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Proposed FinCen Rule on Crypto Wallets Would Likely Be Ineffective, Elliptic Says

Elliptic said that the rules overstate the risks proposed by unhosted wallets since transactions involving cryptocurrencies and could end up being ineffctive.



Dec 31, 2020 at 9:00 a.m. UTC

Proposed FinCen Rule on Crypto Wallets Would Likely Be Ineffective, Elliptic Says

The U.S. Treasury Department’s proposed rules which would require users to comply with KYC requirements if they seek to send their crypto to a private wallet could end up being ineffective, according to blockchain analytics firm Elliptic.

In its published response to the rule, Elliptic said that the rules could “adversely impact” the effectiveness of existing Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations.

Earlier this month, the Treasury Department released an advanced notice of proposed rulemaking which laid out that users of centralized cryptocurrency exchanges who wish to move their holdings onto their own private wallet, or to someone else’s, would have to provide detailed personal information for transactions greater than $3,000. The exchanges would be required to report either individual or groups of transactions that add up to more than $10,000 as well.

According to the Financial Crimes Enforcement Network’s (FinCEN) announcement, the general public will have until Jan. 4, 2021, to provide comments or feedback on the rules.

In its response to the rule, Elliptic said that the rules overstate the risks proposed by unhosted wallets since transactions involving cryptocurrencies can already be traced by analysing the associated blockchain ledger.

Such analytics are already used by law enforcement to track criminal activity, and therefore according to Elliptic, the new rules would only add on documentation cost for information that can be accessed using existing means.

The proposed rules have also been met with concerted pushback even before their release. Regulatory experts have indicated that the rules could have widespread repercussions, including issues that could be faced by decentralised finance (DeFi) projects.

Some of the concerns raised regarding the law also have to do with how it doesn’t clearly define terms like unhosted wallets, or state whether financial institutions must collect such information from counterparties.

Data cited by Elliptic in its response notes that less than 10% of illicit-origin funds remain in unhosted wallets, and the vast majority of them are “simply dormant.” Elliptic noted that since crooked actors are also entirely dependent on their ability to cash-out and convert to fiat, information about such funds is shared with the FinCEN using suspicious activity reports (SAR) and therefore the new rules just add more document work.

Elliptic, in its response, also said that the Treasury’s 15-day comment period for this rule is “unjustifiably short,” and asks that the department should extend the period to 90 days.

Arguing that the proposed requirements are disproportionate vis-a-vis physical cash, Elliptic said that rules “would impose an unjustified tax,” on financial innovation. In its recommendations to the FinCEN, the firm also argued that rules proposed counterparty recordkeeping requirements should also be removed.




Statechains Scaling Solution Offers New Potential for Bitcoin Privacy

Statechains offer another way to scale bitcoin payments. New exploration shows that this layer 2 tech could boost Bitcoin privacy as well.



Statechains Scaling Solution Offers New Potential for Bitcoin Privacy

London-based startup CommerceBlock has revealed that they are working on a new tool for boosting Bitcoin privacy. Their new Mercury Wallet tests the new technology and, if all goes well, will soon put it into practice. The privacy tool uses statechains, a layer currently being built on top of Bitcoin to help the digital currency scale above its limitations so that it can reach more users.

CommerceBlock’s code for the in-progress project is open-source, so anyone can give it a look, spot and report bugs, and even alter the code and use it for their own purposes if they desire. But the company also uses this statechain code and its sidechain code for proprietary projects with as-yet undisclosed institutions.

CommerceBlock has been working on the first-known implementation of statechains, which makes Bitcoin’s future look a little bit rosier in terms of scalability. Currently Bitcoin doesn’t support more than a few transactions per second. But various layer 2 solutions like the Lightning Network, and now, statechains, are helping users to get around this limitation.

Scale is the main purpose of statechains. In addition to building a code implementation, called Mercury, CommerceBlock has been laying the building blocks to make this layer accessible to average users with Mercury Wallet. Here, users can set up statechains and make actual statechain transactions. (Warning: The wallet is for testing only right now and is not safe for real coins.)

More recently, however, CommerceBlock developers have discovered that statechains also offer privacy benefits, which they are now also building into Mercury Wallet, as CommerceBlock outlines in an exploratory blog post.

Bitcoin transactions aren’t very private. The history of transactions of every user is stored permanently by the Bitcoin network. Users have to be extra diligent if they want to cover their tracks successfully.

CommerceBlock has been experimenting with making these privacy transactions work on top of statechains.

“Financial privacy, we believe, is right and necessary; it’s not practical that every time people use bitcoin that the holdings become public to the receiver of their payment,” CommerceBlock CEO Nick Gregory told CoinDesk, adding that institutions CommerceBlock is working with have also expressed interest in increasing their privacy so other institutions can’t see their bitcoin holdings.

An early version of Mercury Wallet putting statechain transactions into practice(CommerceBlock)

So far, CommerceBlock is the only company known to be working on statechains.

New Bitcoin privacy potential

CoinJoins, on Wasabi Wallet and Samourai Wallet, are the most popular way to make private bitcoin transactions today. CoinSwaps, on the other hand, can use a different technique to make these sorts of private transactions undetectable. CoinSwaps are currently in the testing phase.

Gregory thinks they could both get a boost from statechains.

“CoinJoins and CoinSwap work great at the moment. However, they are time-consuming and costly as you have to wait for bitcoin confirmations for each CoinJoin or swap,” Gregory said.

On statechains, however, transactions are instant and cheap. They accomplish this by taking transactions to a layer above most bitcoin transactions.

Bitcoin is made up of a long trail of blocks. Each block contains “on-chain” transactions. Each block has limited space. “Off-chain” transactions, on the other hand, avoid blocks.

Because statechains allow users to make transactions off-chain, outside of blocks, they don’t have to wait. “By moving this off-chain in a noncustodial protocol they become instant and less costly,” Gregory explained.

The other downside of CoinJoins is that they leave an imprint on the Bitcoin blockchain.

CoinJoining or CoinSwapping on a statechain could add more privacy since these sorts of transactions don’t need to be embedded in the blockchain. “CoinSwaps that occur in a statechain are off-chain, and thus their history never makes it on-chain,” CommerceBlock’s blog post states.

CommerceBlock admits that there’s an obvious tradeoff with statechains. As we’ll explain in a minute, statechains users need to place trust in the statechain provider to a degree. But if users are willing to do so, they could see privacy benefits when CommeceBlock rolls out a real wallet that can be used for more than just testing.

A new scalability layer

Now let’s take a deeper look at statechains, the construction that makes these new private transactions possible.

On-chain Bitcoin transaction space is very limited. If Bitcoin aficionados want the digital currency to be made accessible to as many people as possible, they need to get around this limit.

Bitcoin’s Lightning network is currently the most popular method of scaling Bitcoin transactions. Lightning offers a way to make transactions securely without taking up block space, which means faster and cheaper transactions. To this end, statechains are comparable.

Similar to the Lightning network, statechains are powered by multi-signature transactions, which require that more than one user sign off on a transaction before it can be completed. In the case of statechains, 2-of-2 private keys need to sign off. One key belongs to the user and another belongs to the statechain provider – in this case, CommerceBlock.

To pass on the funds, the user simply sends the private key to the recipient. Sending someone your private key is usually a recipe for getting all of your funds stolen. But the idea here is that the statechain provider is supposed to have the user’s back and not allow that to happen.

Since the Lightning network is better known than statechains, let’s compare and contrast them.

Statechains vs. Lightning network: Pros

Statechain users don’t have to deal with routing or liquidity issues like Lightning users do. With statechains, the private key is simply transferred to another owner.

Unlike Lightning, there’s no need for a payment to move through a network; thus the transaction avoids the risk of failing if one hop in the network doesn’t have enough funds. Liquidity is probably the toughest problem Lightning users face today, though innovative new tools have been cropping up in the hopes of making this problem more manageable.

Direct transactions via statechains are thus better for larger payments where routing can be harder.

Statechains vs. Lightning network: Cons

Statechains require more trust than the Lightning network does. The statechain providers need to be trusted not to collude with a previous private key holder. This sort of trust is not required for Lightning payments.

Say Alice is using a statechain to pass the private key to Bob. Bob is supposed to be the owner of the funds. But theoretically, Alice and the statechain could collude to take Bob’s funds. Built-in protections can help guard against this collusion – if the statechain provider cheats, users will be able to see, damaging the reputation of the statechain provider.

Statechain payment amounts are fixed. Say Alice creates a statechain holding 1 BTC, or 0.001 BTC, or whatever amount she likes. Once this value is chosen, and Alice creates the statechain, that amount is set in stone. Let’s say she decides on 1 BTC. When making a payment, she has to send the 1 full bitcoin – she can’t split it into smaller payments. As such, statechains are not ideal for multiple, smaller payments. That’s where Lightning shines.

Since statechains and Lightning each serve different use cases, Gregory sees them as “complementary.” He expects that they will be just as popular as the Lightning network in the long term. “Our goal is certainly to make them as big as Lightning,” Gregory said.



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Coinbase Underpaid Women, Black Employees, NY Times Reports

The New York Times’ data included pay details for most of Coinbase’s roughly 830 employees at the end of 2018.



Dec 29, 2020 at 11:57 p.m. UTCUpdated Dec 30, 2020 at 3:31 a.m. UTC

Coinbase CEO Brian Armstrong(Steve Jennings/Flickr)

Coinbase Underpaid Women, Black Employees, NY Times Reports

An analysis of internal pay data shows leading cryptocurrency exchange Coinbase underpaid its female and Black workers at a much greater rate than exists in the technology industry, the New York Times reported.

  • The report comes on the heels of another New York Times expose in November that painted a picture of a company that “has long struggled with its management of Black employees.”
  • While Coinbase executives at the time said those complaints were limited to a few employees, the company’s compensation data cited in the most recent report suggests that inequitable treatment of both female and Black workers was more widespread than acknowledged.
  • The timing of the back-to-back exposes could hardly be worse for Coinbase, which earlier this month filed preliminary documents with the U.S. Securities and Exchange Commission for an initial public offering, undoubtedly seeking to capitalize on the record surge in the price of bitcoin and the white-hot IPO market.
  • Even before the first New York Times story was published in November, Coinbase saw at least 5% of its staff depart in the wake of being asked to choose between accepting CEO Brian Armstrong’s recently announced “apolitical” policy and leaving the firm. This latest story shows that the exchange’s workforce problems aren’t going away.
  • According to the data presented in the Times report, women at Coinbase were paid an average of $13,000, or 8%, less than men at a comparable jobs and ranks.
  • Meanwhile, Black employees were paid $11,500, or 7%, less than all other workers in similar jobs, the Times said.
  • The Times’ data included pay details for most of Coinbase’s roughly 830 employees at the end of 2018.
  • In a letter to Coinbase employees regarding the most recent New York Times article, L.J. Brock, chief people officer, said Coinbase has been working to ensure equal pay for equal work as part of a broad review of the company’s pay practices that began in 2018.
  • Brock said the company has been working over the past two years “to ensure our compensation framework is transparent” and “fair to all employees.” He also said the company will “examine our pay through the lens of ethnicity/race, in addition to gender.”
  • “Coinbase is committed to ruthlessly eliminating bias in all our internal processes,” Brock wrote.



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Coinbase to Suspend XRP Trading Following SEC Suit Against Ripple

Coinbase said it will suspend trading of XRP, the cryptocurrency at the heart of an SEC lawsuit against Ripple Labs.



Dec 28, 2020 at 10:30 p.m. UTCUpdated Dec 28, 2020 at 11:35 p.m. UTC

Brad Garlinghouse, Ripple CEO, speaks at Davos 2020.(Zack Seward/CoinDesk archives)

Coinbase to Suspend XRP Trading Following SEC Suit Against Ripple

Coinbase said it will suspend trading of XRP, the cryptocurrency the U.S. Securities and Exchange Commission sued last week claiming it is really a security.

Coinbase first listed XRP on its retail-facing platforms in February 2019. Starting now, XRP trading “will move into limit only,” Coinbase wrote. It will be fully suspended on Tuesday, Jan. 19, 2021, at 1 p.m. ET.

“We will continue to monitor legal developments related to XRP and update our customers as more information becomes available,” Paul Grewal, Coinbase’s chief legal officer, wrote in a blog post shared in advance with CoinDesk.

Coinbase said users’ XRP wallets will “remain available for receive and withdraw functionality after the trading suspension.”

Notably, the exchange said it will still support an upcoming airdrop of Spark tokens to XRP holders. XRP will still be supported by Coinbase Custody and in the self-custodial Coinbase Wallet.

Coinbase declined to comment beyond its written statement.

The price of XRP on Coinbase tanked from $0.28 to $0.24 within the first 20 minutes of the announcement. Since the announcement of the SEC’s lawsuit last week, the price of XRP has fallen by more than 50%.

XRP’s price fell over 16% within an hour of Coinbase announcing it would suspend trading.

Source: CoinDesk

Ripple effect

For Coinbase, the reason for dropping XRP as a traded asset was simple: As the company seeks to go public, being a platform for something that’s potentially a security would mean adding more paperwork simply so it could be legally allowed to let retail customers buy and sell a single cryptocurrency.

The SEC claimed last week that XRP is a security, and that Ripple has been selling it without registering or seeking an exemption for seven years, raising $1.3 billion in the process. The legal battle itself is just beginning, and litigation might take years if Ripple fights the charge in court, as it has indicated it would.

Coinbase is now the biggest exchange to act on XRP and could serve as a bellwether for other platforms. On Friday, Bitstamp announced it would halt XRP trading and deposits for all U.S. customers on Jan. 8.

Similarly San Francisco-based OKCoin announced its XRP suspension earlier Monday, effective Jan. 4.

Exchanges that continue to list XRP without registering as a securities exchange with the SEC face potential consequences down the line, including possible enforcement actions. However, should Ripple prevail in its defense, Coinbase can likely re-list XRP fairly easily.

Alex Kruger, a trader and analyst, said, “Crypto exchanges are unregistered with the SEC (by choice, as registering carries on many burdens and increased costs) and thus it is in their best interest to not offer trading of securities. It is for their protection, not their customers’.”

Gabriel Shapiro, an attorney with Belcher, Smolen & Van Loo LLP, told CoinDesk last week that the question of whether exchanges should delist is a complicated one, with both business and legal considerations.

Read our ongoing coverage of the SEC’s case against Ripple and its impact on the industry.

UPDATE (Dec. 28, 23:35 UTC): Adds XRP price reaction.



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