The Secretary Of Treasury, in his last month in office, is giving us a textbook case of how not to regulate important technology innovation. The issue is “unhosted wallets” and how regulated exchanges and other “hosted wallets” interact with them.
Let’s start with why this is important. Our current financial systems are old, creaky, expensive, and do not serve enough people. According to a 2017 survey by the FDIC, 25 percent of U.S. households are unbanked or underbanked. That is close to 100mm people, mostly black and brown. This is a big deal. This is a piece of the structural inequity that exists in the US and around the world.
Technology can, will, and should change this. When a bank account can simply be a wallet on our phone or computer, it should be massively less expensive and much easier for anyone to have one. And when that wallet can connect to any other wallet or bank and send, receive, sell, buy, etc, as easily as a browser can connect to AVC.com, then you have the architecture for an open financial system that is several orders of magnitude less expensive and more available than what we currently have.
What I have just described is how blockchains and cryptocurrencies work today. You can download a cryptocurrency wallet onto your phone, you can send some Ethereum to it from your Coinbase account in the cloud (called a “hosted wallet” and/or “exchange”), and then you can send that Ethereum to anyone else using any other crypto wallet. All of this is built upon open protocols in the same way that the web was built on open protocols. It is completely and totally interoperable, like the web or email, unlike our current financial system.
The crypto sector is building a new financial system, that requires much fewer “middlemen” taking a piece of the transaction, that anyone can adopt and use by simply downloading some software onto their phone, and that is secured with state of the art technology.
But the Treasury Secretary and his advisors are concerned about bad actors using this new open global financial system to do bad things. That is a legitimate concern, but it turns out that only about 2% of transactions that go between regulated exchanges and hosted wallets and unhosted wallets are “illicit” according to Chainalysis.
So in late December, the Treasury Department issued a notice of proposed rulemaking seeking to make the rules around sending cryptocurrencies to unhosted wallets much more restrictive than cash.
The notice of proposed rulemaking is a long-standing approach to regulating new things. But this notice of rulemaking is not like any other. It was shortened to 15 days from the customary “at least 30 days and often much longer” and it was issued in late December making comments due yesterday. That means that comments were due over two holiday weeks in the midst of a global pandemic. And then the Treasury Department intends to wade through all of those comments and issue a rule before it leaves office in a couple of weeks.
That is madness and no way to regulate an issue at the very heart of a new open financial system that is poised to open access and massively reduce the cost of financial services for everyone.
One can only come to one conclusion about the Secretary’s intentions here and it is that this was done intentionally to stifle debate and discussion and jam bad regulation through on his way out of the door.
USV and many others in the tech sector, venture capital sector, and crypto sector have issued comment letters opposing this rulemaking. Our comment letter is here:
I hope the Secretary and his advisors come to their senses and realize that this is no way to regulate important new technology. This would be a terrible legacy to leave office with.
