<html><head><meta http-equiv="Content-Type" content="text/html; charset=utf-8"></head><body style="word-wrap: break-word; -webkit-nbsp-mode: space; line-break: after-white-space;" class=""><div dir="auto" style="word-wrap: break-word; -webkit-nbsp-mode: space; line-break: after-white-space;" class=""><a href="https://medium.com/@stupendous_lawn_gerbil_254/how-to-regulate-crypto-currencies-4c60314f836f" class="">https://medium.com/@stupendous_lawn_gerbil_254/how-to-regulate-crypto-currencies-4c60314f836f</a><div class=""><br class=""></div><div class="">The
rapid growth in crypto currencies has gotten ahead of financial
regulations. Regulators have limited choices: a complete ban, or
historic methods of regulation that are a poor fit with crypto
currencies. This paper proposes a novel approach that leverages the
technology used for blockchain-based currencies to enable oversight
while continuing to enable legitimate transactions with minimal impact.</div><div class=""><br class=""></div><div class=""><p id="c7fc" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">Many
countries around the world are actively looking for ways to manage the
rapid rise in crypto transactions. A large number of these transactions
are funding criminal activities such as the recent wave of ransomware
attacks. The U.S. Secretary of the Treasury, Janet Yellen, spoke on 7
April 2022, promoting the recent Executive Order from President Biden
calling for “a coordinated and comprehensive government approach to
digital asset policy.” 1 A mechanism for regulators to distinguish
legitimate transactions from criminal activity that works at the speed
of blockchain transactions is urgently needed.</p><p id="59e4" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">What is required to regulate crypto currencies? A key part of financial regulation is to <em class="kd">know your customer “</em>KYC<em class="kd">”. </em>All
blockchain transactions are public, with a digital identity tied to
each transaction. But these identities are not always linked to real
identities in the relevant jurisdiction. A mechanism is required for the
appropriate authorities in each jurisdiction to get access to the KYC
information when required. With the transaction information and the real
identity, the existing legal framework can be used to manage fraud and
criminal activity.</p><p id="1c53" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">Crypto
currencies create a virtual world in which its virtual currency value
lives; regulation is part of the real world. The challenge in regulating
is to identify where these two worlds meet. The first interaction point
is in the so called exchanges, where users can exchange between state
issued money and crypto currency. Regulation can be applied to the
commercial entities that operate exchanges. Such regulation could, for
instance, include reporting on anomalous transactions similar to the
anti-money-laundering (AML) requirements for banks.</p><p id="754e" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">The
primary point of engagement between the virtual and real worlds is in
each of the computing nodes that generates transactions and puts them on
a blockchain. These computing nodes are real and operate off of a
common code base, which differs for each blockchain. Operators of the
blockchain nodes are called ‘miners’, and miners are responsible for the
code that they execute. Miners are where the mechanism for regulation
must be implemented.</p><p id="902e" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">The
code base for each blockchain is open source. Authorities can specify
the change in this open source code required to add a KYC mechanism as a
bridge between the virtual world and their jurisdiction. Miners using
code that contains this extension can create blockchains that are legal
for that jurisdiction. Miners that don’t will have the same legal status
as criminals who engage in high-value transactions without proper
reporting. Compliance with this implementation can be seen in the
distributed ledger, which is publicly visible.</p><p id="a253" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">Miners
operate in different locations simultaneously, together computing the
next record to put on the blockchain. Blockchain code includes a
mechanism to move miners to code updates so that new blocks must be
created by with the updated version. In the spirit of the open source
software development a regulator could work with existing developers or
by commissioning a commercial software developer to register as
contributor and have it implement the actual code for the specified
change. Any registered developer in open source project can implement a
code change and then propose the change for adoption. A proposed change
is first balloted by the collective developers to be incorporated in the
code base and subsequently presented for adoption in running code by
the miners.</p><p id="e75f" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">Since
early in the twentieth century withholding tax has been a tool in
managing financial affairs in many countries. Withholding a tax can also
be the basis of regulating cryptos. In this case the withholding can be
applied to each crypto transaction processed. For instance, with a 35%
withholding, 65% of the transaction is transferred to the target account
as usual and recorded in the next block added to the chain, in the same
block the balance is recorded as a transfer into the crypto account for
the regulatory authority in a specific jurisdiction. Withholding part
of each transaction meets a key requirement for the per-miner code to
implement regulatory oversight while allowing the mining process to
continue to operate essentially as before. Legal niceties underpinning
the withholding can be managed according to the best practices in each
jurisdiction.</p><p id="406e" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">To
realize the required code change in multiple cryptocurrencies, it would
make sense for authorities from multiple jurisdictions to cooperate.
This collaboration could be based on an agreed upon common design for
the KYC mechanism. Collaboration on specifying the technical
requirements and sharing the realization burden could be a natural
extension of the long-standing international cooperation in financial
management and criminal justice. Collaboration is not a requirement for
this proposal to be effective. Since crypto code is dynamic,
collaboration can be implemented on any schedule.</p><p id="fd51" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">The
miner code to implement per-transaction withholding is simple: each
transaction is enacted as two distinct simultaneous transactions. The
only visible change is a requirement for the receiving user to specify a
jurisdiction for each transaction. This is, of course, already
mandatory for legal transactions so it is not really a change, just
cryptos catching up with basic requirements.</p><p id="c3b1" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">Each
jurisdiction can then implement appropriate processes for a receiving
party to register its identity using the standard KYC procedures to file
a claim against withheld funds. Once a claim is filed, it can be
arranged to save a link to the provided identity information for use in
subsequent transactions, further reducing the friction in the system.
Along these lines, friction can be further reduced, almost eliminated,
by staying within the crypto currency mindset and create an autonomous,
automated refund mechanism.</p><p id="429f" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">Every
country in the world already has processes and procedures in place
based on their legal system to maintain privacy and security in these
systems, while providing information access to the appropriate criminal
justice and tax authorities. The only groups that will be negatively
affected by this will be criminal enterprises.</p><p id="e60f" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">The
proposed small change to the miner code provides regulators a simple,
secure, and efficient mechanism for compliance by inspecting the ledger
and verifying the provenance of each new block. Crypto-currency
enthusiasts can keep enjoying the benefits of blockchain technology
while complying with standard financial oversight. Individuals and
organizations that fail to comply will pay a severe financial penalty.
And the failure to register will flag these transactions as suspect,
which is a standard requirement in anti money-laundering regulations.</p><p id="0df4" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">The novel points presented here are:</p><p id="2ef7" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">1. Implement regulatory oversight through a code update to the blockchain.</p><p id="1746" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">2. Use withholding to allow transactions at speed, while providing a mechanism for compliance.</p><p id="c551" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">This
approach provides a simple path to bring blockchain currencies into
compliance. By aligning with blockchain technology it works with the
community governance to keep up with transactions. Proven mechanisms
like KYC and withholding fit within existing legal frameworks and
compliance enforcement organizations.</p><p id="3886" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph="">While
this proposal has been created for the purpose of enabling financial
compliance, it should be noted that it would also be suitable for
managing a Carbon Tax.</p><p id="541c" class="jm ju kb jv jn jf ii kc jw jo jg ib jx jp jh jy jq ji jz jr jj gj js jk jt jl ka pw-post-body-paragraph b" data-selectable-paragraph=""><a class="ke au" href="https://home.treasury.gov/news/press-releases/jy0706" rel="noopener ugc nofollow" target="_blank">https://home.treasury.gov/news/press-releases/jy0706</a></p><div class=""><br class=""></div></div><div class=""><br class=""></div><div class=""><br class=""></div></div></body></html>