A basic example of an unhosted wallet would be your physical wallet or bag which isnt connected to any monetary organization, holds as much money as you desire to put into it and is 100% under your control. This is why the usage of misnomers such as “unhosted wallet” need to be seen for what it is: regulatory capture.This attack was changed into equipment in October 2021, when the Financial Action Task Force (FATF), in their “Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers,” specified that deals in between unhosted wallets posture specific money laundering and terrorist funding threats and that, under certain situations, some transactions in between unhosted wallets fall under the travel rule.(Source)Despite the obvious failures of AML in the standard monetary system, legislators and regulators still insist on targeting unhosted wallets with unwise and challenging policies. The architecture of hosted wallets and that of CBDCs are comparable in that they are both centralized, they are subject to monetary security, and they are under the control of a 3rd party.In a world where digital payments are the guideline and not the exception, it is crucial to have payment systems and tools that are sufficiently decentralized and efficient in order to maintain the defense of personal privacy. Central financial systems– of which hosted wallets are a part– are every authoritarians dream and are developed to grant the power of financial omniscience to the state.
This is an opinion editorial by Kudzai Kutukwa, an enthusiastic financial inclusion supporter who was acknowledged by Fast Company publication as one of South Africas top-20 young business owners under 30. The release of the Bitcoin white paper in 2009 after the 2008 financial crisis was one the most considerable occasions of the 21st century. For the very first time ever, a trustless, peer-to-peer financial system for the digital age that was independent of intermediaries and central banks was now a reality. Bitcoin was dismissed as a passing fad and an useless Ponzi scheme, but 13 years later, no one is chuckling at Bitcoin any longer. Its now being ruthlessly attacked in several methods. These attacks have included 2021s restriction of Chinese bitcoin miners by the Chinese government; the continual rejection of a spot Bitcoin exchange-traded fund by the U.S. Securities and Exchange Commission (SEC); the framing of Bitcoin as an environmental danger (which later on prompted the EU to think about prohibiting proof-of-work mining); and, most just recently, the EUs attack on “unhosted wallets.” The latter is not just an effort at the regulatory capture of Bitcoin, but its also an attack on your financial privacy. You can consider it as the 21st-century variation of Executive Order 6102. Financial regulators around the globe have actually been slowly showing up the heat and splitting down on using unhosted wallets, but prior to we proceed any even more, we need to resolve the elephant in the space, which is the term “unhosted wallet.” What in the world is an unhosted wallet anyhow? Its merely a noncustodial wallet (aka self-custody wallet) where the user owns the personal keys and is 100% in control of their money as opposed to handing it over to a third party for “safekeeping.” An easy example of an unhosted wallet would be your physical wallet or purse which isnt tied to any banks, holds as much money as you wish to put into it and is 100% under your control. What makes this term a lot more bizarre and harmful is that it suggests that our personal monetary information has to be “hosted” on somebody elses server. The implication being that self-custody is dangerous, suspicious and wrong.Introducing the term “unhosted wallet” is a subtle but efficient attack meant to keep the role of “trusted third celebrations” that Bitcoin was developed to replace. It makes definitely no sense for a permissionless and trustless system to require the thumbs-up from gatekeepers prior to it can be accessed. Der Gigi revealed this concept perfectly when he stated, “The discussion should not be about hosting in the very first place. It should have to do with control. Who can access your funds? Who can freeze your account? Who is the master, and who is the servant? Much like the cloud is somebody elses computer system, a hosted wallet is somebody elses wallet.” There is no Bitcoin without self-custody, just IOUs from centralized exchanges. This is why “not your keys, not your coins” is more than simply a catchphrase, but a tip to stay financially sovereign.Since Bitcoin is censorship resistant and can not be effectively prohibited, the choke points that are now being exploited are the on-ramps and off-ramps into and out of the money system. Provided the truth that the typical individual is most likely to obtain bitcoin from a central exchange, know your consumer guidelines are then put into have fun with the objective of attaching a federal government ID and physical address to a “Bitcoin address.” Completion goal being a state where every transaction is tied to an identity that leaves an audit path for the authorities, through which they can easily carry out financial surveillance and exert control like they currently carry out in the fiat system. Your individual information is at risk from information leaks and hackers should the exchange get jeopardized, as is usually the case with central databases. A current example of this would be the breaching of the Shanghai Police Departments database that resulted in the theft of one billion individualss individual data. Your bitcoin and personal safety are at threat ought to this take place to a centralized exchange where you have a hosted wallet. This is why the use of misnomers such as “unhosted wallet” must be seen for what it is: regulative capture.This attack was changed into equipment in October 2021, when the Financial Action Task Force (FATF), in their “Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers,” specified that deals in between unhosted wallets posture specific cash laundering and terrorist funding dangers which, under specific scenarios, some deals between unhosted wallets fall under the travel rule. In March 2022, regulators in Canada, Japan and Singapore mandated that central exchanges must collect personal information, such as names and physical addresses of owners of unhosted wallets that send out or get bitcoin or other cryptocurrencies to the customers of these exchanges. These requirements were carried out in Canada right after the government had frozen checking account and even “hosted wallets” of the truckers who were objecting versus COVID-19 mandates. Similar guidelines to those implemented by Canada, Japan and Singapore entered into result in the Netherlands on June 27, 2022. Not to be outshined in this statist overreach, the European parliament reached a provisional agreement on their cryptocurrency costs, dubbed “Markets in Crypto-Assets (MiCA),” which aims to position and manage “unhosted wallets” under monetary surveillance. According to a statement released by the parliament in a press release:”Transfers of crypto-assets will be traced and identified to prevent money laundering, terrorist funding, and other criminal offenses, says the brand-new legislation settled on Wednesday. … The guidelines would likewise cover transactions from so-called un-hosted wallets (a crypto-asset wallet address that is in the custody of a personal user) when they communicate with hosted wallets handled by CASPs [Crypto Asset Service Providers]”Ernest Urtasun, a member of the European Parliament, published a celebratory thread on Twitter detailing a few of the key aspects of the expense that “will put an end to the wild west of uncontrolled crypto.” According to among the tweets in this thread, the brand-new guidelines will mandate centralized exchanges to unmask the identity of the owner of an unhosted wallet before “large” amounts of crypto are sent to them– by big, they suggest EUR1,000 or more. In a subsequent statement, he hailed the brand-new regulations as being the best remedy for combating money laundering and reducing scams. The irony of the matter is in spite of their “good intents” in seeking to curb money laundering, an estimated 2– 5% of international GDP ($1.7 trillion to $4.2 trillion) is washed globally, primarily by means of the traditional banking system according to the UNODC. More money is laundered every year through the banking system than the entire market cap ($1 trillion at the time of publication) of all cryptocurrencies integrated. It worsens: The impact of anti-money laundering laws (AML) on criminal funding is 0.05%– suggesting criminals have a 99.95% success rate in laundering cash– and compliance costs go beyond the worth of taken illicit funds a hundred times over. Real lawbreakers get a free pass while banks and the average obedient resident are penalized. According to the Journal of Financial Crime, AML laws are totally inadequate in stopping the flow of ill-gotten gains. Between 2010 and 2014, a paltry 1.1% of criminal profits were taken in the EU, according to a report by Europol. Not surprising that AML laws have actually been dubbed the most inefficient anti-crime measures anywhere! Yet, the bigger issue appears to be unhosted wallets and the “wild west of uncontrolled crypto.” Speak about lost concerns.(Source)Despite the obvious failures of AML in the standard financial system, regulators and lawmakers still demand targeting unhosted wallets with difficult and impractical policies. Not just will MiCA suppress innovation within the EU, its also going to lead to capital flight to more Bitcoin-friendly jurisdictions like El Salvador. One would be forgiven for hypothesizing that laws like MiCA are a slow creep towards the straight-out ban of self-custody wallets and are leaders that will pave the way for the introduction of central bank digital currencies (CBDCs): a more Orwellian form of money. The architecture of hosted wallets and that of CBDCs are comparable because they are both central, they undergo financial monitoring, and they are under the control of a third party.In a world where digital payments are the rule and not the exception, it is vital to have payment systems and tools that are adequately decentralized and efficient in order to keep the protection of personal privacy. The value of having monetary privacy was summarized completely in Eric Hughes “Cypherpunk Manifesto”:”Privacy is required for an open society in the electronic age. Privacy is not secrecy. A personal matter is something one does not want the entire world to know, however a secret matter is something one does not desire any person to understand. Privacy is the power to selectively reveal oneself to the world … Therefore, privacy in an open society requires anonymous transaction systems. Previously, money has been the primary such system. A confidential transaction system is not a secret transaction system. When preferred and only when desired; this is the essence of personal privacy, an anonymous system empowers individuals to expose their identity.”These words still sound true today. As soon as your identity is combined to a wallet, your personal privacy is jeopardized and it ends up being easier to track all your on-chain transactions permanently. You dont own your cash if you do not control how much you can have or where you can keep it. Whoever manages your cash controls you. Central monetary systems– of which hosted wallets belong– are every authoritarians dream and are created to approve the power of financial omniscience to the state. Bitcoin was developed to empower the person through the separation of cash and state. Self-custody wallets are important in preserving that.This is a guest post by Kudzai Kutukwa. Viewpoints expressed are entirely their own and do not always reflect those of BTC Inc. or Bitcoin Magazine.