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

  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.
  2. As the economy and individuals’ lives have become increasingly digital-first, the use of cash transactions has declined precipitously, driving the vast majority of transactions to online platforms. Because traditional digital financial transactions necessarily involve an exploitable intermediary, they are by definition not private. In the same way, restrictions on self-hosted wallets would lay the foundation for total surveillance of citizens’ financial lives by eliminating a digital cash-like payment option, with potentially disastrous consequences for free societies.
  3. Additional restrictions on self-hosted wallets would eliminate the unique features of digital assets that make them a catalyst of expanding financial inclusivity. Because anyone with an internet connection can create and use self-hosted wallets to transact with others, they are the critical feature of digital assets that could make basic financial services available to the billions of people currently without access to these services. Critically, the digital divide must first be solved before this feature of self-hosted wallets can be fully exploited.
  4. Finally, additional restrictions on self-hosted wallets would indiscriminately apply payments regulation to a diverse and developing ecosystem with applications that extend far beyond the transmission of money. While payments using cryptocurrencies, one type of digital asset, are the use case of distributed ledgers that is currently the focus of regulators and policymakers, self-hosted wallets do not necessarily control digital assets that are used for payments. Just like a home safe, self-hosted wallets could be used to store cash-like assets in addition to other digital assets, including important documents and even immutable digital art. Importantly, with the digital asset and blockchain ecosystem still in its infancy, preemptively applying payments regulation to self-hosted wallets would inappropriately “pigeonhole” an innovative ecosystem that could bring revolutionary products and services to the market.

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