Does government regulation of AML (Anti Money Laundering) represent a new way for governments to capture Bitcoin? FATF (Financial Action Task Force) is driving stricter regulations, and it now appears that large Bitcoin businesses are looking for ways to collaborate with the “Travel Rule”. What are the implications of this for Bitcoin privacy? Will Bitcoin be captured by governments, or will Bitcoin capture governments?

Time zone: Monday 27th July 6pm PT, 9pm ET, Tuesday 28th July 11am AEST. It will be broadcast on YouTube Live at the link below, and on my twitter periscope @stephanlivera.

Links:

• Matt Odell of TFTC/RHR (MattOdell.com)
• Alex Gladstein of HRF
• Rafael Yakobi of The Crypto Lawyers

Prior Episodes:

• SLP70 Matt Odell – Putting Bitcoin into practice for noobs
• SLP138 Matt Odell – Should Bitcoiners Coinjoin?
• SLP102 Jimmy Song & Alex Gladstein – The Little Bitcoin Book
• SLP165 Rafael Yakobi – Should Coinjoin users be flagged? Is Privacy Illegal?

Sponsors:

• Swan Bitcoin
• Unchained Capital

Stephan Livera links:

• Show notes and website 
• Follow me on twitter @stephanlivera
• Subscribe to the podcast 
• Patreon @stephanlivera

Podcast Transcript:

Stephan Livera:

Hi everyone. And welcome to the Stephan Livera podcast. Today. We’re going to 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. All right. So I’m just going to bring in my guests now. So Rafael, Alex and Matt. So I suppose just very quick introductions just for listeners who are not familiar Rafael, he’s a partner of the Crypto Lawyers and also a past guest on the show, Matt Odell, 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 CSO of HRF also well known as a Bitcoin advocate and also discussing Bitcoin privacy also. So welcome to the show, everyone.

Rafael Yakobi:

Thank you.

Alex Gladstein:

Thanks for having me.

Stephan Livera:

Great. So yeah, guys, so look, 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, Rafael, maybe you could tell us a little bit about what FATF is, who are they? What’s this travel rule?

Rafael Yakobi:

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 a well, relatively unaccountable, I would say, right? They’re not, specifically elected by, you know 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 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 and on behalf of the customer, they’re required to include a whole bunch of information, right? The name, maybe your social security number, address, things like that. And so this applies, you know, on transfers from one bank to another bank. So the receiving bank knows where, you know, who sent the money from the other bank.

Stephan Livera:

Excellent. Thank you, Rafael and Alex, I know you had some comments around the FATF in terms of who are the members of this organization?

Alex Gladstein:

Yeah. So I think people should be aware that this is a multi government 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 in their mission statement. So they really want to set up this sort of omniscient the presence 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.

Stephan Livera:

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 you, elaborate a little bit on how that’s being done currently?

Matt Odell:

So Yeah. 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 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 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 this situation where every time you trust one of these services with your private information, and 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 could be shared 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 no privacy by default there, it’s a transparent ledger that is going to 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.

Stephan Livera:

Right. And so I think one of the things that’s important to node is in the earlier days of Bitcoin, it was designed to be a pseudonymous system. The idea is you generate a 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 deanonymisation is occurring. Rafael, maybe you want to 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 FATF or FinCEN or regulator demands?

Rafael Yakobi:

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 regulations were not 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 basically. And so, you know, they’ve kind of, it’s been there and the question was how to comply with it. If it had been applied at all, which it does. And so that’s where the recent news comes in, where, you know, Coinbase and BitGo and 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.

Rafael Yakobi:

And if you send to one of their 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, you know, between different financial institutions, right. And something I mentioned to you guys the other day that if a company is just selling Bitcoin to customers, 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, they don’t have to send you your own information. That would be the equivalent, right. If you’re the recipient, it wouldn’t make any sense to receive your own information. I mean, I think one of the main thing that I’m concerned about with this is that there’s just going to be a ton more information sharing between exchanges and now, whatever custodial privacy risks, like Matt mentioned, you have just like grew exponentially, right? I don’t even know how many exchanges will eventually be part of this network. And then if they’re all sharing information, it’s like, you KYC once and now everybody on the whole planet, it’s got it. Or, you know, 50 exchanges in 30 countries, or, I mean, it could be global. It could be all the exchanges in every country eventually.

Stephan Livera:

Yup. 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’ll 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 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?

Rafael Yakobi:

Yeah. Yeah. So if you’re just withdrawing from the exchange to your own wallet, then this is a not an issue, right. And eventually they’re going to have to decide how they figure out, you know, 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 drop-down menu, you know, certain exchanges, I think Coinbase, and maybe others do this already where they ask you, what do you want to 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 for now you can write whatever you want there. But well, yeah, let’s, that’s that on that.

Stephan Livera:

Yeah. Right. And I think that the difficult part here also is just like, not even just the travel rule, but just broadly the AML rules and sanctions rules, 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 sort of puts exchanges or financial institutions into this position where they have to try and justify it to the regulators, 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, now is that enough? I want you to do more. You need to document this or you need to implement that.” And that’s potentially how this industry has evolved. Would you guys say?

Rafael Yakobi:

Definitely.

Stephan Livera:

Yeah. Yeah. And look, I guess then there’s obviously some privacy and human rights implications of this kind of behavior. If certain addresses are becoming flagged, or if there 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 an oppressive regime, where might they be using Bitcoin today and how could this kind of practice stop them?

Alex Gladstein:

Yeah. So I’ll give you a clear example, would be Hong Kong, right? So China’s a member of FATF. So the Chinese communist party can 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 think this is part of a, understanding the larger picture that essentially this is a trade off a negotiation, a partnership between companies and governments, where the government is saying, Hey, you guys can, you guys can mess around with your cryptocurrency Bitcoin stuff in exchange, you have to play by our rules, right. And their goal is to essentially identify as much Bitcoin as possible out in the world, right? So it’s a 2020 strategy.

Alex Gladstein:

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 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 point because they’re going to 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.

Stephan Livera:

Great. Yeah. Matt, do you want to just chat a little bit about 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.

Matt Odell:

I’m just going to sideline your question for a second. No offense, because 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 FATF you know and the travel rule. I see a couple of things here. I see, first of all, I see regulated services potentially opting for the basically getting their users to, agree as per the terms of service that every single withdrawal they make is only to themselves and that they have full responsibility for that transaction. So you can’t send from a hosted wallet to any address you want. Like right now, there’s a little bit of plausible deniability.

Matt Odell:

You send from CashApp, 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 happened with those coins from that point forward is then the user’s responsibility. And of course, it’ll be backed up with them, also reporting a bunch of data to governments and data sharing agreements and whatnot. The other thing is you could take that a step further and services that really want to 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 can’t ever withdraw.

Matt Odell:

So both of those scenarios would obviously not be great especially if you want to accumulate Bitcoin and you want to be self sovereign about it as we tell people to, but I can see both of those situations happening. And it’s one of the assumptions that I’ve been operating under for years now. You know, because I just think like depending where you live and we see in some countries already, there are clampdowns that prevent you from getting your Bitcoin. And then the last thing is, I wonder there’s like a middle ground here. Coinbase for instance, has 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 shitcoins, but it also supports Bitcoin. So I wonder like where do we see enforcement happening in terms of the travel rule, etcetera in terms of a wallet like that, right? Where Coinbase is obviously, you know, very much in bed with regulators are selling products to the IRS and the DEA, and you have this travel rule and they see all the transactions, how are they going to handle that? How do we see that playing out?

Stephan Livera:

Yeah, that’s a tough question. And I think it’s like, we’ve got this tension where the exchanges are living under fear of 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 guess my question then is 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 continually trying to raise the surveillance requirements. I guess that’s one way to frame it, another way to frame might just be it’s like the baptists and bootleggers thing, right? The chain surveillance companies are trying to say. “Yeah. Yeah. You need to use use us everyone uses us”. When perhaps there are other methods available for crime fighting. What are your views guys

Rafael Yakobi:

So polite around here? Oh, sure. Sure. So just to add to what Matt said earlier about the terms of service and agreeing 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 general in the US,

Rafael Yakobi:

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 Bitcoin, no money transmitter license. So there’s already reasons to do that. Really the law rewards non-custodial 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 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 going to say, but that was, can you give me two second summary of your last question? I apologize.

Stephan Livera:

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

Rafael Yakobi:

You know, okay. First of all, delete Coinbase, delete Coinbase. Second of all, I don’t know that we’re shooting the messenger 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, the 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.

Rafael Yakobi:

So they don’t even weigh that, none of them seem to weigh that 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 risks. So we’re not going to do that. Right. Or some kind of compromise. Cause it doesn’t seem like there’s any it’s just, ever-growing, you know, fear-mongering surveillance, state increase, right. And it’s broken incentives.

Alex Gladstein:

Rafael 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, chainanalysis 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?

Rafael Yakobi:

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’s kind of an open definition, then they’re given some freedom to choose what kind of strategies they want to 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 it also gives them a competitive advantage in that these services are expensive. And so it just, it’s 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.

Alex Gladstein:

So we’re not shooting a messenger. They are completely it is what I want it to sort of help people understand that goes above and beyond, you know? Yeah. The 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.

Rafael Yakobi:

Yeah, absolutely. All of them. Sure. Yeah.

Stephan Livera:

And so perhaps then, this is also to what you were saying, Rafael, it’s a question of structure then. So if the exchange is structured in a way where 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. But if they, if they try to encourage going down that non-custodial pathway, correct?

Rafael Yakobi:

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 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 going to ask you what you’re doing. But as long, I guess if you’re selling, if they’re selling Bitcoin, they have to get the Bitcoin from somewhere, which means at some point the one exchange is going to interface with other exchanges, right. If it’s not all users trading with each other, you know, there’s some issues, there are 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.

Alex Gladstein:

Do you know if the travel rule that they’re basing this on is the $3,000 one that is currently sort of in the legacy system or are they going for this thousand dollar sort of limit?

Rafael Yakobi:

So FinCEN rule is $3000 and the FATF says $1000 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, 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.

Alex Gladstein:

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 of lightning transactions, will probably be less than that amount for now. So they might go totally under the radar. Right.

Matt Odell:

Am I supposed to respond here? Yeah, I was listening. 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. Is very difficult to use privately right now. It’s way easier to use it privately than it was two years ago, three years ago, but it’s still extremely difficult and you could shoot yourself in the foot a lot. lightning improves that significantly, I think on the sending side 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 12% today. But on the receiving side it’s very difficult to do so privately.

Matt Odell:

We have these fixed pub keys that are being used for the node identifiers. So once that pub key is linked to your identity you’re 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, it 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 staking on the lightning network. So you kind of have to run it through Tor if you want to be a private routing node. If otherwise we end up with a bunch of lightning nodes that are run by big Bitcoin companies that are running from server farms that are controlled by Amazon and all these other big, you know, big companies in known places.

Matt Odell:

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 going to want to give up their IP address because that’s a personal, that’s personal data that can identify you. So they’re going to 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 lots, lots of channels, you compete with these like the Bitrefills 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, more tools available to us in the future, but it’s definitely an improvement. And then the other thing I just want to mention is, you know, 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, or that are fixed and can be known.

Matt Odell:

It can very easily, my framework basically, is there some people that like to petition lobby regulators, I just assume regulators are just going to fuck our privacy constantly, no matter what. And I think you have to build tools 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 as like way is almost way easier than doing it on chain. So there’s, there’s definitely some nuances there. Yep.

Alex Gladstein:

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 Mallers is doing with Strike. So Strike if 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 big, a big major victory. I think that groups like Coincenter’s sort of pushing for like, sort of like treat Bitcoin like cash. Right. And 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 technological privacy is like the most important thing by far.

Alex Gladstein:

Right. And also very important is that people who live under dictatorships 4 Billion plus people, they don’t have a shot in hell at having legal privacy, their only chance is technological privacy, which is why that’s so, so important.

Stephan Livera:

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 do you think?

Matt Odell:

Some of them have like on chain lightning analysis. So if it’s connected to 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 the most simple level. Alternatively, as I said earlier, you could also presumably 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 feeling pressure from regulators. So they hire someone like chainanalysis and data sharing happens. Right.

Alex Gladstein:

I also think there’s a scenario Stephan, where they just ban the use of lightning like FATF and the us government could just say, Hey, Coinbase, square, all these different companies find you can do your thing with Bitcoin and with Ethereum or whatever.

Alex Gladstein:

But if you use lightning you’re out or you’re going to get fine. So this, again, this is why it’s so important that 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 going to be the lifeblood of all of these systems. They, but they could very well ban, you know, the use of lightning or privacycoins or whatever. So this is why the work that Chris Belcher is doing is so important. And this is why the human rights foundation started 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 hook, right?

Alex Gladstein:

Bitcoin is the way we can sort of force our way, right?

Matt Odell:

Why couldn’t they ban Bitcoin?

Alex Gladstein:

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

Matt Odell:

What if the ban looked like, like ban self-sovereign Bitcoin. So 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 could still like get their taking it too. I’m not saying it would be easy to enforce, but I also don’t think it’s that outside the realm of possibility to see that kind of regulatory regime come into play.

Alex Gladstein:

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 of 190 countries are gonna agree to that, right?

Alex Gladstein:

FATF itself is only 37 countries.

Rafael Yakobi:

Those kinds of things seem pretty unlikely. But, but that being said, I just want to 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 would not 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?

Alex Gladstein:

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. That’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 want to know everything that’s happening. So our best bet is to just sort of use legal protections and democracies 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.

Stephan Livera:

Yeah. And I think adding to that point is there a cultural element here as well? So if because 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 helping, you know, the terrorists or whatever. It’s more about financial freedom and kind of winning hearts and minds. Do you see that as an important thing that Bitcoin people have to try and promote?

Rafael Yakobi:

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 going to do shit about it. I don’t know if we’re allowed to curse, but unfortunately there’s just nothing that anyone could barely 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, it’s dear to us, but to like the majority of people, they care more than they care about their, you know, probably small Bitcoin investment.

Alex Gladstein:

This is another reason why Bitcoin’s historical development is so important. And we’re so lucky. It sort of grew in this way that a large percentage of Bitcoin is held in a sovereign way. I mean, I know there’s a ton of people who have custodied Bitcoin and people have exposure to things like GBTC, but a large amount of Bitcoin is actually held by the people who own it.

Alex Gladstein:

And because of that even if the government’s decided to do what Matt 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 sorta US government’s regulated bubble. 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 mind, you know?

Matt Odell:

And 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 try and claw back that Bitcoin.

Matt Odell:

But I could just see like the criminalization of honest Bitcoin holders, and it will hurt in whatever countries that happens in, I’m not even saying in America necessarily, wherever this happens 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 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 falls in the same subset as something like 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 that’s the hope, right? 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 10 years, and they don’t seem to be changing anytime soon. But it’s just something that bitcoiners 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.

Stephan Livera:

Right. And it may well be that let’s say hypothetically, they go person to person and, 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 dark net market and absolutely hit him with the book. And there were a lot of dodgy things about that case. But yeah, I guess also given, 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.

Stephan Livera:

And if, if there were to be some kind of 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 happen in that scenario, do you think do you think it’s likely that that scenario just won’t come to pass?

Alex Gladstein:

We would hope for like brave whistleblower types, who would be at the backend of companies like Coinbase, who would just empty these wallets into the world and we can celebrate them. If this is, this does come to pass and we will, we will build statues for these people.

Stephan Livera:

Rafael or Matt. Do you have anything to add on that idea compliant versus a defiance Bitcoin, if you will.

Matt Odell:

I mean, I don’t see, it’s hard for me to fathom how that plays out. But yeah, I mean, we just, I don’t think it’ll be as visible as that as like two pools of Bitcoin. But I mean, we kind of already see it, right? Like, do you, do we think like the million Bitcoin that are in Coinbase, like Coinbase has done so much bad shit, like 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 GBTC or future ETF’s. Like, it almost feels like once it goes in there, it just like never really comes out. I do agree that they will make examples of people. That’s what they did with torrents too. That’s like, it’s like textbook, you make an example, the big fish, and then like 80%, 90% will comply just out of fear.

Matt Odell:

And then, and then last but not least is like. When you have a situation where you can basically, after the fact hit people with things, because the Bitcoin ledger is long term. You do end up putting people in more vulnerable situations, right than something like a 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, 10 years down the line.

Stephan Livera:

Got to be careful with your on chain privacy. So I suppose 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? Chainanalysis, Elliptic, ciphertrace, and others will sort of sell the message and say, look, we aren’t the ones identifying customers. We’re just giving the tool to the exchange.

Stephan Livera:

And then the exchange compliance staff is there trying to understand the flow. Is this a high risk customer or is this customer okay? And generally speaking, most exchanges, they want customers, right. So they would generally be reluctant to flag that customer, right. Because you want more business just generally. But 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 was saying, it’s kind of like “We pretend to do the work and they pretend to pay us”. So is there, you know, 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.

Rafael Yakobi:

Right. Well, yeah. I mean, I think that really is 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 put in a lot of effort into it. And, you know, if the government comes to inspect you, then they can say, well, 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 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 2019 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 going to be that sophisticated.

Rafael Yakobi:

And so if you just wow them with a little bit of, you know, paperwork and processes and flags and see, look, all of these buttons are lighting up on the screen. There must be a lot going on. I don’t know 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.

Rafael Yakobi:

Like somebody who, if somebody runs one Bitcoin ATM, like what kind of compliance operation can the government reasonably expect them to do? You know? And so, as far as people that are going to 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 because the bigger ones just have the money and the motivation, the economic motivation to be compliance, behemoths.

Stephan Livera:

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 going to be able to police this thing. So we’re just going to have to try to manage it. Right. So similar to that idea where, I think it 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 letting them use the bank accounts.

Alex Gladstein:

Yeah, no, that’s like 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 and use Bitcoin where it’s harder for them to know what’s going on. So what they end up doing is loosening restrictions on the financial legacy system, which is good, which is good. So it’s almost like this sort of latent effect that Bitcoin has that we’re just realizing, which is great. But I would say that like maybe in the future, we look back and now is 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.

Alex Gladstein:

It’s free speech. Maybe not so much in dictatorships, but for huge parts of the world, it’s legally protected activity to work on open source software. And the open source software itself is not you know you know, at risk of the same regulations as centralized software. It’s completely different. 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 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 double down on this because maybe in 10 years, it’s different.

Stephan Livera:

Yeah. Anything to add Matt?

Matt Odell:

No, I mean, I agree. I mean, I think the answer is open source software. Like I’m wearing one of the answers on my hat right now. 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 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.

Matt Odell:

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’s that time before that happens where we’re extra vulnerable, particularly as Bitcoiners. And I think that’s where, like a lot of my concern stems from, because I mean, I would guess that, you know, maybe 80 to 90% of, newcoiners, new bitcoiners coming in are going in through KYC exchanges or at least using some kind of KYC service. And sometimes people are using multiple you know, they buy one exchange and then they do some, one of those leverage products or something on a different thing, or maybe they’ve decided to go trade some shitcoins. So, and that’s not the only information leaking.

Matt Odell:

So when you like combine all this stuff together you know, like a big thing in privacy is anonymity loves company. You need a crowd of people doing it for any individual to have some success in being private themselves. 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 we need people to actually care about it, to try and avoid KYC at all costs 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 there’s no one size fits all answer. Right. But some of these smaller services, like are, who knows how they’re securing your data. You have a lot of situations where those are the ones that ended up stealing coins, you know, so who knows what’s going on with privacy as well? So there’s, I wouldn’t, I don’t think there’s like a one size fits all there. You just want to just avoid it in general as much as possible. Yeah.

Alex Gladstein:

I was just gonna say one potentially powerful ally here is remittances, which I’m learning more and more about, and obviously is driving a large part of this exponential growth of Bitcoin in emerging markets. And one of the reasons you would 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 regulated systems. 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

Alex Gladstein:

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, you know, you’re, you’re helping by being part of the, you know, of the non KYC activity. So this is a powerful force, the need for people to remit more cheaply and without restriction. So hopefully it will be a good ally for us moving forward.

Matt Odell:

And that’s another thing that I wanted to mention which is kind of tangential there. 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. So you can choose a KYC source that very well is very much likely to be giving information to the US government and be completely fine with it. You don’t have to ask yourself, you know, do I trust this source to secure this information from Maduro? And so, depending on who the Bitcoin user is there’s different trade offs and different, you know, things you need to consider there.

Rafael Yakobi:

Yup. Yup. I can add one thing on, well, just on this general topic that 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 what terrible things can happen. But 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 altogether 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.

Rafael Yakobi:

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. Yeah we know they collect a lot of information and you guys probably more know, maybe know more 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 how people are. You know, if you think somebody is watching you, you’re going to behave and they could just stop watching and you’ll keep behaving. And that’s, you know, I think that’s definitely real in Bitcoin because we didn’t, 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 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, that we’re not expecting right.

Stephan Livera:

We could be surprised to the upside. Right.

Rafael Yakobi:

Trying to be positive.

Stephan Livera:

Yeah. Well, that’s, I think we’ve also gotta be practical in terms of what we can do. And so I think the obvious steps we can do 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 self custody, CoinJoin and so on. What do you guys see? What are some of the things, where should our focus be in terms of things that we can do?

Alex Gladstein:

I was just going to 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 not feasible with Bitcoin. It’s not like gold. It’s not as confiscatable. It has confiscation resistance. So if enough of 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 the Bitcoin, then you know, we don’t have the leverage. Right. So I think you know, not your keys, not your coins, this is gotta be the mantra here.

Stephan Livera:

Anything to add?

Rafael Yakobi:

Well, I think 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 question is how to get it without doing that. And the best, earning really seems like the best answer. It’s something that is, it’s an awesome thing. If you can do it. Yeah.

Matt Odell:

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 going to 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 doesn’t seem like they’re there. The law applies to them yet. You know, it could happen in the future like HODLHODL, and bisq, which bisque is a little bit more censorship resistant there because Hodlhodl 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, going to want to use your own node, a, you need a node to interact with the Bitcoin network. 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 to want to learn about using CoinJoin and a lot of the mistakes you can make along that way. That is not something that can just be explained in a five minute, little bit. You’re going to 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, some of the ways I’ve learned the way, 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 your privacy is life or death, you know, 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.

Alex Gladstein:

The other thing is that, look, it’s too much to ask folks who are 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 things 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 12 to 18 months, some 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.

Alex Gladstein:

So at least you got to 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 of years. And the other concluding thought I had is just the FATF is like one of the worst of these, like you know, TFTC, 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 going to 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 honest way 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 exposed themselves. Right. That’s really important.

Stephan Livera:

Excellent. I totally agree with you there. And Alex, maybe you just want to 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?

Alex Gladstein:

Yeah, sure. So we just wanted to throw our 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 Coin Swap. We’re going to be announcing some more gifts this coming month in the areas of privacy and resilience and decentralization. Hopefully 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 https://hrf.org/devfund if they want to learn more.

Stephan Livera:

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 want to go first?

Rafael Yakobi:

Sure. On Twitter I’m CACryptoLawyer, you can see it on the screen there. It should be. I think it pops up on your side and my website is the thecryptolawyers.com.

Stephan Livera:

Excellent, Matt,

Matt Odell:

First of all, thanks for having me. I have a weekly podcast tales from the crypt with Marty Bent, rabbit hole recap. You can just look that up tales from the crypt in your favorite podcast app. All my links are mattodell.com. And you can find me on Twitter @matt_odell.

Stephan Livera:

Excellent. Alex, where can we find you?

Alex Gladstein:

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 going to need to be a very well educated Bitcoiner, and take your freedom into your own hands. You can find me @gladstein on Twitter. And you can follow the work of the human rights foundation, at HRF.org or @HRF on Twitter.

Stephan Livera:

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