Coinbase. Like, I don't know, like what it'll take to remove those Bitcoin from Coinbase or like the Bitcoin in, in GBTC or future ETFs. Like, it almost feels like once it goes in there, it just like never really comes out. I, I do agree that they will make examples of people. That's Lorenz too. That's like, it's like textbook. You make an example of the big, big fish, and then like eighty percent, ninety percent will comply just out of fear. and then, and then last but not least is like, I, wh-when you- When you have a situation where,

you can, you can, you can basically, after the fact, hit people with certain, certain things because the Bitcoin ledger is, is long term, you do end up putting people in more vulnerable situations, right? Than, than something like, Torrent, where like you got hit like four months after the fact or something like that. Like, there could be situations- Here where people get hit with things, you know, five years, ten years down the line.

Gotta be careful with your on-chain privacy. so I suppose it, it might be good to just talk a little bit about the current state of how things are working right now. So the way the- Bitcoin surveillance companies or financial surveillance companies, right? Chainalysis, Elliptic, CipherTrace and others, will sort of sell the message as they say, "Look, we aren't the ones identifying customers, we're just giving the tool to the exchange, and then the exchange compliance staff is there trying to understand the flow, is this, high-risk customer or..." is this customer okay? And generally speaking, most exchanges, they want customers, right? So they, they would generally be reluctant to flag that customer, right? Because you want more business, just generally. But I, I, on that side, they have to try to, they're trying to do that, aspect of, I think Rafael, we were talking about this on our earlier episode where you were saying it's kind of like, what is it? We, we pretend to do the work and, they pretend to pay us. so is there, you know, some, some level there of like, exchanges just have to- Make it look like they're doing something, and, people can just accumulate and self-custody.

Right. Well, yeah, I mean, I think that really is a, a part of it that there's a lot of work that is done just for the sake of showing that you're doing something so that you can show that your policies and procedures are, you know, reasonable under the circumstances and like you're putting a lot of effort into it. And You know, if the government comes to inspect you, then they could say, "Well, they, they look like they're doing a lot of things, so that seems like good, right? More is better than less."

There really is some of that, because, you know, not at- There's some people in the government that are sophisticated and thoughtful, especially at FinCEN, that I think understand how Bitcoin works. You know, they had their twenty nineteen guidance where they like understand what mixers are and CoinJoin and stuff like that. but I can't imagine that every, you know, inspector is gonna be that sophisticated. And so if you just wow them with a little bit of- You know, paperwork and processes and flags, and see, look, all these buttons are lighting up on the screen, there must be a lot going on. I don't know, It's kind of, it's kind of a gray area, right? Where some of it is like legitimate and this is harmful data collection and it puts us at risk, and for some companies, especially the smaller ones, they may not all keep As good records as we're worried about. Like the big exchanges are definitely the worst offenders in terms of doing a very good job at cataloging all of your information and keeping it readily available and accessible forever, or for a long time. But I don't think that kind of burden and that kind of expectation can be reasonably put onto smaller businesses, like somebody who-- if somebody runs one Bitcoin ATM, like what kind of compliance operation can you re-- can the government reasonably expect them to do? You know? And so as far as people that are gonna use KYC services I'm generally in favor of smaller ones versus bigger ones, for that reason. Because you're just dealing with one person or two people or three people. I mean, look, not everyone wants to buy from a Bitcoin ATM, you know, the UI isn't that great and the fees are high. But in general, smaller is better than bigger, 'cause the bigger ones just have the money and the motivation, the economic motivation, to be compliance, you know, compliance behemoths.

yeah. And also, I guess kind of, sort of like that game theory idea as well of like, if there are enough ways for non-KYC acquiring of Bitcoin, then does that mean people sort of at some point just sort of say, "Well, we're not gonna be able to police this thing, so we're just gonna have to try to manage it," right? So similar to that idea where, I think there was actually an example where, I think it was in, was it Russia, where they intentionally, because they knew people would otherwise use Bitcoin, they would just sort of say, like, let him use the bank account. Yes.

Yeah, no, that's like, a, a sort of, effect that Bitcoin has on government officials. They realize that, or they will realize in the future as Bitcoin becomes more popular, they're starting to realize now, that if they restrict the legacy financial system, people will just go use Bitcoin where it's harder for them to know what's going on. So what they end up doing is lo-loosening restrictions on the fina-legacy system, which is good, which is good It's like this sort of latent effect that Bitcoin has that we're just realizing, which is, which is great. but I would say that like maybe in the future we look back at now as like sort of like a mini golden age where Bitcoin is fungible, like there's not like discount Bitcoin you can buy that's like been tainted, that like doesn't really exist, and it's legally protected in democracies like the United States to work on open source software, it's free speech. maybe not so much in dictatorships, but, but for huge parts of the world, it's activity to work on open source software, and the open soft software, the open source software itself isn't, you know, you know, at risk of the same regulations as centralized software. it's completely different, and that's so important for people to understand the difference between, you know, something like, a centralized mixing service and something like CoinJoin. So currently we're, we're living in, I would argue, kind of like a mini golden age where, we can develop this technology It's legally protected, Bitcoin's still fungible, and now's the time to, to double down on this because maybe in ten years it's different.

Yeah. Anything to add, Matt?

No, I mean, I agree. I, I mean, I think the answer is open source software. Like, I'm wearing one of the answers on my hat right now. Yeah. I, I, I think, I think long term, most people won't buy Bitcoin, they will earn Bitcoin, and most people won't sell Bitcoin, they'll spend Bitcoin. and if they, if they use a self-sovereign way of doing that, like BTC Pay Server, then it becomes really difficult to enforce any kind of KYC and information collection at that point. Then you're going like store to store, bodega to bodega, to get them to do it, which is similar to what we see with cash right now, where there's large portions of cash, the cash economy go unreported, and they literally would have to do like sting operations on individual small businesses to try and enforce anything. but it, it's, it's It's that time before that happens, where we're extra vulnerable, particularly as Bitcoiners, and I, I think that's where like a lot of my concern, stems from, because I mean, I would guess that, you know, maybe eighty to ninety percent of, of, of new, new corners, new Bitcoiners coming in are, are going in through KYC exchanges, or, or at least using some kind of KYC service, and sometimes people are using multiple. you know, they buy on one exchange and then they do some, one of those leverage Products or something on a different thing, or maybe they decide to go trade some shit coins. so, and that's not only the only information leaking. So when you like combine all this stuff together, You know, like a big thing in privacy is, is anonymity loves company, and you, you need, you need a crowd of people all doing it, for any individual to have some success in being private themselves. If, if you're the only person, wearing a mask in a crowd of people, they can easily track you through that crowd. but if everyone's wearing the same mask, then it becomes a lot more difficult. and then, you know, so- So we, we need people to, to actually care about it, to try and avoid KYC at all costs, a, a-at least reduce the amount of KYC services you use. I'm not sure if I'm sold on Rafael's idea of smaller services versus bigger services. I think it goes both ways,

Yeah, I, I, there's, there's no one size fits all answer, right? But there's some of these smaller services, like, or who knows how they're securing your data? you have a lot of situations where those are the ones that end up stealing coins, you know? So who knows what's going on with privacy as well? so there's, there's, I wouldn't, I don't think there's like a one size fits all there. you just wanna just avoid it in general as much as possible. yeah.

Yeah. One, in terms of tech, in terms of technologies, well, go on, go on.

I was just gonna say one potentially powerful ally here is, is remittances, which I'm learning more and more about, and obviously are, is driving a, a large part of this exponential growth of Bitcoin in emerging markets. and one of the reasons you'd use Bitcoin for remittances is to go outside of the system, right? So it is interesting that one of the big use cases for Bitcoin today relies on being outside of the SWIFT system, being outside of these very So that's something that's going to be interesting to track moving forward. Again, if you live in America and are remitting back to Mexico, and you have to use Western Union to get money back to your family in a small town, like the reason, again, to use Bitcoin would be to go around that and to not be part of that, to be part of a parallel system. And, you know, privacy is not your objective, but as Matt says, anonymity loves company, and, you know, you're, you're helping by being part of the, you know, of the non For people to remit more cheaply and, and without restriction. So hopefully it'll be a good ally for us, moving forward.

And, and that's another thing that I wanted to mention, which is kind of tangential there, is, you know, it depends on the user and what the user's situation is and what their threat model is. you know, I was just on the Satoshi and Venezuela podcast, like if you're a Venezuelan, your primary threat is Maduro. You're concerned about Maduro having that information. Right. So you can You can choose a KYC source that very well is, is very much likely to be, be giving information to the US government and be completely fine with it. You have to ask yourself, you know, do I trust this source to secure this information from Maduro? And then so, so depending on who the Bitcoin user is, there's different trade-offs and different, you know, things you need to consider there.

Yeah. Yeah. I can add one thing on, well, just on this general topic, that I, I, you know, I love how Bitcoin culture is so adversarial thinking, right? We're all brainstorming and, you know, stressing out about these future problems or and current problems and, and what terrible things can happen, but I- I think it might be worth remembering, even though we should stay vigilant, that the government may not be as smart and as all-knowing as they come off, or they seem, or they want us to know. And I remember Something, at one point I was talking with like the DOJ and the IRS and the FBI all together on one phone call, and they were asking me questions, you know, info I needed to give them about one of my, one of my clients, and I was like, "Why are you asking me this when you already obviously know all this information? Like, you can hear all of his phone calls, and you can definitely get access to all this other stuff." Why are you even asking me? I just assume you know all this stuff already, and they're like, "That's exactly what we want you to think." So, you know, we don't know how organized they really are. You know, we know they collect a lot of information, and you guys probably more know-- maybe more know details about that, no more details about that, but- A lot of it definitely relies on us being worried about what they might know, right? It's just, it's just how people are, you know, if you think somebody's watching you, you're gonna behave, and then they could just stop watching and you'll keep behaving. And that's, you know, I think that's definitely real in, in Bitcoin because we, you know, we hear bits and pieces about how far along they are and, you know, they make examples out of people, but we're, we're, we don't know Unless you're on the inside, we just don't know how far along they are, right? And how big of a threat this is, and if they're considering any of these things, and if banning Bitcoin or, you know, banning self-custody, if anyone in the government has ever mentioned that as a serious possibility. You know, we don't, we don't know that for sure yet. So definitely be vigilant, but, you know, it's also possible that There will be some good outcomes or absence of bad outcomes that we're not, you know, that we're not expecting.

Right. We could be surprised to the upside, right? I think, the- Trying to be positive. Yeah. Well, that's, I think we've also got to be practical in terms of what we can do, and so I think the obvious steps, we can do are things like build the local Bitcoin Meetup scene, have a family and friends, non-KYC, little informal trading network, kind of encourage people to Use, use, you know, self custody, coinjoin, and so on. what, what do you guys see? What are some of the things, where should our focus be in terms of things that we can do?

I, I was just gonna say encourage people to own their own Bitcoin. I mean, that is just the most important thing. 'Cause if enough people, again, if enough people are owning their own Bitcoin, as Matt said, the idea of a door-to-door sort of search and seizure is, is not feasible with Bitcoin. It's not like gold, it's us are storing it, we kind of hold the cards, we have the leverage, but if, but if only a small number of people are holding and a large number of corporations control all the Bitcoin, then, you know, we don't have the leverage, right? So I think, own, you know, own, you know, not your keys, not your coins has just got to be the mantra here. Yeah, anything to

add? Well, I think e-everyone would agree with, not your keys, not your coins, and you should hold your own Bitcoin. The question is how to get it, right? And for the vast majority of people currently, they're doing KYC and giving up a lot of privacy, which puts them in potential danger in the future or danger now. And so the, the question is how to get it without doing that, and the best-- I don't know, earning it really seems like the best answer. It's something that is, it's an awesome thing if you

Yeah. So,

so you have earning Bitcoin, you have, so getting paid for goods and services, you have mining Bitcoin, which, you know, depending on your electricity prices, you are gonna pay a premium for that, but it is KYC free. you have P2P services, which are non-custodial, which right now are sitting outside of the law. it, it, it doesn't seem like they're, they're, the law applies to them yet. That, you know, it could happen in the future, like Hodelhodel and Bisk, which Bisk is a little bit, is, is more censorship resistant there, because Hodelhodel is an actual company, but they're not custodying. when you use those services, it depends on your payment method, 'cause if you're using a bank account, then obviously there's, there's some private information leaking there, versus using something like cash. Then on the Bitcoin side, you're gonna wanna use your own node. you need a node to interact with If you're not using your own node, you're using someone else's node, and that node can track all your transactions and balances and, and potentially your IP address if you're not connecting through Tor or VPN. you're gonna wanna learn about using CoinJoin, and a lot of the- Mistakes you can make along that way, that isn't something that can just be explained in, in a five minute little bit. you're gonna have to do a lot of research and play around with it and get used to and get comfortable with it when you're, you know, when your life is not on the line. and then, you know, further educate yourself from there, you know, learn how the Lightning Network works, learn some of the nuances there, and just keep on, looking into that because, You know, I, I've-- the, some of the ways I've learned, the way I-- the main way I've learned about Bitcoin is just making a ton of mistakes, throughout my Bitcoin experience. And fortunately, I live in a country where those mistakes didn't cost me too dearly, For other countries, that's not the case. So if, if your privacy is life or death, you know, if, if, if shit really comes down to it, like you need to be extra careful, like you can't be learning by making those mistakes, you have to try and avoid them as much as possible.

The, the, the other thing is that, look, it's too much to ask folks who are, you know, just getting into this field to do anything really more than own their own coins or at least have sovereignty. and that may be enough for now, because even if you give up your KYC and use something like Square or Coinbase to buy your Bitcoin, which is what most Americans are doing, or most Europeans, et cetera, most East Asians, if in the next twelve to eighteen months, so open source software can be developed whereby you can use You know, a piece of software that you can download without giving any information up to obfuscate where those funds are going, we can mitigate the problem, which again, why this is so important to do right now. but if you never remove your coins from the custody of someone like Coinbase, you could be totally screwed. So at least you gotta get your coins in your own control, and then you may have an option to remain private. It's-- we're not guaranteeing it, and as Matt's saying, it's really hard right now, but maybe it'll get better in the next couple you know, TFTP, Alphabet, soup organizations, I mean, it's right up there with the UN Human Rights Council and the World Health Organization. I mean, this thing, again, it's run by Saudi Arabia and Turkey and Russia and China, and they're gonna use this thing to go after dissidents and human rights activists. So we should be like very anti-FATF and any company that works with FATF or to bring your company to the standards of FATF needs to be seen as a mercenary, and we just have to shame them and force them to talk about themselves in an That they are sort of surveillance companies and not sort of chain analysis companies or compliance companies. Make them come out, from, you know, behind that, sort of like, you know, fig leaf and expose themselves, right? That's

really important. Excellent, I totally agree with you there. and Alex, maybe you just wanna tell the listeners as well about your HRF, the fund where if they would like to donate for privacy, can you tell us about that?

Yeah, sure. So we just wanted to throw a hat in the ring as a human rights group donating to open source Bitcoin software development. there's a lot of great companies out there doing it, but we wanted to sort of, encourage the nonprofit space and the human rights space, to get more involved. our first gift was to Chris Belcher for his work on CoinSwap. We're gonna be announcing some more gifts this coming month in the areas of privacy and resilience and decentralization. hope- Hopefully it's, it's an effort that, allows us to make a new gift or set of gifts every quarter or so, and we're very excited about it. So folks can visit hdraw.io/devfund if they wanna learn more.

Excellent. and yeah, guys, look, I think that's about all we've got time for. So, if everyone could just, let the listeners know where, where we can find you, Rafael, do you wanna go first?

Sure. On Twitter, I'm c a crypto lawyer. You can see it on the screen there. It should be, I think it pops up on your side. And my website is thecrypto-lawyers dot com. Excellent,

Matt. First of all, thanks for having me. I have a weekly podcast, Tails from the Crypt with Marty Bent, Rabbit Hole Recap. you can just look that up, Tails from the Crypt, in your favorite podcast app. All my links are at mattodell dot com, and you can find me on Twitter at at matt under dash odell.

Excellent. And Alex, where can we find you?

Yeah, first of all, thanks for having me. if you're listening, you should continue to listen to Stephan's show and Matt's show, and that's pretty much all you're gonna need to be a very well-educated, bitcoiner and take your freedom into your own hands. You can find me at, Gladstein, G L A D S T E I N, on Twitter, and you can follow the work of the Human Rights Foundation at hrf dot org or hrf on Twitter.

Fantastic. Well, thank you all for joining me. I really enjoyed chatting with you. And listeners, you can find me at stephanlivera dot com. Make sure you share if you enjoyed it. That's it from us, and we'll see you guys in the citadels.