Exploring transformation of value in the digital age
By Michael J. Casey, chief content officer
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Even as governments crack down on crypto players – with the customer funds lost at custodian Prime Trust this past week giving officials more reason to mistrust the industry – they’re continuing their embrace of certain elements of digital money tech, notably central bank digital currencies (CBDCs). But, as this week’s column addresses in its review of the European Commission’s professed commitment for a digital euro to protect privacy, their conception of the future remains very different from that of crypto developers.
In this week’s Money Reimagined, we surface an interview I did with Galaxy Digital CEO Mike Novogratz on the sidelines of the Uncharted Summit last week. We explore the idea of digital property rights and get his take on why institutions like BlackRock and Invesco, with which Galaxy has created a proposed exchange-traded fund for bitcoin, are pursuing approval for such products despite hostility in Washington.
Will the Digital Euro Really Protect Privacy?
(Getty Images)
Someone needs to remind the European Commission that it can’t have its cake and eat it too.
This recognizes European citizens’ civil liberties, as politicians are wont to do. But you can be forgiven for seeing it as mere lip service. A review of the proposal’s explicit record-keeping provisions for payment service providers challenges those intentions, especially in light of recent European government crackdowns on cryptographic privacy.
The fact is the European Commission – and for that matter, the governments of the U.S., U.K. and other major liberal democracies – have generally shown themselves incapable of embracing real privacy in digital money. They want the facade of privacy, something that lets them sell the idea that Western democracies would never engage in the kind of round-the-clock surveillance for which China is accused, while retaining the power to uncover users’ identities when needed.
I mean, what exactly is the difference?
European proponents of privacy-preserving CBDCs say they want to recreate the freedom of cash. But as security analyst Lukasz Olejnik pointed out this week in his critique of the European proposal, these models are a long way from the anonymity of euro notes. In the case of the offline NFC transactions, service providers would be required to record data on the amount spent; the phone or other device’s unique identifier; the date and time of the transactions and the account numbers used. Does any such identifying information get logged when you hand over a banknote to a merchant? No.
Meanwhile, the crackdowns on open-source privacy projects are a clear indication that tolerance for people engaging in private, non-monitored transactions is low, whether in Europe or elsewhere. The Netherlands played a very active role in prosecuting the U.S. case against Ethereum-based mixing service Tornado Cash, arresting developer Alexey Pertsev days after the U.S. Office of Foreign Asset Control took the unprecedented step of placing the open-source software system – not a person, nor a company, but a body of code – on its list of sanctioned foreign persons.
Misplaced enforcement actions
The Tornado Cash enforcement, which civil rights activists decry as an attack on free speech, sent a chill through the pro-privacy cryptography community. It fears for innovation in the field as developers worry about reprisals by security agencies.
This crackdown is boneheaded. We are entering into an artificial intelligence era in which digital systems are extracting ever-ballooning amounts of data from our digital activity and can use it to manipulate us. Privacy tech is a bulwark against that encroachment into our lives. Our leaders have expressed concern about AI’s invasive powers, so they should be encouraging the development of these innovative solutions, not driving them out of town.
Let’s recognize that a half-century (since the introduction of the 1971 Bank Secrecy Act) of ever-expanding compliance rules to enable government surveillance of financial activity has built such a complex web of compliance requirements for financial institutions that true digital privacy is mostly impossible without tearing down that entire complex of regulations. That sort of reform runs counter to the principles of that surveillance system, which governments built in a (mostly futile) effort to curb money laundering and other forms of illicit finance.
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In its weekly State of the Network newsletter, data provider Coin Metrics noted a recent surge in the metric known as “bitcoin dominance,” which measures how much of the overall market capitalization of the wider cryptocurrency market bitcoin accounts for. At the time of that dispatch on Tuesday it was at 58% of Coin Metrics’ market cap estimate, the highest level of dominance since April 2021. It provided the following chart.
In the past, rising bitcoin dominance has sometimes been seen as a harbinger of a wider crypto rally, as bitcoin is the first token attracting bulls. Over time, the rally leads ether and other altcoins to start to outpace bitcoin and dominance declines. But this time there’s a macro story behind the shift that might be more lasting. The recent Securities and Exchange Commission submissions by Blackrock, Invesco, Wisdom Tree and others seeking approval of bitcoin exchange-traded funds has spurred interest in the biggest cryptocurrency while the SEC’s lawsuit against Coinbase has fostered legal concerns about a host of altcoins that seem to now be designated as unregistered securities.
The Conversation: Not So Prime
Another week, another failed crypto intermediary. The troubles at custodian Prime Trust, which suffered a regulator-ordered shutdown and which BitGo abandoned plans to acquire, have exposed an alarming shortfall in its holdings that make a mockery of its status as a regulated entity. This spurred another new round of intense debate and hang-wringing on Twitter and elsewhere in the crypto community.
One to weigh in was Custodia Bank founder and CEO Caitlin Long, who used the “mess” of its looming bankruptcy to talk up the crypto-forward laws of Wyoming, the state in which Custodia is based.
Relevant Reads: Trustless Custodians
CoinDesk’s own coverage of the Prime Trust story noted how many crypto service providers stray far from acceptable compliance norms for protecting clients’ assets. Last week, BitGo’s abandonment of its acquisition left it clear that something was up. This week, the underlying story got revealed.
After confirming the suspicions fired up by the BitGo exit – that Prime Trust had a shortfall in customer funds – its Nevada regulator put it into receivership. Nik De reported.
In his State of Crypto newsletter under the understated headline declaring that Prime Trust is having a bad month, NIk identified why it’s so significant – and worrying – that a custodian, an entity with the explicit responsibility to safeguard customer assets, should lose them.
Then columnist George Kaloudis laid out just how bad the situation was: not only had Prime Trust been unable to retrieve customers’ funds it appeared to have used them in proprietary transactions, a major breach of custodial protocol.
