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Jack Dorsey says proposed cryptocurrency regulation would create ‘perverse incentives’

Jack Dorsey says proposed cryptocurrency regulation would create ‘perverse incentives’


The Square CEO warns that the regulations could lead to cryptocurrency transactions being less visible, not more

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Illustration by Alex Castro / The Verge

Jack Dorsey, the CEO of Twitter and Square, isn’t happy about the new proposed cryptocurrency regulation. He emphasized how the regulation would hurt Square, a financial services company, in a letter posted to the company website.

In October, Square bought $50 million in bitcoin. The company also has invested heavily in the cryptocurrency ecosystem, so Square has plenty of skin in the game. The regulations create “unnecessary friction and perverse incentives for cryptocurrency customers to avoid regulated entities for cryptocurrency transactions,” Dorsey writes.

The regulation could end up driving customers “to use non-custodial wallets or services outside the U.S.”

The regulation, proposed by the Financial Crimes Enforcement Network (FinCEN), would require financial institutions (like Square) to collect personal information about the parties involved in cryptocurrency transactions. You can read a deep-dive on them here, but the more important requirement is for financial institutions to collect the name and physical address of both parties of any large transaction they’re involved in.

The regulation aims to help prevent some of the illegal uses of cryptocurrencies, such as drug trafficking, money laundering, and “international terrorist financing.” But Dorsey’s major complaint is that they would create “unnecessary friction” between cryptocurrency users and financial institutions, which could lead to “perverse incentives.”

To put it plainly — were the [regulations] to be implemented as written, Square would be required to collect unreliable data about people who have not opted into our service or signed up as our customers.

To use an example included in the letter, say a parent uses Square to send their daughter $4,000 in bitcoin. Even if the daughter is using a private bitcoin wallet on her own computer, Square would then be obligated to collect her personal information, including her physical address. Dorsey, along with other privacy advocates, sees that as an overreach, particularly given the open nature of the blockchain.

Dorsey argues the regulation could end up driving customers “to use non-custodial wallets or services outside the U.S. to transfer their assets more easily,” leading to FinCEN having “less visibility into the universe of cryptocurrency transactions than it has today.” Put simply, if people have to provide private information to a bank in order to make a transaction, they’ll avoid using the bank — something the CEO describes as a perverse incentive.

What’s more, Dorsey writes, it hampers innovation. “The burdensome information collection and reporting requirements deprive U.S. companies like Square of the chance to compete on a level playing field to enable cryptocurrency as a tool of economic empowerment.”

The letter was submitted as part of the unusually short comment period for the regulation. The standard public comment period for these types of policies is 60 days, but the comment period for this proposal is 15 days — many of which were holidays. The Treasury Department’s reasoning for this is due to “significant national security imperatives,” but it doesn’t provide any further examples.

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