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DOJ Crypto Framework Is a ‘Disaster’ for Digital Privacy Rights

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The U.S. Department of Justice’s (DOJ) recent crypto enforcement framework is a threat to digital privacy rights, according to an attorney for the Electronic Frontier Foundation (EFF).

“It was a complete disaster for privacy and anonymity and civil liberties in the cryptocurrency space,” said Marta Belcher, special counsel to the digital rights advocacy group.

The framework, released earlier this month, details the U.S. government’s approach to crimes committed using cryptocurrencies, but also appears to define some broad policy positions on crypto and crypto exchanges more generally. Belcher, who is an attorney with Ropes and Gray and an outside counsel to Protocol Labs, said the framework released earlier this month raises many concerns about privacy rights, pointing to language on peer-to-peer exchanges, mixers/tumblers and “anonymity enhanced cryptocurrencies” (privacy coins). 

In Belcher’s view, there are a number of legal concerns with the crypto enforcement framework as laid out by the DOJ’s Cyber Digital Task Force. Language in the framework would appear to have implications for individuals sending cryptocurrencies to one another, as well as exchangers offering transactions as a service.

The enforcement framework even had a section on mixers and tumblers, noting that entities qualifying as money services businesses are subject to the BSA or “similar international regulations.”

Encryption

The DOJ’s arguments against cryptocurrencies are similar to those made against encryption, another law enforcement boogeyman. The DOJ, alongside other members of the “Five Eyes” intelligence alliance plus India and Japan published a statement calling for backdoor access to encrypted messaging services and other systems last weekend. 

The statement reflects law enforcement agencies’ “fundamental discomfort” with any technology that could allow for private interactions, said Jake Chervinsky, general counsel at Compound Finance. 

The enforcement framework is “making exactly the same argument you’ve seen being made for decades about encryption,” Belcher told CoinDesk. “These are the exact same arguments that are against encryption and they’re coming from the exact same place as the fight against encryption.”

Read more: Startup Aleo Wants to Help You Use the Internet Without Sacrificing Data Privacy

The intelligence agencies claim backdoors in encrypted protocols and systems would make it easier to identify and prosecute crimes committed using privacy-protecting tools (including cryptocurrencies).

This statement ignores the technical realities of building strong encryption, he noted.

“The Five Eyes [coalition continues] to overlook a few basic points about encryption: first, that strong encryption itself enhances public safety and prevents crime by protecting people and their data; second, that it’s impossible to build backdoors into encrypted systems without creating extraordinary new cybersecurity risks; and third, that cryptography tools are increasingly open-source and can’t be easily cabined or controlled at their request,” he said.

Many cryptocurrency companies and developers, for example, wouldn’t be able to comply with the backdoor requests because of this open sourcing, he said.

P2P exchangers

According to the DOJ’s crypto framework, a P2P exchanger is considered a money services business, which means it is required to abide by recordkeeping and reporting requirements as defined by the Bank Secrecy Act (BSA) and other regulations if they buy or sell convertible virtual currencies. 

The framework defines individual exchangers as individuals who provide crypto transaction services to others, but Belcher believes it could be used to apply to two individuals who just transact between each other – not just individuals acting as service providers.

“Individual exchangers – as well as platforms and websites – that fail to collect and maintain customer or transactional data or maintain an effective AML/CFT program may be subject to civil and criminal penalties,” the framework said, referring to anti-money laundering/combating the financing of terrorism regulations.

The distinction is between “software providers” and “service providers,” Chervinsky said. Software providers, which compose a large part of the crypto industry, deploy decentralized protocols and publish open-source projects that the writers cannot control or modify. Service providers, on the other hand, offer “permissioned, proprietary platforms” that the operators can control. 

Read more: The US Crypto Enforcement Framework Is a Warning to International Exchanges

In Belcher’s view, the crypto framework puts both individuals who write code for peer-to-peer transactions as well as those who use this code at risk for enforcement actions. 

“There’s liability on people using these exchanges in order to exchange cryptocurrencies anonymously with others,” she said. “To say I can’t send you cryptocurrency using a script, you and I can’t transact with each other directly in a peer-to-peer way without that data being collected somewhere by a third party is a complete affront to privacy and civil liberty.”

Individuals can easily conduct similar transactions using cash, she said. “No one questions that I can hand you money without there needing to be a written record of that.”

Privacy protections

The framework also took aim at privacy coins and other tools to obfuscate transactions, like mixers and tumblers. Belcher said it is wrong to focus on whether privacy coins can be compliant with the BSA and other laws.

Cryptocurrencies could potentially transfer the privacy protections that come from cash transactions and shift them online, she said.

“The thing that is so important for me is that you can transact anonymously and you can take the protections of cash and you can transfer that to the online world,” she said. 

“The idea that merely by exercising your right to transact anonymously is indicative of you committing a crime is wrong in my view.”

Read more: FinCEN: Stablecoin Issuers Are Money Transmitters, No Matter What

The U.S. government followed the framework with its first enforcement action against a bitcoin mixer just 11 days later, when the Financial Crimes Enforcement Network (FinCEN) fined Larry Dean Harmon, the alleged operator of a mixer, $60 million for his operations. 

However, that particular case doesn’t have major implications for mixing software more generally, said Carlton Fields attorney Andrew Hinkes on Twitter. 

“The facts here are egregious and ghastly. A service provider that profits from software that provides money transmission services must comply, must keep records, and must report. Plain as day, and should be obvious by now,” he wrote, pointing to various facts in the case, including the operator’s boasting of transaction privacy for customers, transactions conducted for Iran-affiliated accounts and payments facilitated for at least one child exploitation site. 

Chervinsky agreed, noting that Harmon was treated like a service provider, not a software provider.

Financial censorship

It’s possible the DOJ’s framework can help contribute to financial censorship, an ongoing issue within the U.S., Belcher said.

Traditional payments giants surveil and censor a number of transactions, including innocuous ones that might upset certain sensibilities. 

“There are all these examples of a kinky bookstore or a nonprofit that supports LGBT fiction getting their accounts shut down by Visa and Mastercard, and also famously things like WikiLeaks that then turn to cryptocurrency when they can’t be served by the financial intermediaries that are censoring that,” she said.

These transactions aren’t illegal, Belcher noted.

Read more: The Web Wasn’t Built for Privacy, but It Could Be

A cashless society is effectively a surveillance society in this respect, she said.

Actual crimes committed using cryptocurrencies should be prosecuted, and it’s a benefit to the crypto community when they are, she said. 

The DOJ report included dozens of examples of crimes that were committed using or at some point touching on cryptocurrencies, including several recent high-profile cases. 

However, blaming cryptocurrencies for their use in crimes does not make sense, she said.

“I think they’re missing that cash has always been used to facilitate illegal activity,” she said. “We don’t blame Ford when one of its cars is used as a getaway vehicle in a bank robbery.”





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VanEck Launches Bitcoin-backed ETP in Germany

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VanEck has pushed out of the US into the European markets and, with favorable regulations, it expects to have a better embrace in the region where similar products are already available.

Investment management firm VanEck has successfully launched a bitcoin-backed Exchange Traded Product known as an Exchange Traded Note (ETN) on the Deutsche Borse Xetra exchange. According to a report by Funds Europe, the move by VanEck to launch the exchange-traded product (ETP) models that of other European Exchange Traded Fund Issuers who had made similar moves in the past.

According to the Funds Europe report, the VanEck ETP Bitcoin ETN has a total expense ratio of 2% and it will allow investors to gain exposure to Bitcoin (BTC) without having to purchase the premier digital currency themselves. “Today @vaneck_eu launched a #Bitcoin ETN. The ETN is physically-backed by Bitcoin and listed on Deutsche Böerse Xetra. Launching a Bitcoin ETP was a top priority for VanEck. We succeeded! VanEck hopes to serve many in Europe and Asia!” Gabor Gurbacs, VanEck’s digital asset strategist/director revealed in a tweet.

Gurbacs noted that the bitcoin-backed ETN is 100% physically backed meaning that any ETN invested in by an investor will be used to purchase the equivalent amount of Bitcoin. With professionally managed offerings, Gurbacs affirmed that the company’s ETN features transparent pricing with reliable investor protections.

The custody for the Bitcoins purchased through the VanEck ETP services will be offered by Liechtenstein-based crypto custodian Bank Frick. Frick will provide the Cold storage options for any deposited Bitcoin.

VanEck and Its Way to Bitcoin-Backed ETP Approval

The desire by VanEck to launch a bitcoin-backed ETP dates back to a few years ago when it made several attempts to launch the product in the US.

“Bringing to market a physical, fully-backed major exchange-listed bitcoin ETP was a top priority for our firm,” Gurbacs was quoted as saying. The United States Securities and Exchange Commission (SEC) has wielded its strong-arm into denying the VanEck the privilege of rolling out the product through a delay of crucial meetings and events where the decision to approve the application was to be made.

The haul has been a long one for VanEck. And the limited version of a Bitcoin exchange-traded fund which it launched as reported by Coinspeaker back in September 2019 has not seen so much success as it was only able to issue just 4 Bitcoins upon launch.

VanEck has pushed out of America into the European markets and with favorable regulations, it expects to have a better soft landing and embrace in Germany and the rest of Europe where similar products are already on offer.

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Benjamin Godfrey is a blockchain enthusiast and journalists who relish writing about the real life applications of blockchain technology and innovations to drive general acceptance and worldwide integration of the emerging technology. His desires to educate people about cryptocurrencies inspires his contributions to renowned blockchain based media and sites. Benjamin Godfrey is a lover of sports and agriculture.





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US Intelligence Chief Raises Concerns With SEC Over China’s Crypto Dominance: Report

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U.S. intelligence chief John Ratcliffe was reportedly seeking clearer regulation around digital currency.



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South Korea May Delay Crypto Income Tax Rule to January 2022

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South Korean lawmakers want to delay the implementation of the new rules in order to give more time to crypto exchanges to get ready.

South Korea may extend the implementation of its earlier proposed crypto income tax rule to January 2022, an extension of about 3 months from the earlier proposed October implementation plan. The plan to extend the implementation of the rule was revealed in a report published by a local South Korean media Dong-a Ilbo.

Per the reports, the lawmakers from the South Korean National Assembly’s planning and finance committee issued a report suggesting that it is necessary to consider enforcing the crypto income tax rule from at least January 1, 2022, in a bid to give enough allowance to cryptocurrency exchanges to put plans in place to implement the rules.

Dong-a-ilbo noted that the lawmakers look to hand out this allowance because cryptocurrency exchanges complained that they did not have enough time to adjust their books and develop the right crypto reporting tools to be able to comply with the tax rules.

Crypto Income Tax in South Korea

Earlier, Coinspeaker reported the South Korean proposal to levy a 20% income tax on crypto gains of 2.5 million Korean won, or about $2,000 due to the increasing rise of earnings on exchanges. Yonhap news agency said at the time:

“According to the data released by Rep. Park Kwang-on of the ruling Democratic Party, accumulated commission-related sales of some 30 cryptocurrency exchange operators are presumed to have reached 700 billion won [~USD$658 million] as of the end of last year, compared with an estimated amount of 8 billion won as of the end of 2016.”

To comply with this, South Korea put up the “Specific Financial Information Act” which details the timeline expected for exchanges to complete a reporting system slated for March next year, the completion of a Know Your Customer (KYC) procedure by September 2021 so that deposits and withdrawals can be adequately captured before the implementation which is slated to commence by Oct. Should the new extension be agreed on following the Subcommittee’s meeting to decide on a specific taxation time next week, crypto exchanges will have a 3-month window to get ready for the new crypto tax regime.

South Korea and Cryptocurrency Exchanges

South Korea is renowned for having zero tolerance for misdemeanor especially as it relates to cryptocurrency exchanges. South Korean authorities conducted about two consecutive raids on Bithumb cryptocurrency for alleged money laundering levied on the chairman of the board at Bithumb Korea and Bithumb Holdings Lee Jung-hoon.

The clampdown on Bithumb spurred the exchange to give itself up for sale with China-based cryptocurrency exchange Huobi Global among the top outfits to take over the exchange. Apparently, the zero-tolerance of South Korea on situations of money laundering and tax fraud is unacceptable, a position that may allow the country to give the concerned parties the needed allowance to adjust to the changes that are set to come.

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Benjamin Godfrey is a blockchain enthusiast and journalists who relish writing about the real life applications of blockchain technology and innovations to drive general acceptance and worldwide integration of the emerging technology. His desires to educate people about cryptocurrencies inspires his contributions to renowned blockchain based media and sites. Benjamin Godfrey is a lover of sports and agriculture.



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