Why Self-Hosted Wallets Are Critical to the Future of the Crypto Economy

Today, the Blockchain Association published a report for policymakers that explains the fundamental role of self-hosted wallets in the cryptocurrency ecosystem and why they are important to the future of free societies. The report is divided into two sections: The first section describes what self-hosted wallets are, their role in the digital asset ecosystem, and the current regulatory framework for managing digital asset transactions involving self-hosted wallets. The second section argues that imposing restrictions on individuals’ ability to use self-hosted wallets would be misguided.

Self-hosted wallets allow individuals to engage in transactions over the internet on a peer-to-peer basis, meaning that no other individuals or entities are parties to the transaction. Peer-to-peer transactions over the internet were impossible before the advent of the first cryptocurrency, and — as is explored throughout the paper — this seemingly straightforward innovation has widespread, profound, and exciting implications for policymaking and society. The ability to “cut out the middleman” in digital transactions creates a new paradigm for individuals, policymakers, and law enforcement alike because traditional digital financial transactions necessarily involve regulated intermediaries.

Some domestic and international regulators are concerned that individuals’ ability to engage in transactions without the use of middlemen creates unacceptable money laundering and terrorist financing (ML/TF) risks. Their concerns are understandable: illicit actors exploit the digital asset ecosystem, just as they exploit cash and the traditional financial system. The report addresses these concerns head-on, arguing that allowing individuals to transact on a peer-to-peer basis over the internet is a net positive for society and is therefore good policy. The paper presents four core arguments:

  1. Cryptocurrencies have long suffered from the (thankfully) fast-fading misperception that they are primarily used for illicit purposes. However, the best available evidence suggests that the percentage of activity (as well as absolute dollar amount) in the traditional financial system that is illicit is higher than the percentage of activity in the digital asset ecosystem that is illicit. Moreover, as evidenced by a string of recent forfeitures, law enforcement has become adept at identifying and seizing ill-gotten digital assets. Thus, additional restrictions on individuals’ ability to use self-hosted wallets would not only represent a disproportionate response to the risks posed by the illicit use of digital assets but would also undermine law enforcement’s ability to establish attribution in cases involving digital assets.

While readers may not agree with the conclusions drawn in the paper, restricting individuals’ ability to use self-hosted wallets, and by extension engage in digital peer-to-peer transactions, would have broad and long-lasting consequences for our society. With so much at stake, the Blockchain Association firmly believes that the debate surrounding peer-to-peer transactions using self-hosted wallets must be addressed by Congress. In other words, restricting peer-to-peer transactions using self-hosted wallets is a policy decision that has vast societal implications, and it should therefore be adjudicated by our elected representatives.

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The unified voice of the blockchain industry. theblockchainassociation.org

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