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Some legislators are calling for a new form of money, which will have all the technical equipment of cryptoassets with the impenetrable privacy of paper money. But can we really have our cake and eat it too? Responding to this call for more opaque digital payments, Representatives Jesús G Garcia and Stephen Lynch – both members of the House Financial Services Committee – introduced the Electronic Currency and Secure Hardware (ECASH) Act.
Lynch and Garcia hired Rohan Gray to help them draft this bill. The latter is a legal scholar and professor who previously gained notoriety in the crypto policy space when he helped Representative Rashida Tlaib introduce the highly unpopular Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act in the previous Congress.
To be clear, certain privacy tokens like Monero and Z-Cash already fit the description of being digitally native currencies and (relatively) untraceable. However, these tokens are often an undesirable offering for most cryptoasset exchanges, as their features appeal more to bad actors than principled privacy fanatics. So why the sudden interest from Capitol Hill?
As efforts to establish a U.S. central bank digital currency (CBDC) gather pace following President Joe Biden’s recent executive order, the proposed e-cash seeks to complement — rather than compete with — any U.S. digital dollar. The ECASH Act will differ from any CBDC primarily because it would be issued by the Treasury instead of the Federal Reserve. Additionally, it would not be supported by blockchain or any other distributed ledger technology. The proposed e-cash also separates itself from privately issued cryptoassets as it will be considered legal tender. Currently, no digital asset is considered legal tender in the US.
The proposed e-cash would allow users to transact with each other quickly and with lower fees compared to most financial intermediaries. E-cash also aims to prevent any financial tracking through its locally secured cryptographic encryption. Finally, it will be “capable of immediate, final, direct, peer-to-peer, offline transactions that do not involve or require subsequent or final settlement on or through a shared or distributed ledger, or any other additional approval or validation by the United States Government or any other third party payment processing intermediary,” according to the e-cash website.
Most notably, the proposal would not require users to provide any personal information to use the currency. The philosophy is that if cash doesn’t require an ID, neither does e-cash. Of course, regulatory mandates will still be in place because it is “classified and regulated in a manner similar to physical currency for anti-money laundering, know-your-customer, counter-terrorism and transaction reporting laws, and therefore is not subject to third-party exemptions from otherwise presumed expectation of privacy.”
Remember last week when Federal Reserve Chairman Jerome Powell said “same activity, same regulation” during the Bank of International Settlements panel? Powell said this in relation to stronger regulation for cryptocurrencies, but it still fits in this context of treating cash as cash. This particular aspect of the law has real teeth as far as financial inclusion efforts go. In the US alone, there are millions of people without any form of government-issued ID. These people are virtually excluded from most formal banking, non-banking and even non-banking financial institutions that all require some form of identity to be presented for customer onboarding.
It remains unclear whether Reps. Garcia and Lynch consulted with the ACLU on the bill, but earlier this week, the ACLU published an article that essentially serves as a rallying cry for the ECASH bill. The article – titled “We need a digital cash that’s actually like digital cash” – complements the cryptocurrency for its core tenants being permissionless and decentralized. It then goes on to say that cryptocurrency will never be a truly sustainable currency because it is inelastic, volatile and “unreliable in providing privacy”. However, the Bitcoin Whitepaper never actually claims that crypto is a total black box. He actually describes the level of privacy as similar to a stock market, “where the time and size of individual trades, the ‘tape’, are made public, but without specifying who the parties were.”
This pseudonymous feature of cryptocurrencies actually allows forensic blockchain companies like Elliptic to prevent illegal activities like sanctions evasion or dark market payments from progressing. While privacy – or the degree to which it is maintained – is a very personal issue, preventing financial crimes is something universally useful and necessary to make cryptocurrencies a safe and accessible means of payment.
EU tightens rules on crypto anonymity
While certain policymakers and stakeholders in the US are working hard to preserve the anonymity and privacy of cryptocurrencies, lawmakers in the European Union (EU) are moving in the opposite direction. On Thursday, the EU voted overwhelmingly in favor of a draft law that would impose major restrictions on the overall anonymity of crypto-asset transactions by mandating full transparency of counterparty payments. This is a generally unpopular position taken by EU regulators as the industry calls for protection from surveillance.
According to the new decision, once the minimum payment threshold of 1,000 euros is reached, exchanges will be obliged to collect and store information related to the transaction and its counterparties. These intermediaries would be required to obtain, hold and provide information about each individual transaction. In addition, discussions are ongoing to include non-hosted wallets under the new reporting obligations, which would effectively outlaw these non-hosted wallets.
Proponents of the crypto industry are vocal in their opposition to the new ruling. Many point out that these tighter restrictions will force new innovations and existing legal entities into jurisdictions with more favorable regulatory environments. There is also a valid complaint that most exchanges simply find it impossible to meet these requirements.
If someone were to pay rent every month in cryptocurrencies, all those payments would have to be verified under the new rule. Patrick Hansen – head of strategy and business development at Unstoppable Finance – gave his opinion on the bill. He told Cointelegraph: “It introduces unworkable wallet verification requirements and unjustified reporting requirements for crypto companies that would have huge adverse consequences for EU citizens and companies alike.”
Coinbase Chief Legal Officer Paul Grewal said in a March 31 blog post that “traditional cash, not cryptocurrency, is by far the most popular way to hide financial crime.” Grewal’s statement is backed up by significant data and research that the crypto industry typically cites when regulations are moving in an overly punitive direction. There is significant buy-in from other crypto advocates that expanding government oversight of financial transactions is a bad thing, but this is a tough argument for a regulator.
Japan tightens sanctions compliance standards for crypto exchanges
Japan has voted to amend its Foreign Exchange and Foreign Trade Act – which previously only applied to banks – to now include crypto exchanges under its supervision. Regulators and financial institutions around the world are reevaluating their KYC and customer due diligence practices to prevent any Russian sanctioned actors from moving money through foreign intermediaries.
This global concern has only been exacerbated in recent weeks, as Russian President Vladimir Putin has discussed accepting Bitcoin to pay for oil and gas. Japan’s newly expanded foreign exchange laws will require crypto exchanges and banks to participate in preventing and flagging any transactions that could expose individuals or entities under Russian sanctions.
Global calls for harmonization of crypto regulation
The head of the Bank of Japan’s payment and settlement system – Kazushige Kamiyama – called on other G7 countries to introduce coordinated international efforts around standardized crypto regulations. This call to action comes in response to increased scrutiny being paid to Russia’s potential evasion of sanctions through the use of crypto-assets.
IMF Managing Director Kristalina Georgieva and IMF Deputy Managing Director Gita Gopinath spoke on the Foreign Policy Live podcast last week. During the podcast taping, each reiterated the concerns of Japan and others about regulating cryptoassets in light of Russia’s attack on Ukraine.
Gopinath noted that while the IMF does not have a complete picture of how widespread the use of cryptocurrencies actually is in Russian sanctions evasion. However, she believes that in light of recent events, other countries will move forward with their potential CBDC implementation strategies. Georgieva added that “enough time has passed for regulatory frameworks to harmonize as much as possible worldwide.”
Regulatory compliance of CBDCs
