Published: January 22nd, 2021
A series of new regulations for digital currencies could force crypto exchanges to file a report with the US Financial Crimes Enforcement Network (FinCEN) any time a purchase occurs in excess of USD 10,000. Exchanges will also be expected to capture Know Your Customer (KYC) data for transactions of USD 3,000 or more that use a non-custodial wallet.
If the regulations come into force, This means that if a customer buys USD 3,000 worth of Ether or Bitcoin and withdraws it to a wallet they control, they would have to reveal their name and address, prove they own the wallet and provide other identifying information.
For privacy-conscious crypto users, the proposed rules would add unwelcome friction to withdrawals and deposits. At the moment, users simply register with an exchange, provide basic KYC information, and then purchase or transfer crypto to any wallet they control. When they want to take advantage of gains, they transfer the funds from the wallet back to their exchange trading account, convert to a fiat, and make a withdrawal.
If the regulations are enacted, crypto users will have to prove that they own the wallet used for the transfers, along with the origin of the funds being transferred back on to an exchange. That won’t sit well with many users, who may look for other ways to use their cryptocurrency that don’t require so much government scrutiny.
They could, for example, use an expanding array of options to make payments with crypto for products and services, and sidestep the hassles of jumping through regulatory hoops every time they want to use their digital currency.
One reason why relatively few people use crypto to make purchases is that they haven’t had to Bitcoin. Major exchanges like Coinbase and Binance make it easy for users to buy crypto, and then convert it into a fiat for withdrawal. Up until now, the basic process of purchasing crypto for trading or investment purposes, and selling it to spend or realise gains, has been relatively hassle-free.
Most average crypto users stay inside the closed-loop exchanges offer for precisely the same reason they might soon leave it: it’s simple, and it works.
Bitcoin’s original vision was to be a form of decentralised digital payment. However, the rise of exchanges has raised BTC's and other cryptos’ utility as a digital store-of-value. An unintended consequence of this is that the scaling infrastructure needed for widespread use of BTC hasn’t fully developed.
Bitcoin’s payments path has seen it move to off-chain scaling via solutions like Lightning Network, and the use of SegWit to optimise on-chain transactions. Many believe growth, adoption and innovation in the BTC payments ecosystem have stagnated as a result. Today, SegWit transactions comprise less than half of daily BTC transactions, and Lightning Network growth has slowed.
Using the Bitcoin network as it functions today for payments would likely shock the average user. That could compel wallets and service providers to prioritise Lightning and SegWit. If enough crypto users demand that ETH and BTC work seamlessly for small, one-off transactions, it could prompt the payments ecosystem to develop accordingly.
There’s now loads of competition for Bitcoin as a form of digital payment. The main competitors are probably Bitcoin Cash (BCH) and Bitcoin SV (BSV), not in terms of market cap (yet) but because both have adopted a chain scaling approach that enables their blockchains to handle a large number of transactions quickly and cost-effectively. Under current market rules, those advantages haven’t been compelling enough to drive a shift away from Bitcoin. If the proposed exchange regulations come into force, that could change quickly.
Bitcoin Cash may find itself in pole position thanks to integrations with services like Purse.io. Bitcoin SV has impressive integrations with social media platforms and offers human-readable usernames. Litecoin (LTC) has the longest track record as a payments-focused Bitcoin alternative but hasn’t had the traction yet to make it a contender. Total transaction volume trended down from 2014 to 2017, gently ticking upward when awareness of Bitcoin’s scaling issues began to rise.
Some analysts think Dash could be a dark horse in the race, with steady growth in transaction volume through crypto bull and bear markets. Dash has innovated consistently, offering real enhancements that improve the payments experience. It boasts instant transaction settlement and strong protection against cyber-attacks.
Add that to the recent release of its “Evolution” upgrade, which premises to deliver contact lists, human-readable usernames, and fully-decentralised digital identities.
The Biden administration’s approach to financial regulation could make 2021 a turning point for the crypto payments space. Whether or not a combination of instant payments and ease of use will be enough to win over crypto users, who are notorious for shifting attention quickly the latest new toy, remains to be seen.
For now, the industry will be watching to see if the proposed FinCEN regulations covering wallets and exchanges kick starts a slow march away from exchanges altogether. If there’s a sharp rise in users making more direct payments with their coins, it could signal that Bitcoin is ready to reclaim its original digital cash purpose: a private P2P payments mechanism.
That could prompt scaling solutions like Lightning Network to make themselves more user friendly, or drive new innovations from a BTC competitor that pushes it to the forefront of the digital payments space, while Bitcoin consolidates its place as an alternative store of value, e.g. digital gold.