Happy Tuesday!

For today’s newsletter, we’re pleased to present an op-ed by Harsha Goli on the boring (but pernicious!) way that compliance can be used to shackle Bitcoin and its industry. Harsha Goli is the CEO and founder of bitcoin custody provider Magnolia, and he previously served as a lightning network engineer for Swan Bitcoin, Lightning Labs, and other companies.

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How to attack BTC without spending a dime

I got into Bitcoin for money free from nation-state control. That was almost 10 years ago, and a lot’s changed since.

Back then, the government was hilariously incompetent when it came to Bitcoin and its universe of altcoins. It felt like they’d never catch up, that this stuff was somehow too slippery for the boring bureaucrats. Some people still feel like that’s the case – but it’s not.

I had a conversation recently that reminded me just how much progress the state has made beneath the noses of most Bitcoiners, even those in the know.

People don’t realize how bad it’s gotten, and even the most cypherpunk among us haven’t realized because well… compliance is boring and these changes took years to manifest.

But make no mistake, compliance is creeping into every corner of the Bitcoin ecosystem. Regulated exchanges are no longer the only ones beholden to KYC/AML/IRS regulations.

The noose is already tied, and exchanges have felt it tighten for a long time. Now other centralized entities that don’t even custody funds are feeling it. Soon, the noose could be around your renegade open source bitcoind node too.

Think I’m hyperbolizing? Let’s see where the line used to be, where it is now, and where it may be in the future based on trends and existing compliance laws in tradfi.

The original sin: If you touch fiat, you’re beholden to regulations

To start, we need to dispel the myth that compliance is a boring, snore-fest thing.

Because it’s not. The “boring” narrative is a lie to keep people from looking into the truth. The reality is that the government holds a legal gun to the heads of founders, and compliance rules dictate which bureaucrat can pull the trigger and under what circumstances.

We’re not talking about fines. The penalty for not complying is prison time — up to 10 years.

Cool, so now compliance is exciting! I’m gonna skip over a lot, but by and large, an entity’s requirement to comply is determined by whether or not regulators designate it as a money transmitter. Money transmitter’s are regulated state by state, and it can be quite complex to determine who is and who isn’t one, especially in the early days.

To help determine what defines a money transmitter, the Financial Crimes Enforcement Network (FinCEN) put out guidelines in 2019, the creatively named FIN-2019.

FIN-2019 dictates a lot, but it essentially says “listen, if you convert fiat to crypto and vice versa, you’re a money transmitter and have to comply with money transmitter regulations.” This typically means KYC/AML and state-by-state applications for approval.

It also explicitly says you aren’t a money transmitter if:

• You use an un-hosted wallet with keys stored locally (FIN-2019 4.2.1)

• You use a hosted multisig setup and control the majority of keys (FIN-2019 4.2.2)

• You are a developer of anonymizing software

• You are a developer of a Dapp

• You are an end user in control of your own value (not holding value on behalf of someone else), using your own home cooked software.

Most folks in-the-know are probably familiar with these rules and they probably think these rules are still in effect.

They’re not. The line’s been moved and the old FinCEN guidelines are more or less completely null.

Continue reading here!

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