In the corridors of power in board rooms, lecture halls, and legislative chambers, Bitcoin is no longer an enigma resigned to just technology or economics enthusiasts.
After a decade of gradual adoption, Bitcoin is an innovation invoked in political debates, presidential speeches, quarterly earnings reports, and is now the most recognized “crypto” by anyone with an Internet connection.
And as adoption has grown, the ecosystem has grown with it, sprouting all kinds of various exchanges, hardware signing devices, applications, and much more. Even betting on political outcomes is now enabled by Bitcoin.
With more liquidity pouring into the protocol and people using Bitcoin as an investment or as a currency to buy and sell things, it is inevitable that rules and regulations will be introduced to set the rules of the game and to try to protect consumers.
The rules of the game
From the federal government down to state and sometimes municipal jurisdictions, there are now plenty of laws on the books that give direction to citizens on how their bitcoin is taxed, what rules exchanges must follow, and whether you can mine it in a certain area.
Think money transmission licenses, capital gains taxes, environmental permits, accounting standards, and regulatory guidance to institutions. With more yet to come, it is prudent for those of us in policy and business to advocate for the best policies that will empower bitcoin holders and entrepreneurs while ensuring a base layer of protection. We should also make the case for why Bitcoin is different and shouldn’t be pigeon-holed to just yet another financial product.
While many new legislative efforts are gaining steam in the House of Representatives in Washington or in state capitals, both positive and negative, we should never lose sight of one of the most unique qualities of Bitcoin that sets it apart from any other technology or money in the world: self-custody.
With Bitcoin, individuals have the ability to sovereignly hold their money without counterparties and censorship risk. By holding one’s own keys, simplified in 12 or 24-word seed phrases, people can claim ownership over their small unlocked portion of the Bitcoin blockchain at the total exclusion of anyone else. This is one of Satoshi’s most brilliant gifts in the code.
As digital cash, bitcoin cannot be unilaterally usurped or confiscated from a bank account. Its value is the representation of a true free market set by buyers and sellers, and those who own the keys are the only ones who can move the units from one address to another.
There is always the risk of physical theft, either by so-called 5 dollar wrench attacks or seed phrase compromise, but the point remains that the ownership model of Bitcoin makes it unique. As long as a holder is using their own keys to move or safeguard their bitcoin, we should also be clear that any legislative proposal that aims to restrict the movement or possession of bitcoin is beyond the pale.
Self-custody as the prime directive
As policy advocates who seek to influence smart, defensive rules on Bitcoin, that means that our prime directive must be protecting, defending, and demarcating self-custody from other custodial solutions that may exist in the market. Self-custody, as a practice, an innovation, or a method of possession, is nonnegotiable.
We know there will be stringent regulations on institutions holding bitcoin on behalf of their customers or products that custody bitcoin, and that is fine and likely necessary. There are well-founded concerns that jurisdictions should protect users from risk if their assets are stored outside of their control.
We can submit that there will be reasonable rules on the various interactions between fiat money from the traditional system and Bitcoin. The on and off ramps will always be the places for regulatory scrutiny, as will concerns about sanctions lists and illicit activities. So will ensuring that no one is committing fraud or deception, or as in the case of FTX and other exchanges, discretely re-allocating customer assets for risky bets.
But once these rules begin to restrict the activities of users with bitcoin in self-custody, who send funds to other wallets and users who also maintain self-custody, there must be an effective line in the sand. This also applies to protocols and software that allow users to perform collaborative transactions, or to privately send between addresses, as in the case of the developers of Samourai Wallet and similar services (be sure to check out P2P Rights).
Previous attempts at flagging or IDing “self-hosted” wallets that receive amounts over a certain threshold were initially found in the European Union’s cryptocurrency regulations, but those were thankfully scuttled. But we must remain vigilant that no similar proposal aims to do the same in our own country.
Regardless of how Bitcoin grows, we must articulate the case for self-custody to be clear and distinctly separate from custodial solutions, as my colleague and BPI Legal Fellow Zack Shapiro has eloquently covered. Shoehorning noncustodial products into legislation or rules meant for custody relationships would be overburdensome, unnecessary, and essentially erase the entire point of Bitcoin in the first place.
The right to self-custody shall not be infringed.
WATCH: Bitcoin Policy Institute Fellow Yaël Ossowski makes the case for legal clarity on self-custody at the European Blockchain Convention in Barcelona, Spain.
