Coinbase CEO Expresses Concerns About Potential New Regulations for Self-Hosted Crypto Wallets

Brian Armstrong, Co-founder and CEO at Coinbase, the leading US-based digital asset exchange, notes that this past week, the company heard rumors that the U.S. Treasury and Secretary Mnuchin had been planning to “rush out” some new regulations for self-hosted cryptocurrency wallets  – which would be before the end of his term.

Armstrong says that he’s concerned that this could potentially have “unintended” side effects, which is why he decided to share these potential issues via social media.


Armstrong explained that self-hosted digital currency wallets (also referred to as non-custodial wallets or self-custody wallets) are basically a type of software program that allows individuals and organizations to store and use their own virtual currency, instead of having to depend on a third-party financial institution.

He also mentioned that self-hosted crypto-asset wallets serve an important function, as they allow individuals and companies to use this new technology to gain access to basic financial services – just like anyone can use a computer or smart device to access services on the Internet.

Armstrong further noted that the “open” nature of cryptocurrency is what “makes it a powerful tool for innovation, and it is what levels the playing field globally.” This openness and ease of accessibility is also what drives innovation, like we’ve seen with decentralized finance (DeFi), Armstrong argued. According to the Coinbase chief executive, the open nature of crypto-assets has “the potential to bring down the cost of financial services, and improve accessibility.”

Armstrong stated:

“This proposed regulation would, we think, require financial institutions like Coinbase to verify the recipient/owner of the self-hosted wallet, collecting identifying information on that party, before a withdrawal could be sent to that self-hosted wallet. This sounds like a reasonable idea on the surface, but it is a bad idea in practice because it is often impractical to collect identifying information on a recipient in the cryptoeconomy.”

He also noted that many cryptocurrency users are sending funds to blockchain-enabled smart contracts in order to transact on DeFi apps. He clarified that a smart contract isn’t necessarily owned by any individual or organization that can be accurately identified. He claims that it’s a new type of recipient that “doesn’t have any direct equivalent in traditional financial services.”

Armstrong pointed out that many digital currency users send funds to different online merchants so they can buy goods and services.

He asks:

“Does it make sense to require customers to help verify the identity of a business before they can buy a product there?”

Armstrong further notes that many crypto users are also sending funds to individuals or businesses in emerging markets, where it’s quite challenging or not even possible in certain cases to gather meaningful KYC information. He also mentioned that some of these people in developing nations are living in poverty, and might not have permanent addresses or any official form of government-issued ID.

Armstrong pointed out that digital currency users are using their crypto with new types of apps online. He also noted that “imagine if every time you wanted to upvote some content on Reddit or transfer an item in a game you were hit with a form asking you to verify a recipient.”

He added:

“Many recipients (in the U.S. or abroad) who value their financial privacy, may simply not want to upload more identifying documents to various companies, which could be hacked or stolen. This additional friction would kill many of the emerging use cases for crypto. Crypto is not just money – it is digitizing every type of asset.”

He predicted:

“Given these barriers, we’re likely to see fewer transactions from crypto financial institutions to self-hosted wallets. This would effectively create a walled garden for crypto financial services in the U.S., cutting us off from innovation happening in the rest of the world. This would be bad for America because it would force U.S. consumers to use foreign unregulated crypto companies to get access to these services. And long term, I believe this would put America’s status as a financial hub at risk.”

He went on to mention that just like the U.S. had benefited from embracing the “open” Internet, it could also embrace the open cryptocurrency networks and let U.S. residents move their funds freely in the nascent cryptoeconomy.

Armstrong claims that if this crypto regulation is actually enforced, then it could be a “terrible legacy” and have “long-standing negative impacts” for the United States. During the early days of the Internet, there had been individuals who called for it to be monitored the same way that the phone companies were being regulated, Armstrong noted. He added that “thank goodness they didn’t.”

He confirmed that Coinbase has sent a letter to the Treasury,  along with several other crypto firms and investors, articulating these concerns while also highlighting some other issues.

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