Crypto
Bitcoin Self-Custody Is Necessary For Financial Sovereignty
Published
2 years agoon
This is an opinion editorial by Kudzai Kutukwa, a passionate financial inclusion advocate who was recognized by Fast Company magazine as one of South Africa’s top-20 young entrepreneurs under 30.
The release of the Bitcoin white paper in 2009 after the 2008 financial crisis was one the most significant events of the 21st century. For the first time ever, a trustless, peer-to-peer monetary system for the digital age that was independent of intermediaries and central banks was now a reality.
Initially, Bitcoin was dismissed as a passing fad and a worthless Ponzi scheme, but 13 years later, no one is laughing at Bitcoin anymore. In fact, it’s now being ruthlessly attacked in multiple ways. These attacks have included 2021’s ban of Chinese bitcoin miners by the Chinese government; the continual denial of a spot Bitcoin exchange-traded fund by the U.S. Securities and Exchange Commission (SEC); the framing of Bitcoin as an environmental hazard (which later prompted the EU to consider banning proof-of-work mining); and, most recently, the EU’s attack on “unhosted wallets.” The latter is not just an attempt at the regulatory capture of Bitcoin, but it’s also an attack on your financial privacy. You can think of it as the 21st-century version of Executive Order 6102.
Financial regulators around the world have been slowly turning up the heat and cracking down on the use of unhosted wallets, but before we proceed any further, we need to address the elephant in the room, which is the term “unhosted wallet.” What on Earth is an unhosted wallet anyway? It’s simply a noncustodial wallet (aka self-custody wallet) where the user owns the private keys and is 100% in control of their money as opposed to handing it over to a third party for “safekeeping.” A simple example of an unhosted wallet would be your physical wallet or purse which isn’t tied to any financial institution, holds as much cash as you want to put into it and is 100% under your control. What makes this term even more bizarre and dangerous is that it implies that our personal financial data has to be “hosted” on someone else’s server. The implication being that self-custody is dangerous, suspicious and wrong.
Introducing the term “unhosted wallet” is a subtle but effective attack meant to maintain the role of “trusted third parties” that Bitcoin was created to replace. It makes absolutely no sense for a permissionless and trustless system to require the green light from gatekeepers before it can be accessed.
Der Gigi expressed this idea perfectly when he said, “The discussion shouldn’t be about ‘hosting’ in the first place. It should be about control. Who can access your funds? Who can freeze your account? Who is the master, and who is the slave? Just like ‘the cloud is someone else’s computer,’ a ‘hosted wallet’ is someone else’s 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 just a catchphrase, but a reminder to remain financially sovereign.
Since Bitcoin is censorship resistant and cannot be effectively banned, the choke points that are now being exploited are the on-ramps and off-ramps into and out of the cash system. Given the fact that the average person is likely to acquire bitcoin from a centralized exchange, know your customer rules are then put into play with the intention of attaching a government ID and physical address to a “Bitcoin address.” The end goal being a state where every transaction is tied to an identity that leaves an audit trail for the authorities, through which they can easily conduct financial surveillance and exert control like they already do in the fiat system. Furthermore, your personal data is at risk from data leaks and hackers should the exchange get compromised, as is usually the case with centralized databases. A recent example of this would be the breaching of the Shanghai Police Department’s database that resulted in the theft of one billion people’s personal data. Your bitcoin and personal safety are at risk should this happen to a centralized exchange where you have a hosted wallet. This is why the use of misnomers such as “unhosted wallet” should be seen for what it is: regulatory capture.
This attack was switched into gear 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 transactions between unhosted wallets pose specific money laundering and terrorist financing risks and that, under certain situations, some transactions between unhosted wallets fall under the travel rule. In March 2022, regulators in Canada, Japan and Singapore mandated that centralized exchanges should collect personal data, such as names and physical addresses of owners of unhosted wallets that receive or send bitcoin or other cryptocurrencies to the customers of these exchanges. These requirements were implemented in Canada soon after the government had frozen bank accounts and even “hosted wallets” of the truckers who were protesting against COVID-19 mandates. Similar rules to those implemented by Canada, Japan and Singapore went into effect in the Netherlands on June 27, 2022.
Not to be outdone in this statist overreach, the European parliament reached a provisional agreement on their cryptocurrency bill, dubbed “Markets in Crypto-Assets (MiCA),” which aims to regulate and place “unhosted wallets” under financial 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 financing, and other crimes, says the new legislation agreed on Wednesday. … The rules would also cover transactions from so-called un-hosted wallets (a crypto-asset wallet address that is in the custody of a private user) when they interact with hosted wallets managed by CASPs [Crypto Asset Service Providers].”
Ernest Urtasun, a member of the European Parliament, posted a celebratory thread on Twitter outlining some of the key aspects of the bill that “will put an end to the wild west of unregulated crypto.” According to one of the tweets in this thread, the new regulations 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 large, they mean €1,000 or more. In a subsequent statement, he hailed the new regulations as being the right remedy for fighting money laundering and reducing fraud.
The irony of the matter is despite their “good intentions” in seeking to curb money laundering, an estimated 2–5% of global GDP ($1.7 trillion to $4.2 trillion) is laundered globally, mostly via the traditional banking system according to the UNODC. More money is laundered annually through the banking system than the entire market cap ($1 trillion at the time of publication) of all cryptocurrencies combined. It gets worse: The impact of anti-money laundering laws (AML) on criminal financing is 0.05% — meaning criminals have a 99.95% success rate in laundering money — and compliance costs exceed the value of confiscated illicit funds a hundred times over. Real criminals get a free pass while financial institutions and the average law-abiding citizen are penalized. According to the Journal of Financial Crime, AML laws are totally ineffective in stopping the flow of ill-gotten gains. Between 2010 and 2014, a paltry 1.1% of criminal profits were seized in the EU, according to a report by Europol. No wonder AML laws have been dubbed the most ineffective anti-crime measures anywhere! Yet, the bigger problem seems to be unhosted wallets and the “wild west of unregulated crypto.” Talk about misplaced priorities.
Despite the obvious failures of AML in the traditional financial system, lawmakers and regulators still insist on targeting unhosted wallets with burdensome and impractical regulations. Not only will MiCA stifle innovation within the EU, it’s also going to result in capital flight to more Bitcoin-friendly jurisdictions like El Salvador. One would be forgiven for speculating that laws like MiCA are a slow creep toward the outright ban of self-custody wallets and are forerunners 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 similar in that they are both centralized, they are subject to financial surveillance, 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 critical to have payment systems and tools that are sufficiently decentralized and efficient in order to maintain the protection of privacy. The importance of having financial privacy was summarized perfectly in Eric Hughes’ “Cypherpunk Manifesto”:
“Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn’t want the whole world to know, but a secret matter is something one doesn’t want anybody to know. Privacy is the power to selectively reveal oneself to the world … Therefore, privacy in an open society requires anonymous transaction systems. Until now, cash has been the primary such system. An anonymous transaction system is not a secret transaction system. An anonymous system empowers individuals to reveal their identity when desired and only when desired; this is the essence of privacy.”
These words still ring true today. Once your identity is paired to a wallet, your privacy is compromised and it becomes easier to track all your on-chain transactions forever. If you don’t control how much you can have or where you can store it, you don’t own your money. Whoever controls your money controls you. Centralized financial systems — of which hosted wallets are a part — are every authoritarian’s dream and are designed to grant the power of financial omniscience to the state. Bitcoin was designed to empower the individual through the separation of money and state. Self-custody wallets are integral in preserving that.
This is a guest post by Kudzai Kutukwa. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
Crypto
El Salvador Takes First Step To Issue Bitcoin Volcano Bonds
Published
2 years agoon
November 22, 2022
El Salvador’s Minister of the Economy Maria Luisa Hayem Brevé submitted a digital assets issuance bill to the country’s legislative assembly, paving the way for the launch of its bitcoin-backed “volcano” bonds.
First announced one year ago today, the pioneering initiative seeks to attract capital and investors to El Salvador. It was revealed at the time the plans to issue $1 billion in bonds on the Liquid Network, a federated Bitcoin sidechain, with the proceedings of the bonds being split between a $500 million direct allocation to bitcoin and an investment of the same amount in building out energy and bitcoin mining infrastructure in the region.
A sidechain is an independent blockchain that runs parallel to another blockchain, allowing for tokens from that blockchain to be used securely in the sidechain while abiding by a different set of rules, performance requirements, and security mechanisms. Liquid is a sidechain of Bitcoin that allows bitcoin to flow between the Liquid and Bitcoin networks with a two-way peg. A representation of bitcoin used in the Liquid network is referred to as L-BTC. Its verifiably equivalent amount of BTC is managed and secured by the network’s members, called functionaries.
“Digital securities law will enable El Salvador to be the financial center of central and south America,” wrote Paolo Ardoino, CTO of cryptocurrency exchange Bitfinex, on Twitter.
Bitfinex is set to be granted a license in order to be able to process and list the bond issuance in El Salvador.
The bonds will pay a 6.5% yield and enable fast-tracked citizenship for investors. The government will share half the additional gains with investors as a Bitcoin Dividend once the original $500 million has been monetized. These dividends will be dispersed annually using Blockstream’s asset management platform.
The act of submitting the bill, which was hinted at earlier this year, kickstarts the first major milestone before the bonds can see the light of day. The next is getting it approved, which is expected to happen before Christmas, a source close to President Nayib Bukele told Bitcoin Magazine. The bill was submitted on November 17 and presented to the country’s Congress today. It is embedded in full below.
Crypto
How I’ll Talk To Family Members About Bitcoin This Thanksgiving
Published
2 years agoon
November 22, 2022
This is an opinion editorial by Joakim Book, a Research Fellow at the American Institute for Economic Research, contributor and copy editor for Bitcoin Magazine and a writer on all things money and financial history.
I don’t.
That’s it. That’s the article.
In all sincerity, that is the full message: Just don’t do it. It’s not worth it.
You’re not an excited teenager anymore, in desperate need of bragging credits or trying out your newfound wisdom. You’re not a preaching priestess with lost souls to save right before some imminent arrival of the day of reckoning. We have time.
Instead: just leave people alone. Seriously. They came to Thanksgiving dinner to relax and rejoice with family, laugh, tell stories and zone out for a day — not to be ambushed with what to them will sound like a deranged rant in some obscure topic they couldn’t care less about. Even if it’s the monetary system, which nobody understands anyway.
Get real.
If you’re not convinced of this Dale Carnegie-esque social approach, and you still naively think that your meager words in between bites can change anybody’s view on anything, here are some more serious reasons for why you don’t talk to friends and family about Bitcoin the protocol — but most certainly not bitcoin, the asset:
- Your family and friends don’t want to hear it. Move on.
- For op-sec reasons, you don’t want to draw unnecessary attention to the fact that you probably have a decent bitcoin stack. Hopefully, family and close friends should be safe enough to confide in, but people talk and that gossip can only hurt you.
- People find bitcoin interesting only when they’re ready to; everyone gets the price they deserve. Like Gigi says in “21 Lessons:”
“Bitcoin will be understood by you as soon as you are ready, and I also believe that the first fractions of a bitcoin will find you as soon as you are ready to receive them. In essence, everyone will get ₿itcoin at exactly the right time.”
It’s highly unlikely that your uncle or mother-in-law just happens to be at that stage, just when you’re about to sit down for dinner.
- Unless you can claim youth, old age or extreme poverty, there are very few people who genuinely haven’t heard of bitcoin. That means your evangelizing wouldn’t be preaching to lost, ignorant souls ready to be saved but the tired, huddled and jaded masses who could care less about the discovery that will change their societies more than the internal combustion engine, internet and Big Government combined. Big deal.
- What is the case, however, is that everyone in your prospective audience has already had a couple of touchpoints and rejected bitcoin for this or that standard FUD. It’s a scam; seems weird; it’s dead; let’s trust the central bankers, who have our best interest at heart.
No amount of FUD busting changes that impression, because nobody holds uninformed and fringe convictions for rational reasons, reasons that can be flipped by your enthusiastic arguments in-between wiping off cranberry sauce and grabbing another turkey slice. - It really is bad form to talk about money — and bitcoin is the best money there is. Be classy.
Now, I’m not saying to never ever talk about Bitcoin. We love to talk Bitcoin — that’s why we go to meetups, join Twitter Spaces, write, code, run nodes, listen to podcasts, attend conferences. People there get something about this monetary rebellion and have opted in to be part of it. Your unsuspecting family members have not; ambushing them with the wonders of multisig, the magically fast Lightning transactions or how they too really need to get on this hype train, like, yesterday, is unlikely to go down well.
However, if in the post-dinner lull on the porch someone comes to you one-on-one, whisky in hand and of an inquisitive mind, that’s a very different story. That’s personal rather than public, and it’s without the time constraints that so usually trouble us. It involves clarifying questions or doubts for somebody who is both expressively curious about the topic and available for the talk. That’s rare — cherish it, and nurture it.
Last year I wrote something about the proper role of political conversations in social settings. Since November was also election month, it’s appropriate to cite here:
“Politics, I’m starting to believe, best belongs in the closet — rebranded and brought out for the specific occasion. Or perhaps the bedroom, with those you most trust, love, and respect. Not in public, not with strangers, not with friends, and most certainly not with other people in your community. Purge it from your being as much as you possibly could, and refuse to let political issues invade the areas of our lives that we cherish; politics and political disagreements don’t belong there, and our lives are too important to let them be ruled by (mostly contrived) political disagreements.”
If anything, those words seem more true today than they even did then. And I posit to you that the same applies for bitcoin.
Everyone has some sort of impression or opinion of bitcoin — and most of them are plain wrong. But there’s nothing people love more than a savior in white armor, riding in to dispel their errors about some thing they are freshly out of fucks for. Just like politics, nobody really cares.
Leave them alone. They will find bitcoin in their own time, just like all of us did.
This is a guest post by Joakim Book. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
This is an opinion editorial by Federico Tenga, a long time contributor to Bitcoin projects with experience as start-up founder, consultant and educator.
The term “smart contracts” predates the invention of the blockchain and Bitcoin itself. Its first mention is in a 1994 article by Nick Szabo, who defined smart contracts as a “computerized transaction protocol that executes the terms of a contract.” While by this definition Bitcoin, thanks to its scripting language, supported smart contracts from the very first block, the term was popularized only later by Ethereum promoters, who twisted the original definition as “code that is redundantly executed by all nodes in a global consensus network”
While delegating code execution to a global consensus network has advantages (e.g. it is easy to deploy unowed contracts, such as the popularly automated market makers), this design has one major flaw: lack of scalability (and privacy). If every node in a network must redundantly run the same code, the amount of code that can actually be executed without excessively increasing the cost of running a node (and thus preserving decentralization) remains scarce, meaning that only a small number of contracts can be executed.
But what if we could design a system where the terms of the contract are executed and validated only by the parties involved, rather than by all members of the network? Let us imagine the example of a company that wants to issue shares. Instead of publishing the issuance contract publicly on a global ledger and using that ledger to track all future transfers of ownership, it could simply issue the shares privately and pass to the buyers the right to further transfer them. Then, the right to transfer ownership can be passed on to each new owner as if it were an amendment to the original issuance contract. In this way, each owner can independently verify that the shares he or she received are genuine by reading the original contract and validating that all the history of amendments that moved the shares conform to the rules set forth in the original contract.
This is actually nothing new, it is indeed the same mechanism that was used to transfer property before public registers became popular. In the U.K., for example, it was not compulsory to register a property when its ownership was transferred until the ‘90s. This means that still today over 15% of land in England and Wales is unregistered. If you are buying an unregistered property, instead of checking on a registry if the seller is the true owner, you would have to verify an unbroken chain of ownership going back at least 15 years (a period considered long enough to assume that the seller has sufficient title to the property). In doing so, you must ensure that any transfer of ownership has been carried out correctly and that any mortgages used for previous transactions have been paid off in full. This model has the advantage of improved privacy over ownership, and you do not have to rely on the maintainer of the public land register. On the other hand, it makes the verification of the seller’s ownership much more complicated for the buyer.
How can the transfer of unregistered properties be improved? First of all, by making it a digitized process. If there is code that can be run by a computer to verify that all the history of ownership transfers is in compliance with the original contract rules, buying and selling becomes much faster and cheaper.
Secondly, to avoid the risk of the seller double-spending their asset, a system of proof of publication must be implemented. For example, we could implement a rule that every transfer of ownership must be committed on a predefined spot of a well-known newspaper (e.g. put the hash of the transfer of ownership in the upper-right corner of the first page of the New York Times). Since you cannot place the hash of a transfer in the same place twice, this prevents double-spending attempts. However, using a famous newspaper for this purpose has some disadvantages:
- You have to buy a lot of newspapers for the verification process. Not very practical.
- Each contract needs its own space in the newspaper. Not very scalable.
- The newspaper editor can easily censor or, even worse, simulate double-spending by putting a random hash in your slot, making any potential buyer of your asset think it has been sold before, and discouraging them from buying it. Not very trustless.
For these reasons, a better place to post proof of ownership transfers needs to be found. And what better option than the Bitcoin blockchain, an already established trusted public ledger with strong incentives to keep it censorship-resistant and decentralized?
If we use Bitcoin, we should not specify a fixed place in the block where the commitment to transfer ownership must occur (e.g. in the first transaction) because, just like with the editor of the New York Times, the miner could mess with it. A better approach is to place the commitment in a predefined Bitcoin transaction, more specifically in a transaction that originates from an unspent transaction output (UTXO) to which the ownership of the asset to be issued is linked. The link between an asset and a bitcoin UTXO can occur either in the contract that issues the asset or in a subsequent transfer of ownership, each time making the target UTXO the controller of the transferred asset. In this way, we have clearly defined where the obligation to transfer ownership should be (i.e in the Bitcoin transaction originating from a particular UTXO). Anyone running a Bitcoin node can independently verify the commitments and neither the miners nor any other entity are able to censor or interfere with the asset transfer in any way.
Since on the Bitcoin blockchain we only publish a commitment of an ownership transfer, not the content of the transfer itself, the seller needs a dedicated communication channel to provide the buyer with all the proofs that the ownership transfer is valid. This could be done in a number of ways, potentially even by printing out the proofs and shipping them with a carrier pigeon, which, while a bit impractical, would still do the job. But the best option to avoid the censorship and privacy violations is establish a direct peer-to-peer encrypted communication, which compared to the pigeons also has the advantage of being easy to integrate with a software to verify the proofs received from the counterparty.
This model just described for client-side validated contracts and ownership transfers is exactly what has been implemented with the RGB protocol. With RGB, it is possible to create a contract that defines rights, assigns them to one or more existing bitcoin UTXO and specifies how their ownership can be transferred. The contract can be created starting from a template, called a “schema,” in which the creator of the contract only adjusts the parameters and ownership rights, as is done with traditional legal contracts. Currently, there are two types of schemas in RGB: one for issuing fungible tokens (RGB20) and a second for issuing collectibles (RGB21), but in the future, more schemas can be developed by anyone in a permissionless fashion without requiring changes at the protocol level.
To use a more practical example, an issuer of fungible assets (e.g. company shares, stablecoins, etc.) can use the RGB20 schema template and create a contract defining how many tokens it will issue, the name of the asset and some additional metadata associated with it. It can then define which bitcoin UTXO has the right to transfer ownership of the created tokens and assign other rights to other UTXOs, such as the right to make a secondary issuance or to renominate the asset. Each client receiving tokens created by this contract will be able to verify the content of the Genesis contract and validate that any transfer of ownership in the history of the token received has complied with the rules set out therein.
So what can we do with RGB in practice today? First and foremost, it enables the issuance and the transfer of tokenized assets with better scalability and privacy compared to any existing alternative. On the privacy side, RGB benefits from the fact that all transfer-related data is kept client-side, so a blockchain observer cannot extract any information about the user’s financial activities (it is not even possible to distinguish a bitcoin transaction containing an RGB commitment from a regular one), moreover, the receiver shares with the sender only blinded UTXO (i. e. the hash of the concatenation between the UTXO in which she wish to receive the assets and a random number) instead of the UTXO itself, so it is not possible for the payer to monitor future activities of the receiver. To further increase the privacy of users, RGB also adopts the bulletproof cryptographic mechanism to hide the amounts in the history of asset transfers, so that even future owners of assets have an obfuscated view of the financial behavior of previous holders.
In terms of scalability, RGB offers some advantages as well. First of all, most of the data is kept off-chain, as the blockchain is only used as a commitment layer, reducing the fees that need to be paid and meaning that each client only validates the transfers it is interested in instead of all the activity of a global network. Since an RGB transfer still requires a Bitcoin transaction, the fee saving may seem minimal, but when you start introducing transaction batching they can quickly become massive. Indeed, it is possible to transfer all the tokens (or, more generally, “rights”) associated with a UTXO towards an arbitrary amount of recipients with a single commitment in a single bitcoin transaction. Let’s assume you are a service provider making payouts to several users at once. With RGB, you can commit in a single Bitcoin transaction thousands of transfers to thousands of users requesting different types of assets, making the marginal cost of each single payout absolutely negligible.
Another fee-saving mechanism for issuers of low value assets is that in RGB the issuance of an asset does not require paying fees. This happens because the creation of an issuance contract does not need to be committed on the blockchain. A contract simply defines to which already existing UTXO the newly issued assets will be allocated to. So if you are an artist interested in creating collectible tokens, you can issue as many as you want for free and then only pay the bitcoin transaction fee when a buyer shows up and requests the token to be assigned to their UTXO.
Furthermore, because RGB is built on top of bitcoin transactions, it is also compatible with the Lightning Network. While it is not yet implemented at the time of writing, it will be possible to create asset-specific Lightning channels and route payments through them, similar to how it works with normal Lightning transactions.
Conclusion
RGB is a groundbreaking innovation that opens up to new use cases using a completely new paradigm, but which tools are available to use it? If you want to experiment with the core of the technology itself, you should directly try out the RGB node. If you want to build applications on top of RGB without having to deep dive into the complexity of the protocol, you can use the rgb-lib library, which provides a simple interface for developers. If you just want to try to issue and transfer assets, you can play with Iris Wallet for Android, whose code is also open source on GitHub. If you just want to learn more about RGB you can check out this list of resources.
This is a guest post by Federico Tenga. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.