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Jake Chervinsky and Rafael Yakobi: Swan Signal Live E38

Posted 11/18/20 by Brady Swenson

Jake Chervinsky, General Counsel at Compound, and Rafael Yakobi, Managing Attorney for the Crypto Lawyers, discuss regula­tory arbitrage, new laws affecting Bitcoiners, and the biggest regula­tory threats to Bitcoin. 

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00:00 Introduction 

05:30 New Bitcoin Regulations 

08:21 Travel Rule Implications 

11:55 FINCEN Proposals and Concerns 

13:53 Lowering Thresh­olds v.s Expanding Requirements 

16:07 Poten­tial Problems with New Rules Requirements 

18:00 Effects on Finan­cial Privacy 

22:08 FATF Function­ality and Global Impact 

27:45 Bitcoin and Legal Attack Vectors 

34:50 On the Topic of Privacy 

47:00 Privacy and the Light­ning Network 

51:07 The War Against End-to-End Encryption 

54:00 Cypher Punks Write Code 

59:39 Legal Action Against BitMEX 

1:10:00 Closing Thoughts 

1:13:36 SSL Sign-Off


Brady Swenson:

Everyone, welcome back to Swan Signal Live. It’s another Tuesday. It’s another day for talking Bitcoin here on Swan Signal Live. This is a produc­tion of, the best safest and easiest way to stack sets. This course is a weekly show, and it’s brought to you by Swan Bitcoin, and we put together guests for compelling discus­sions. We’ve got two great guests for you today to talk about Bitcoin and law. This is something that we don’t talk about enough as Bitcoiners. We’re going to get into a great conver­sa­tion. There’s going to be a lot to learn for me and for you as well. Before we dive in, let’s talk a little bit about Swan. We’re going to check in quickly. We have lots going on at Swan. We just launched Bitcoin TV last week.

You’ll find that at, or on our YouTube channel at We have over 10,000 unique viewers of it so far just in the past week. There’s usually about 50 Bitcoiners hanging out there, chatting and watching what we have on. We are adding new content to it all the time. We’re finding the best stuff avail­able on the web, curating it, organizing it, putting it together in an order that we think makes sense. We have some fun like hype videos that run in between amazing videos by Alex Glads­tine and Safa Dean and all the great Bitcoin thinkers and speakers out there. Tons to learn. It’s fun just to lay back and watch and learn and absorb all that great Bitcoin contents.

In Q1 next year after we get this thing nailed down, we’re going to launch on Pluto TV, Roku, and Samsung, over the top TV networks like those. I can’t wait to see what becomes of Bitcoin TV, really excited about it. We have lots going on in the product as well. By now, we’ll be launching soon of course. We have been the way to stack sets, is what we were focused on is just steady accumu­la­tion of Bitcoin, and that is not going away. That is still the best way to invest in Bitcoin over time for 99.9% of you. If you are not a profes­sional trader, you should not be trying to time the market and stacking set steadily is the way to do that. But every now and then you want to add a little bit to that stack. You want to buy right now.

So we’re going to add that buy now button. You can join in as a Swan member and help us test that out at Sign up for that beta. All right, stay tuned. We have lots of other exciting product announced coming the next few weeks. There’s a lot going on. We’ll keep you informed here. All right, let’s dive into this episode. Today we have Jake Chervinsky and Rafael Yacobi with us. They’re both lawyers who are experts on laws and regula­tions applic­able and adjacent to Bitcoin and cryptocur­rency. As I said at the top, in general, we as Bitcoiners, we talk a lot about the economics and technology of Bitcoin, the poten­tial benefits for society but, and I’m sure both of our guests will agree, we don’t as Bitcoiners talk or think enough about the legal and regula­tory environ­ment in which it exists. That’s what we’re going to do today. Jake, Rafael, welcome to Swan Signal Live.

Jake Chervinsky:

Thanks for having us.

Rafael Yakobi:

Yes, thank you for having us.

Brady Swenson:

Absolutely. Jake, it’s been a big year for Bitcoin in general, also a big year in terms of devel­op­ments in the legal and regula­tory frame­work that it lives within. Lot has happen, positive that we can construe positively in the United States with govern­ments warming up to Bitcoin in various ways. Also, some looming possible negatives out there as well. I want to talk about all of those today, but let’s start off with the big thread that you dropped. It’s got one and a half … 1.6 thousand likes. I think it was super infor­ma­tive, and it’s something that we need to talk about here because it’s flown under the radar for a lot of Bitcoiners and I’d love to get into the details here. We are set up with this travel rule sugges­tion, or I guess a recom­men­da­tion, from the FATF, the Finan­cial Action Task Force, and we had to first of all get into what the hell that is and how it came to be. Then talk about this travel rule and how it might apply to Bitcoin.

Jake Chervinsky:

Yeah, definitely. There’s a lot to unpack here, but let me try to set the stage a little bit for why this issue is so impor­tant. I think we’ll all agree that Bitcoin is funda­men­tally impor­tant because it’s an asset that we can hold on our own without having to rely on trusted third parties to create it, to store it for us or to process trans­ac­tions for us, right? This is why we always say not your keys, not your coins. You want to take posses­sion of your own Bitcoin so you don’t have to rely on any trusted third parties. Without that core concept, Bitcoin isn’t really worth a whole lot. What we don’t want, although we love insti­tu­tions like Swan Bitcoin, we don’t want to have to rely on them to hold our assets, our Bitcoin for us or process Bitcoin trans­ac­tions for us.

The thing is that concept of a peer to peer electronic cash system is somewhat incon­sis­tent with the regula­tions that apply to tradi­tional finan­cial insti­tu­tions. We’re talking about the Anti-Money Laundering and Countering the Financing of Terrorism regula­tions, which essen­tially require regulated finan­cial insti­tu­tions to conduct finan­cial surveil­lance over all of the trans­ac­tions that they process for their customers, and also to perform customer due diligence. KYC is how it’s usually referred to, know your customer require­ments, where those insti­tu­tions have to figure out who their customers are in the first place. Unless you comply with all of those require­ments, then the finan­cial insti­tu­tion could violate the law and be in trouble with an enforce­ment agency like FinCEN, the Finan­cial Crimes Enforce­ment Network here in the United States.

What we’ve been seeing recently, and this is what motivated me to write that thread to let everyone know what’s happening in the regula­tory world right now is some interest among regula­tors in restricting the ability of customers of those finan­cial insti­tu­tions to withdraw their Bitcoin from the exchange or from a custo­dian to their own wallet where they can actually own and hold their own keys. So we can get into a little bit more about the technical issues and how this is rolling out, but really the problem that we’re starting to run into is regula­tors being concerned about self custody and privacy, and as a result, consid­ering some new regula­tions that would make it harder or even impos­sible for people to hold their own keys.

Brady Swenson:

Rafael, what was your reaction to this poten­tial travel rule situa­tion and its impli­ca­tions on Bitcoiners’ self-custodying and self sover­eignty, which is why a lot of us are here?

Rafael Yakobi:

Sure. Well, I think Jake put together a really good background that helps provide a lot of good context here, but just it might be worth repeating gener­ally what the travel rule is. The travel rule applies to trans­ac­tions between finan­cial insti­tu­tions, and Jake feel free to correct me on any of this, but it applies specif­i­cally on trans­ac­tions taking place in between finan­cial insti­tu­tions and requires that, under certain condi­tions, they have to collect infor­ma­tion and share infor­ma­tion in between insti­tu­tions. FinCEN is in the process of putting forth proposed rule making which would change the rules and reduce the threshold for when the travel rule applies to $250 for inter­na­tional trans­ac­tions down from $3,000. I think it’s a concern, but I may … I see some silver lining in reading the proposed rule making because they talk about that … Of course, the lower threshold is negative and hard to justify for me.

I mean, I really can’t see what people would be doing with $300 that could be so bad that dragnet surveil­lance is neces­sary. But one thing I remember reading in the proposed rule making is that there would be this reason to know standard, which would mean that it’s not like the insti­tu­tions have to collect all this infor­ma­tion for every trans­ac­tion, for every wallet all the time. It would only apply if there’s a reason to know that this is an inter­na­tional trans­ac­tion. Now, this isn’t saying that this is a good idea, but this is just trying to, well, find some silver lining there. Given that there’s going to be this reason to no standard, it’s like there’s going to be some plausible denia­bility for exchanges and for any finan­cial insti­tu­tion where if you’re withdrawing Bitcoin to your own wallet, for example, the travel rule doesn’t apply anyway.

So they would have to have some reason to know that you’re sending money inter­na­tion­ally, and from user’s point of view, you can just withdraw Bitcoin to your own wallet, right? Then the travel rule doesn’t apply anyway. Even if you’re going to send it inter­na­tion­ally after­wards, you should always just withdraw to your own wallet, and then wherever you’re going to send the money, the Bitcoin after­wards, just send it there from your own wallet. Obviously some exchanges will be tracking what you’re doing, but it won’t be their respon­si­bility anymore. So it’s also worth keeping in mind that this proposed change isn’t specific to crypto. They did mention crypto and say that it does apply to crypto as well. But this is for finan­cial insti­tu­tions in general, and with tradi­tional finan­cial insti­tu­tions, you’re telling them who to send the money to.

So they’re always going to know if it’s inter­na­tional, almost always, right? Either you’re sending it to an account number at a bank, in which case they know it’s an inter­na­tional bank, or you’re giving them an address or you’re giving them the person’s name and social security number or whatever it is, right? So I don’t see it changing so much immedi­ately for crypto. Of course, it might be evidence of bad things to come in the future and it’s very incre­mental. There’s risks down the line, but I don’t see this partic­ular change for a lot of Bitcoin businesses making too much of a differ­ence, mainly because you can just withdraw to your own wallet, which you should just do anyway.

Jake Chervinsky:

Yeah. I think that’s right. Just to make sure we’re clear about exactly what proposals and poten­tial regula­tory changes we’re talking about, I want to be clear about what Rafael is describing and then what the bigger concern is that may come down the road but it isn’t being consid­ered right now. Rafael was talking about a current notice of public rule making that FinCEN issued saying that they want to change the travel rule to reduce the threshold for the require­ment of sending infor­ma­tion about the customer and the nature of the trans­ac­tion between finan­cial insti­tu­tions from $3,000 down to $250. What that means is let’s say you want to send Bitcoin from Swan Bitcoin to some other exchange or some other custodian.

Swan Bitcoin, as a regulated finan­cial insti­tu­tion, is required to send infor­ma­tion about you, the person sending your Bitcoin, and some other infor­ma­tion about you to that other finan­cial insti­tu­tion which will then be required to maintain that infor­ma­tion. That’s part of the way that the anti-money laundering regula­tions ensure finan­cial surveil­lance over all kinds of trans­ac­tions no matter where in the world these finan­cial instru­ments move, whether it’s Bitcoin or something else like US dollars in a tradi­tional bank account. Honestly, I agree with Rafael. I don’t think that’s that big of an issue. I do think that it’s the wrong direc­tion. I think what that does is it expands the amount of finan­cial surveil­lance that regula­tors are doing by capturing trans­ac­tions that are of a much lower dollar value and pose much less money laundering or terrorist financing risk.

Basically what we’re doing by agreeing with that reduc­tion in a threshold is saying we’re going to give the govern­ment way more infor­ma­tion about us and about our finan­cial trans­ac­tions, we’re going to sacri­fice our privacy to some extent, without really having a whole lot of benefit for the govern­ment in terms of them trying to detect or prose­cute crimes or terrorist activity. But honestly, it’s not that big a deal because, like Rafael said, you can and should withdraw your Bitcoin to your own wallet anyway, right? Not your keys, not your coins. The bigger question is whether regula­tion will stop with just lowering that threshold, but still saying the travel rule only applies to trans­ac­tions between finan­cial insti­tu­tions, or whether the next thing the regula­tors will do right next year or in two years, or at some point down the road, is say, “You know what? We actually want to expand the travel rule as well.”

We want to change it to say even if you are conducting trans­ac­tions between a finan­cial insti­tu­tion on one side and a self hosted wallet, like a hardware wallet or a paper wallet, or some way in which you, the user of Bitcoin is going to hold your own keys, they might say, we think that those regula­tions should apply there as well, and the user should somehow prove that they own that hardware wallet, or we should be able to monitor or surveil trans­ac­tions with that hardware wallet or paper wallet, or what have you. That’s not something that is required currently under US law. It is unfor­tu­nately something that we’re seeing happen in some other jurisdictions.

So in Switzer­land, for example, the Swiss govern­ment is now requiring Swiss finan­cial insti­tu­tions to switch Bitcoin exchanges and custo­dians to verify the owner of a self hosted wallet before they allow trans­ac­tions with that self hosted wallet, which I think is very much a restric­tion on the freedom of users and customers of those exchanges and custo­dians that we shouldn’t put up with. Just today we saw the Nether­lands imple­ment a similar require­ment. My fear and the reason that I wanted folks to start thinking more about that issue is that that could become a global standard so that you, as a customer of Swan Bitcoin, will have to prove that your ledger hardware wallet or your treasure or whatever you have belongs to you just in order to take posses­sion of your own Bitcoin, and that’s a problem.

Brady Swenson:

That is a big problem poten­tially. That’s happening already in Switzer­land. Swiss Bitcoiners have to basically proclaim and attach their identity to specific wallets addresses. How are they imple­menting it? Do you know?

Jake Chervinsky:

Yeah, so what the require­ment says is the exchange has to, “Verify the benefi­cial owner of the unhosted wallet.” That’s the word that they use to describe someone’s own wallet. The problem is there isn’t really a clear way that an exchange can do that, right? How do I prove to you that my hardware wallet belongs to me or that I’m in posses­sion of it and not somebody else. The unfor­tu­nate result of this in Switzer­land is that exchangers have basically said, “We don’t know how to comply with this require­ment. So we’re just not going to allow any trans­ac­tions with self-hosted wallets. It’s easier that way, and then we don’t have to worry about compli­ance.” What that means is Bitcoin is essen­tially stuck in a custo­dial world where customers of those exchanges can not take posses­sion of their own Bitcoin.

In the Nether­lands, I think there was an exchange today that announced that they will allow people to take a picture of their wallet and then sign a message from the address that they want to withdraw to. So maybe that works, but I think it’s very unclear. For me the concern is this is really just a smoke screen for govern­ment trying to stop people from taking posses­sion of their own Bitcoin, and it sounds like, well, all you have to do is verify the benefi­cial owner of the hardware wallet. There must be a way to do that, but they know it’s really very diffi­cult and it will result in fewer people taking owner­ship of their own Bitcoin.

Brady Swenson:

Inter­esting. Rafael, this is really concerning poten­tial attack vector against Bitcoin’s propo­si­tion as money that’s outside of the legacy finan­cial system and their control. Do you see this happening? What are the prospects for this happening in the United States, do you think?

Rafael Yakobi:

Well, I thought it was inter­esting that I didn’t know too much about how the Swiss firms were reacting to this rule, but I thought it was inter­esting that you said that they’re not allowing withdrawals to self-hosted wallets, at least temporarily because we had a similar situa­tion here with the travel rule where even though it seems relatively clear that it applied to crypto, there wasn’t any way to comply with it for exchanges, right? There’s various compa­nies and collab­o­ra­tions that are working on solutions, but the response here was just not to do anything, right? If you didn’t have a means to be able to know where the Bitcoin is going and who to send the infor­ma­tion to, if you’re supposed to send infor­ma­tion to another exchange, you just don’t do it because there’s no tools to do it, there’s no mecha­nism for doing it.

I think that’s a reflec­tion of our rebel­lious American spirit, which I’m very happy about, that the response was to ignore rules that are impos­sible to comply with instead of burdening the users with the punish­ment of not being able to comply. But as far as seeing that happen here, well, I can’t say that I’m super optimistic about the future of finan­cial privacy, but I don’t see the same kind of interest and willing­ness here for that immedi­ately, although it seems like it’s the logical exten­sion of what other nations are doing and your privacy is bad according to the govern­ment, basically. If your privacy is bad, then you shouldn’t have it and you will not have it. That’s the direc­tion that we’re heading.

How soon that will happen and how it will happen is a little bit more challenging to predict. But I do want to give FinCEN some credit for knowing what they’re talking about, for the most part, in the guidance that they’ve put out, which shows that they, at least to me, under­stand how Bitcoin works relatively well. There were some things about the guidance that they put out that maybe were contra­dic­tory or didn’t make as much sense as they could. But in general, they were able to recog­nize things like the differ­ence between anonymized cryptocur­ren­cies and Bitcoin and self-hosted wallets and custo­dial wallets. I’m happy about the fact that they under­stand what they’re talking about, and the hope is that they can get the right infor­ma­tion to make logical, thoughtful decisions

In general, although the US leads the inter­na­tional push against finan­cial privacy, I still have some faith that they’re not going to rush through some kind of new rule that is going to be extremely problem­atic for the industry, but the trend is still the same, right? Incre­mental decreases in your privacy and the fact that the finan­cial thresh­olds that usually apply to these kinds of rules never change. So even though we have infla­tion, they never seem to be adjusted for inflation.

Meanwhile, the penal­ties, for example, that you get for noncom­pli­ance are adjusted for infla­tion, which I thought was an inter­esting contrast. I mean, I think it’s been a while since I read about it, but I think that the $10,000 rule for currency trans­ac­tion reports has been the same for I don’t even know how many years, right? The value of that infla­tion adjusted dollars is five times as much. It used to be, if you went into a bank and you deposited 60 grand, for example, that they would have to make a report, and now it’s 10 grand, right? Now they want to reduce the travel rule to 250. I mean, it’s absurd. What can you get for 250 bucks anyway?

Brady Swenson:

Yeah. Yeah. I’m curious to know what is the Finan­cial Action Taskforce, and how did it come to exist? It hasn’t been around forever. It seems to be … I think, when I looked it up on it, it’s been around for 20 years or something. I mean, are these just recom­men­da­tions being issued by a group of countries, repre­sen­ta­tive of certain countries? Then how often are these sugges­tions actually adopted by the countries? Is there any incen­tive or disin­cen­tive for people to … for these countries to adopt the recom­men­da­tions from the FATF?

Jake Chervinsky:

Yeah, so the FATF, the Finan­cial Action Task Force is an inter­na­tional standard setting body that has about 40 odd, a few more than that, member juris­dic­tions. It’s basically a group of countries that get together to talk about what best practices are and what the industry standards should be for anti-money laundering regula­tion. It’s impor­tant to note that the FATF doesn’t make the law, it just makes recom­men­da­tions for what its member juris­dic­tions should or should not do with their own laws. I’m not totally sure about exactly how it arose, what the details are around that, but I will tell you that as the finan­cial system has become digitized in the last few decades, there has been a lot more atten­tion paid to anti-money laundering regula­tions and bringing as much of the world’s finan­cial system under the scope of finan­cial surveil­lance as possible.

The FATF is part of that effort to make sure that there aren’t, for example, offshore banking havens like there was for quite a while in Switzer­land, where people can escape this realm of finan­cial surveil­lance and hide their assets from either tax author­i­ties or from law enforce­ment. The FATF basically makes recom­men­da­tions for what its member countries should do. Not all of the member countries agree with what the FATF’s recom­men­da­tions are. Also, the FATF makes its decisions based on the repre­sen­ta­tives who are sent to the FATF by the member countries. So it’s the treasury depart­ment here in the United States that sends a repre­sen­ta­tive to the FATF to try to work out what these industry standards should be.

The thing is some of those standards are legal changes that have to go through Congress in the US, right? That the treasury depart­ment can’t imple­ment on its own. Sometimes you would need the House and Senate to agree on some type of change in order to bring the US into compli­ance with a FATF recom­men­da­tion that Congress might not agree with treasury about, or the treasury, frankly, might be in the minority among FATF and not agree with what FATF’s recom­men­da­tion is. While the FATF is very impor­tant in making recom­men­da­tions that we assume are going to end up the global industry standard, it isn’t the be all end all for what the law will be in any partic­ular country.

I think here in the US, frankly, we put more of a premium on individual liberty and on finan­cial freedom than some other countries do. I think, frankly, it’s a lot easier for some European countries, a country like Switzer­land, to have an onerous restric­tion on exchanges that elimi­nates the possi­bility of people taking posses­sion of their own assets that they should, by all rights, be able to control however they want because they own those assets. I think that might be harder in the US than it is in some other places.

Brady Swenson:

Well, that’s good to hear, and that thanks for laying out to me. I wasn’t exactly sure how the FATF worked. Do they have any mecha­nism by which to compel nations to adopt one way or the other? Or is it just by group, I guess … I mean, it’s just peer pressure almost, is what I guess what I’m looking at. Is that how this work?

Rafael Yakobi:

Yeah. I could speak to that just a little bit. So they keep various lists of countries, and then if you don’t do what they want, then they put you on the bad list. Then if they put you on the bad list and there’s this social pressure or some kind of finan­cial pressure where if you’re on the bad list, then you can’t make deals or do finan­cial trans­ac­tions with another country that has agreed not to do deals with people that are on the bad list. Right?

Brady Swenson:

Got you.

Rafael Yakobi:

So you’re limiting the finan­cial oppor­tu­ni­ties for the citizens of your nation if you don’t comply. Right? I thought it was inter­esting that they have a presi­dency that switches every year or two years or something like that, and their last presi­dent was from China, who is the last country that I would want in charge of any kind of surveil­lance program, although I don’t doubt their effec­tive­ness. That’s why I don’t want them to charge because they’re a little bit too into it.

Brady Swenson:

Yeah. I mean, I think that’s probably like most nation states these days. We are in a world now where we are seeing more and more finan­cial regula­tion, more and more I guess using the finan­cial system as a way to spy on people, as a way to enforce behav­iors and laws. We, as Bitcoiners, look to Bitcoin as a beacon of hope for a way to opt out of a finan­cial surveil­lance system, it seems that we will get the full brunt of the finan­cial … the finan­cial govern­ment complex coming down on Bitcoin. As you guys are … I would assume that this would happen mostly through regula­tory frame­works and legal and regula­tory frame­works as that is the probably most effec­tive way to attack something like Bitcoin or free money like Bitcoin. Jake, what do you think is the … I mean, this is one rule, the travel rule is one. But what are some other vectors of illegal attack on Bitcoin?

Jake Chervinsky:

Yeah, I think that’s right. I mean, I do think that it will be harder for regula­tors and policy makers to attack Bitcoin than we might be making it sound, right? I will freely admit that I’m a little bit of an alarmist on this issue, because I think it’s so impor­tant, it’s so existen­tial to the point of Bitcoin that it’s worth being a little bit alarmed about.

Brady Swenson:

Sure sure.

Jake Chervinsky:

There are other people who will tell you, right, it’s not quite so much of a worry and the policy­makers are less likely to attack. I just want to put some minds at ease in case folks are worried about that. I do think that the world of Bitcoin that a critical hostile govern­ment would accept is a world of forced Bitcoin banking, where you basically treat Bitcoin just like the US dollar where trans­ac­tions are only allowed between regulated insti­tu­tions, where because Bitcoin users don’t control their own private keys, the govern­ment can censor trans­ac­tions, can surveil trans­ac­tions, will know the identity of all of the users of Bitcoin. Now, is this actually possible? I would say as a practical matter, of course it isn’t, right?

The govern­ment can’t regulate Bitcoin, but blockchain, and there will always be people who use it outside of a finan­cial system that has the stamp of approval from govern­ment. But I do think that what we would look at is, number one, these restric­tions on allowing people to take Bitcoin off of custo­dial platforms and into their own wallets, that could look like the travel rule imple­men­ta­tion that we were just talking about where an exchange has to verify the owner of the hardware wallet which might discourage some folks from withdrawing Bitcoin. It also might give the govern­ment an upper hand in tracing trans­ac­tions on the Bitcoin blockchain, which is a separate issue that we should get into, the blockchain analytics question.

It also could look like restric­tions on the amount that you can withdraw in a given day or a given week. We actually see some compa­nies that impose restric­tions right now. Cash App, for example, I think only allows a few thousand dollars of withdrawals per week. It could be something that looks more like that. It could be a reporting require­ment. So the govern­ment could say that every time an exchange allows a withdrawal to a self-hosted wallet, they have to file a report with the govern­ment telling the govern­ment that this has happened and who the person was and how much they withdrew or something of that nature. I think those are all the attack factors that we would imagine.

I don’t think that we’re in a world where govern­ment would ever try to ban or illegalize posses­sion of Bitcoin. I just think that that adoption is too widespread now, right? We have too many hedge fund managers and investors and pension plans and folks who are excited about and inter­ested in buying Bitcoin for us to have a 6102-like event, right? 6102 refer­ring the execu­tive order where posses­sion of gold was illegal­ized in the 1940s. But I do think we could see an effort to create basically a wall to garden where Bitcoin is just another finan­cial instru­ment that govern­ment can control just like any other, and that’s what we have to watch out for and advocate against.

Brady Swenson:

Yeah. Rafael, anything to add to that? So some color or some other ideas for attack vectors?

Rafael Yakobi:

Sure. I think those are all great points, and this might sound strange, but I’m hesitant to speak my night­mares out loud because I don’t want to give anybody any sugges­tions. I mean, I under­stand it makes sense to prepare for what might happen, but part of me feels like there’s some kind of strategic advan­tage to not telling our enemies, you could call them, exactly how they can defeat us, so to speak, and maybe that’s me speaking more as a Bitcoiner than a lawyer. But I’m skeptical about that, and what I try to think about and focus on might be more best practices that you can take given the current situa­tion, right? Rather than outline the worst case scenario, but Jake has done a good job of covering that, although there’s one or two terrible things I can think of that I don’t even want to talk about.

We’ll have to just let those ruminate. But as far as best practices, since it’s still respon­sive to the question hopefully, you had mentioned earlier about Bitcoin being a way to escape finan­cial surveil­lance. I actually don’t know if that’s what Bitcoin is able to do. I mean, it can under certain circum­stances, depending on how you use it. For example, if somebody pays you in Bitcoin, there’s no reporting oblig­a­tion. You don’t have to collect their infor­ma­tion, right? Just the same way that if you go to a store and buy some food, there’s no real infor­ma­tion collec­tion happening there. That way, you can use it relatively privately, right? Yu can use CoinJoin or things like that. But if you’re going to interact with finan­cial insti­tu­tions and tradi­tional fiat on-ramps, then Bitcoin is not the way for privacy, right?

I don’t know that Bitcoin was designed to solve that issue, or this has obviously been an ongoing debate about Bitcoin privacy, right? Whether or not it should have been more private or how can we make it more private and what problems is it really solving? It certainly solves, to me, the scarcity problem, right? And not being able to be debased. That part is set in stone for practical purposes and very clear, but it’s not clear to me that Bitcoin is the way to get finan­cial privacy, although it certainly is better than fiat currency in that regard. But, well, I would say I would encourage people to earn Bitcoin, not to discourage them neces­sarily from using Swan. Swan is cool, but if you want to opt out, then you need to opt out and not interact with entities that are under the control of govern­ment and effec­tively agents of the govern­ment for purposes of infor­ma­tion collection.

Brady Swenson:

Sure. Yeah. You bring up a good point of discus­sion that I want to get into, which is privacy, and Jake was refer­ring to it earlier with the blockchain analytics. I know both of you have done work in this area and studied it, and I would love to dive into that conver­sa­tion now. I saw in … I think it was a BIS report in that thread that you posted Jake. They referred to a set of cryptocur­ren­cies called Anonymity Enhanced Cryptocur­rency, AEC. It’s a way to separate something like Monero, I suppose, from Bitcoin. They also claim in that same report that full anonymity is not possible.

Just flat out say that, right? Bitcoin is not completely anony­mous. It is pseudo­ny­mous blockchain analytics to allow law enforce­ment to enforce laws through the tracing of trans­ac­tions. We’ve seen it happen over and over again. There’s many high profile cases we can point to. First of all, do you think that Bitcoin would be in a much different position now from a regula­tory stand­point in terms of its relation­ship with the law and the govern­ment if it were fully anony­mous on the base layer?

Jake Chervinsky:

Yes. Unequiv­o­cally definitely yes, and I think it’s impor­tant to know there’s basically two main concerns that govern­ments broadly speaking have about Bitcoin. One is the threats to their monetary sover­eignty, right? The idea that Bitcoin is going to supplant the US dollar as the global reserve currency, and it’s going to destroy the value of all fiat curren­cies, right? Bitcoin is a black hole that sucks in all value, right? We all, I think, are pretty inter­ested and excited about that idea. Govern­ments, frankly, just being honest, they don’t take that seriously. They’re really not very worried about Bitcoin being a monetary sover­eignty issue. They’re actually more worried about stable coins like Tether or USDC as a monetary sover­eignty threat. So set that aside for a second.

The second biggest concern that they have though is this money laundering and terrorist financing risk, right? They’re concerned that they cannot control the flow of funds between individ­uals, right? The censor­ship resis­tance and also the privacy that a public blockchain like Bitcoin can enable. They want to know who has money, they want to know where they’re moving in, they want to be able to stop those trans­ac­tions, and they want to be able to seize those assets whenever and wherever they please, when they think that there’s some illicit activity going on. That’s what they’re really worried about when it comes to Bitcoin. The thing is, as you said, Bitcoin really isn’t that private.

There are ways of trying to obscure trans­ac­tions in Bitcoin like CoinJoin. The truth is, and again I hate to be the bearer of that news, analytics compa­nies are actually very good at unwinding CoinJoin and other types of mixing trans­ac­tions. It’s really not private. Because of that, govern­ments tend to be much more concerned about other cryptocur­ren­cies that really are private, right? Things that they really cannot trace. Basically, that comes down to Monero and shielded Zcash trans­ac­tions. Those are the ones that they’re most concerned about. What we see is attempts by govern­ment to limit access to those cryptocur­ren­cies, even in this world of walled garden of regulated finan­cial insti­tu­tions that still have to do customer due diligence and trans­ac­tion monitoring.

What happened, that you refer­enced, I wrote about in my thread, was the Depart­ment of Justice basically saying to exchanges in slightly different words, but the point being, we do not think that you can comply with the law if you allow access to “anonymity enhancing cryptocur­ren­cies.” Then as you mentioned, the BIS, in talking about CBDCs, Central Bank Digital Curren­cies, basically said anonymity is a non-starter. We cannot have anonymity because we need to know who is trans­acting and be able to trace their trans­ac­tions and stop them from commit­ting crimes. I do think, if Bitcoin were more private, we would see that same kind of approach from the Depart­ment of Justice, which is to say, we’re just not okay with this technology existing, and we’re going to try to stamp it out wherever we can.

To be honest, that’s what they’re trying to do with end-to-end encryp­tion. Not to go on for too long, but recently the five eyes, which is a group of five different countries that cooperate on surveil­lance matters, recently put out a state­ment basically attacking encryp­tion, the very concept of it, almost as a throw­back to the ’90s crypto wars. We still haven’t resolved that question about the ability of people just to use end-to-end encrypted systems.

Brady Swenson:

Yeah. Rafael, do you want to comment on the question about Bitcoin and its base layer and privacy level and whether or not that’s basically the reason that Bitcoin still exists? I feel like it would have been attacked a lot earlier and a lot harder way more like Monero than it is. Then let’s talk a little bit more about this end-to-end encryp­tion thing, but first are comments on Bitcoins base layer and privacy.

Rafael Yakobi:

Sure. I was thinking through it while you guys were talking about how things would have been if Bitcoin was totally private, right? Manda­tory on chain privacy, like Monero but without Monero’s scaling problems or being able to … challenges with verifying the total supply or infla­tion bugs, things like that. Right? If Bitcoin was just like Monero minus those issues. Right? It seems like it would have a lot more negative publicity and probably a number would probably not go up so much. That would be my guess as the differ­ence. Right? There’d be less exchanges avail­able, less insti­tu­tional adoption, right? I don’t know that it would have failed. I mean, Monero has managed and in spite of this poten­tially bad publicity, but it certainly wouldn’t be as widely accepted as it is now.

That being said, I did want to make a comment about the blockchain surveil­lance compa­nies and CoinJoin. I’m not a technical expert on this and neither is Jake, although he might know a lot about it. But there’s two points to make there. One is, I don’t know that we’re always able to know for sure how well the blockchain analytics compa­nies are doing, right? Because their claims about their abili­ties to track and trace things are a little bit self-inter­ested, right? If they proclaim what a good job they’re doing, then it can help them sell their services to their poten­tial customers and to govern­ments and anyone else who might want to buy them. Right? Obviously if they said, “Well, we really can’t trace certain kinds of trans­ac­tions,” then their services are not that valuable.

I’m not in a position to do blockchain analysis myself to debate how effec­tive they are, but that’s something that I just keep in mind when I read press releases like we can track Monero or whatever, which I remember saying and I don’t know if there’s any truth to that at all in practice. But as far as CoinJoin goes, that’s certainly a hot topic and I’ll leave that to lots of other people that love debating about it. But I’m hopeful and confi­dent, sort of confi­dent, that the tech will remain ahead of the law and will remain ahead of the people trying to track it, right? I’m hopeful that people that build tech are able to build inter­esting creative innova­tions that take time to unwind before they get found out.

I’m optimistic that they can stay perma­nently ahead of the chain analytics compa­nies. Now, of course not many people use these things, and that might be part of the issue of why they’re not getting a lot of atten­tion from the govern­ment and why although some exchanges have made some state­ments about them that it’s not a widespread policy of banning CoinJoin trans­ac­tions or anything like that. We haven’t gotten to be able to test that at the forefront yet. I think if those things become widely adopted then we’ll see how much of a big deal they really are.

Jake Chervinsky:

Yeah. Rafael is right to point out that I am definitely not a technical expert on this, and definitely the analytics compa­nies have an incen­tive to claim that they can trace every trans­ac­tion on any public blockchain, including Monero, and that’s not true. I think Monero actually does have quite robust privacy. But I will also tell you that I’ve heard, not just from the analytics compa­nies, but from some enforce­ment lawyers and inves­ti­ga­tors who will tell you off the record that they can easily trace coins through a CoinJoin trans­ac­tion if it’s done only once. That’s not to say that you can’t get privacy on the Bitcoin blockchain, but I do think we would have seen a lot more aggres­sive enforce­ment and a lot more onerous regula­tion if Bitcoin was robustly private in the way that Monero is.

We see that in two ways, two ways we know that that’s true. One is we see the Depart­ment of Justice making this very aggres­sive state­ments about what they call anonymity enhancing cryptocur­ren­cies, and they do not include Bitcoin in that set. They ban struct exchanges basically. You should be very careful about thinking through whether you can comply with your anti-money laundering compli­ance oblig­a­tions if you’re offering these anonymity enhancing cryptocur­ren­cies. In other words, you absolutely should not offer them, and we saw ShapeShift, for example, a delist Monero and Zcash. I think it was last week, or maybe earlier this week. The other thing we see is we do see aggres­sive enforce­ment of central­ized mixing services.

For example, there was a guy, I think his last name was Harmon, who was running a mixing service called Helix that was mixing coins used on AlphaBay, a dark net market. If you’re running a central­ized mixer, then you absolutely can provide privacy because essen­tially you’re a finan­cial insti­tu­tion taking posses­sion of other people’s Bitcoin, and then you’re mixing them up and you’re sending them out to other people, only you know who is Bitcoin belongs to who, and we have seen the US govern­ment crack down on those central­ized mixing services that have not complied with the Bank Secrecy Act for the very reason that they do actually provide privacy somewhat unlike just purely on chain proto­cols like CoinJoin. So there is a differ­ence there.

I do agree with Rafael that this will change as time goes on, and I do think that it’s a race to see, right? How good the privacy technology becomes versus how effec­tive the analytics compa­nies can be. Eventu­ally, we will live in a world where there are private peer-to-peer trans­ac­tions. I think it’s incum­bent on us as lawyers and advocates to make the argument to govern­ment why that’s okay. Why? Just like they allow with paper cash, which is absolutely private, they should allow digital cash trans­ac­tions and preserve privacy has an impor­tant, funda­mental right even if there are some concerns from a law enforce­ment perspec­tive and that’s a separate but I think extremely impor­tant part of this.

Brady Swenson:

Yeah. I love hearing that. I mean, it’s fantastic points and I think cannot be overstated. I think we need action on Bitcoiners to carry this flag as well, but also policy­makers and lawyers such as yourself. Well, okay. I have three things that I want to get to, but before we move off this because I think this question keeps popping into my head as we talk about privacy enhancing trans­ac­tions and cash, it’s the Light­ning Network. Has there been any peeps at all? Have there been any peeps at all in the legal and regula­tory area about the legality of peer-to-peer trans­ac­tions and privacy on the Light­ning Network? Either one of you, sorry.

Rafael Yakobi:

You can go ahead, Jake, if you have thoughts on that.

Jake Chervinsky:

I haven’t heard anything about it. The only thing I can add on that is there’s been a concern for a while about, in just the layer one Bitcoin context, whether a miner is a money trans­mitter, right? In theory, a miner is processing trans­ac­tions on behalf of other people. If FinCEN want it to be totally crazy, they could say miners are regulated finan­cial insti­tu­tions that have to register and report, which is insane, and FinCEN has not said that because it’s insane. In the Light­ening context, there’s the same question, right? As a node operator and Light­ening or money trans­mitter, the argument is maybe a little bit more problem­atic than it is for a miner because coins actually do pass through Light­ning nodes, but FinCEN hasn’t taken any action on that, and they’ve had every oppor­tu­nity for years to crack down on Light­ening if they wanted to and they haven’t. I think that’s a good sign. But that’s all I’ve heard, and I wouldn’t swear to the fact that we shouldn’t be concerned about what may come next.

Brady Swenson:

Becky just sent me an article in the chat that is titled The IRS Offers a $625,000 Bounty To Anyone Who Can Break Monero and Light­ening. It looks like this is on the IRS’s radar.

Rafael Yakobi:

Yeah. I’m guessing that this probably … I remember reading it I think earlier when it came out, but this is probably from the criminal enforce­ment divisions inves­ti­ga­tory depart­ment, right? That is working on specific inves­ti­ga­tions and wants help, and is willing to pay for compa­nies that are able to help them work on this. Although, they might want it for the broader purpose of addressing things, but not too surprising. Although I’m not an expert enough on Light­ening to know how much privacy Light­ening even provides to begin with compared to on-chain trans­ac­tions, my under­standing is that not that much.

Brady Swenson:

Well, they are onion routed, the trans­ac­tions are. It has the same privacy technology that Tor uses baked into the protocol itself. It is much more privacy conscious as a protocol than in the base layer is. It’s certainly attempting to provide private cash trans­ac­tions, digital trans­ac­tions. Like we’ve been saying here, this is a game of cat and mouse, and the coders and cypher­punks are going to produce proto­cols that will stay ahead hopefully of the regula­tors and that’s been that way for a long time, and that brings us back to the end-to-end encryp­tion discus­sion. We wrap that up and put a bow on that and move on. But the DOJ has issued basically a state­ment that says that they are against end-to-end encryption.

Of course, their citing says that compa­nies should embed the safety of public in system designs, enable compa­nies to act against illegal content, and actively and effec­tively with no reduc­tion to safety and facil­i­tating the inves­ti­ga­tion, prose­cu­tion of offenses and safeguarding the vulner­able, enable law enforce­ment access to content in a readable and usable format. When there is lawful autho­riza­tion, engage in consul­ta­tion with govern­ments and other stake­holders to facil­i­tate legal access in a way that is substan­tive and genuinely influ­ences design decisions. They’re basically saying that we should bake in back doors to end-to-end encryp­tion. This is an open decla­ra­tion of war against end-to-end encryp­tion. Jake, you refer­enced the wars, the crypto wars, cryptog­raphy wars, the original crypto wars back in the ’90s. Could you talk a little bit about that, and then what your reaction is to a state­ment like this from the DOJ?

Jake Chervinsky:

Yeah. Once upon a time, encrypted software was treated as basically a military weapon, right? It was only used for military purposes. It was not avail­able to the public. When, for example, PGP, right in the early days of encryp­tion came out and all of a sudden anyone in the world who wanted to encrypt the infor­ma­tion could do so, and then transfer it to anywhere in the world using the internet, that became a huge concern for govern­ments, and specif­i­cally for one enforce­ment. For a long time, there was an argument about whether encryp­tion technology was legal or whether it would be a viola­tion of export controls, right? The trade sanctions laws, to send encryp­tion software out of the country, just like it would be to send a missile to some other country.

Basically, the resolu­tion of what we call the crypto wars, which were these arguments in the ’90s about how encryp­tion software will be treated, was general accep­tance that, first of all, encryp­tion couldn’t be stopped. Right? We have the example of folks who would wear tee shirts that had encryp­tion code on them, or write a book that had encryp­tion code in them and make First Amend­ment arguments about their right to freedom of speech. So there were a diffi­culty of govern­ment actually trying to take any action against encryp­tion software. But also a general accep­tance that for the internet to be commer­cially viable, you had to have end-to-end encryp­tion, right? If you’re a business and you’re going to take a payment online, you need to have a secure channel to do that.

So govern­ment ended up leaving alone the question of encryp­tion and moving away from trying to crack down on it. The thing is we never really won that war, right? We won one battle of that war in the early internet era, but govern­ment still has the view that privacy is only good when it is privacy among individ­uals and compa­nies, but not when it is privacy from the govern­ment. The govern­ment basically wants to say it’s okay for you to have private trans­ac­tions or private trans­mis­sion of infor­ma­tion as long as we, the govern­ment, can break that privacy and we can figure out what you’re doing, what you’re saying, who you’re paying, where you’re holding money. So they do want devel­opers and compa­nies to build back doors that the govern­ment can use into basically every product and service on earth. I think there are a lot of problems with that, but since I’m rambling on here, let me stop there and see what Rafael thinks about this.

Rafael Yakobi:

Sure. Well, I endorse every­thing you just said, unequiv­o­cally. But I mean, obviously this possi­bility of an encryp­tion ban, I don’t know if it’s polit­i­cally viable or not. I hope not. Other­wise, well, who are we voting for? Right? If Congress autho­rizes something like that. But I’m guessing if something like that were to happen, then the response would be open source software that people can use that just doesn’t have back doors. Right? I’m guessing that that would continue to happen, but it would still be a terrible thing because every service that you might want to use if you’re not savvy enough to get into the open source software game is going to have these back doors and nothing you say will be private. I’m very concerned about it and I don’t have any partic­ular solution.

I’d like to believe that raising aware­ness about this kind of thing can help prevent it from happening, but I’m not sure that I … I’ve never really been optimistic about polit­ical solutions. I’ve always … That’s what made me so inter­ested in Bitcoin, is I feel like Bitcoin was a technical solution to what are polit­ical problems. And I’m happy to help, try to do whatever tiny thing I can do to move policy in the right direc­tion, but I’m not counting on our politi­cians to protect us from the govern­ment in particular.

Jake Chervinsky:

I think in terms of whether it’s polit­i­cally viable, unfor­tu­nately I have to say it might be, and the reason I say that is because of a bill that recently passed. I think it passed the Senate called the EARN IT Act. If folks haven’t heard about this, it does a couple of things. One is it basically repeals section 230 of the Commu­ni­ca­tions Decency Act, which is a whole other topic that we’ll have to leave for another day. But the other thing that it does is it basically allows govern­ment to require compa­nies to build back doors into their encrypted products and services. The EARN IT Act hasn’t passed and in this lame duck session before the transi­tion to the Biden admin­is­tra­tion, it won’t pass, but the EARN IT Act is something that we’re going to have to fight against pretty hard next year.

If that passed, I think it would be a huge attack on encryp­tion and a really big problem for folks who believe in privacy, finan­cial and other­wise. I think as a practical matter, these attempts to attack encryp­tion, like Rafael said, are doomed to fail. All of this technology is open source. It can be used by anyone every­where. I think that the mistake that govern­ment makes … There’s really a couple, one is failing to recog­nize the source nature of the technology and the fact that the law, even if it passes, isn’t going to be effec­tive in practice. It’s like prohibiting sales of alcohol. Well, how well did prohi­bi­tion work? How well have drug prohi­bi­tion laws work? It’s similar to that. Another is failing to under­stand that encryp­tion actually protects people, right?

Jake Chervinsky:

Encryp­tion stops us from having our identi­ties stolen and having people fraud­u­lently using our credit card infor­ma­tion, and it protects us in any number of ways. That encryp­tion is actually a net positive. Just like any technology, it’s a tool that can be used for good or bad, and it’s used for much more good than it is for bad. Lastly, that a back door can ever be effec­tive, right? The govern­ment says that software devel­opers and tech compa­nies should build these perfect flawless back doors into their products that can never be compro­mised by any bad actors, that only the govern­ment will be able to use, without under­standing that that’s just not techni­cally possible. When we have seen back doors built into products in the past, even if it’s done at the behest of the intel­li­gence commu­nity or law enforce­ment, they don’t stay secure.

I think the NSA famously had a back door that was compro­mised by a bad actor some years ago, and even the NSA had to admit that back doors are vulner­a­bil­i­ties that can be compro­mised. I’m hopeful that these arguments will convince our lawmakers not to go forward with an attack on encryp­tion. But that’s just a fight that we’re going to have to battle out and win.

Brady Swenson:

Unstop­pable technology, and I think that’s what we’re here for. The question is how long can they hold the eventu­ality, the winning of these technolo­gies against us? I would like to think, and I like your optimism, Jake, that our govern­ment, it would be amenable to those kinds of arguments. This is a First Amend­ment, freedom of speech, right to privacy situa­tions, and that this is good for the citizens of this country and that we can strike a balance between those rights and individual freedom and law enforce­ment. I’m hopeful as well. I did want to bring up, before we wrap up the BitMEX situa­tion, and I’d like to hear you guys break down what we saw happen with BitMEX and what you guys expect might happen. Where are we at in the legal process at this point and what’s to come? Rafael, do you want to take a first swipe at that one?

Rafael Yakobi:

Sure. One last thing on the EARN IT Act, I just had looked it up to see which senators were sponsoring it or intro­ducing it just because I was curious who I can be upset at, and I saw Lindsey Graham and then I also saw Diane Feinstein. These are people that don’t get along about anything, right? And call each other traitors and all kinds of other polit­ical insults, and appar­ently they can agree on something, which is that you shouldn’t have privacy. What an abomi­na­tion! I mean, of all the things that they could get along about? They can make a deal to give people money when their businesses are shut down. That’s too diffi­cult. But they can agree on getting rid of our privacy? I mean, it’s like a joke.

In case you needed to be disaf­fected by politics a little bit more than most of us already are, there you’ve got it. This very surprising to me to see. But as far as BitMEX goes, well, I’m not an expert on the CFTC issue, so I’m just going to defer to Jake on every­thing related to the CFTC. But one of the issues, one of the charges as far as I recall, is that they’re charged with failing to register as a money services business with FinCEN, right? This goes to what we’ve talked about earlier, right? If you’re going to be finan­cial insti­tu­tion and serve customers in the United States, FinCEN wants you to register, collect infor­ma­tion, et cetera, et cetera. Right? BitMEX histor­i­cally has been Bitcoin only, which is very cool and no fiat on there.

They’ve been able to not collect infor­ma­tion on I’m guessing the vast majority of their customers for quite a long time. I mean, I’m sure they collect email addresses and IP addresses and things like that, but not collecting the typical kinds of infor­ma­tion. This was part of the reason that they were popular. They weren’t obviously known for their trading engine perfor­mance, right? All the freezing of the trading and the overload and all that. Those were obviously big issues. But I, as far as predicting what’s going to happen to them, can’t say I envy their position. I mean, they did take some efforts to block US users from using BitMEX, but those efforts were debat­able on their effec­tive­ness, and, right, blocking US IP addresses, you have to use a VPN and things like that.

They’re going to have a challenge, although it’s inter­esting that they did announce before the charges were officially brought that they were going to imple­ment KYC. So maybe that will help them. But, well, they’ve got money, they can afford some excel­lent lawyers, and I cannot wait to read all the work that their lawyers do and the briefing on these issues.

Jake Chervinsky:

Yeah. They do have I think the best lawyers you can get. So it will be inter­esting to see what happens. That’s a great summary. The CFTC piece that Rafael mentioned is pretty simple. The Commodity Exchange Act requires deriv­a­tive exchanges to register with the CFTC if they offer swaps to US citizens. BitMEX was offering perpetual swaps. They were offering them to US citizens knowingly. They had to register with the CFTC has a futures commis­sion merchant. By not doing that, they’ve committed a viola­tion of the commodi­ties laws. That’s a regula­tory offense that is somewhat serious, but not nearly as serious as what they ended up getting charged with, which was violating the Bank Secrecy Act.

Because being a futures commis­sion merchant also requires you to comply with the Bank Secrecy Act anti-money laundering compli­ance oblig­a­tions. As we’ve been discussing for the last hour or so, the ability of the US govern­ment to surveil on sensor finan­cial trans­ac­tions is really what matters most to law enforce­ment. What they’re really concerned about is money laundering and terrorist financing. So they were very concerned that some of that was happening through BitMax. Ultimately, those were the more serious charges that came down against, not just BitMax as a company, but also its co-founders individ­u­ally who were crimi­nally charged, meaning they are poten­tially exposed to jail time for facil­i­tating viola­tions of the Bank Secrecy Act.

Now obviously we should say that everyone in the US is presumed innocent until they are proven guilty beyond a reason­able doubt by a jury of their peers. All of these are just the govern­ment’s allega­tions. We’ve only heard one side of the story. So we’re still waiting to see what the other side of the story is. But I do think that this is just more evidence about how concerned govern­ment is becoming about getting control of Bitcoin trans­ac­tions and being able to head off these venues where folks are able to poten­tially obscure the source of funds, right? Meaning prevent the govern­ment from tracing their transactions.

I imagine there are some other offshore exchanges, frankly, who are doing the same thing. I won’t name any names, but we all know what the other offshore exchanges are that have made a show of trying to exclude US customers. But in reality, if you have a VPN, you can still get on and they are not regis­tered with any US federal agency as they might be required to do. I think BitMax is probably the first of many that the govern­ment will go after to try to get more control over global Bitcoin markets.

Brady Swenson:

The legal commu­nity was … I mean, I saw some tweets to this end anyway that a lot and several people in the legal commu­nity, at least, were surprised about the criminal allega­tions. Was that surprising to you, Jake?

Jake Chervinsky:

Yes and no. It surprised me because there’s a huge differ­ence between bringing a civil enforce­ment action and bringing criminal charges, right? When you turn something criminal, that is not just a sign that the facts of the partic­ular case are serious. It is also a message that the govern­ment is sending to everyone else in the industry. I do think that this was a message to other well-known leaders of offshore exchanges that may be servicing US customers, that if they don’t cooperate with the US govern­ment, it doesn’t matter where they are in the world, right? They can be in the Seychelles or in Singa­pore, or they can be moving around between a bunch of different apart­ments in a bunch of different jurisdictions.

This game of “regula­tory arbitrage” does not pass muster with US enforce­ment agencies. The penalty isn’t just going to be a slap on the wrist. You pay a few $100,000 and you move on. It’s you get thrown in handcuffs and you get thrown in jail to await trial and then poten­tially you’ll spend years in prison. It’s reminis­cence in a way of Ross Ulbricht, who I think many of us in the industry believe was really penal­ized more harshly than he deserved to send a message to other people in the crypto industry and others who were involved in dark net markets that were using Bitcoin for poten­tially illicit trans­ac­tions. That’s why this was so surprising.

Rafael Yakobi:

Yeah. Yeah, one thing to add to that is … Well, Arthur meme them, right? He memed on them too hard. That was part of the impetus that is that I think I remember reading in the original complaint they actually put some meme that he posted about bribing regula­tors into the complaint. So they’re definitely trying to send a message and going after one of the biggest players is the way to do that. Although, it will be inter­esting to see what the contrast is here between what the SEC has done, right? Because the SEC went after and ended up giving them a very small settle­ment that they had to pay that was like pennies on the dollar compared to what they raised.

But time will tell what kind of settle­ment, if any, comes from the BitMEX action. One more thing just that came to mind is that earlier Jake had mentioned … I think Jake had mentioned that the govern­ment’s interest in, well, preventing money laundering, terrorist financing, right? Child trafficking, things like that. I feel like those are loaded terms that are a very good way to get people to go along with what it is you’re doing, right? It’s like, “Do you want encryp­tion or do you hate children?” Right? Or something like that. False dichotomies. It’s either you care about stopping terrorism or you don’t, right?

I hesitate to use their language, right? I think it’s clear that the end goal is the erosion of privacy for the overwhelming majority of people who are not terror­ists or sex traffickers or anything bad. For me, that’s my focus rather than on their purported goals, which are laudable to the extent that they’re really pursuing them. But just want to put that polit­ical angle in context.

Brady Swenson:

Yeah. Yeah. I mean, the politics of fear should not be foreign to anybody’s under­standing of how this world works, who’s watching out there this, these kinds of crimi­nals, terror­ists, child pornog­ra­phers, et cetera, are lever­aged to diminish individual privacy…

Rafael Yakobi:

Yeah. They were all going 100x on BitMEX, but now we’re going to put a stop to that.

Brady Swenson:

Right. Yeah. Guys, thanks so much. I really appre­ciate this conver­sa­tion. I think it was great. Do you guys have any closing words you want to pass along to Bitcoiners regarding your work in terms of Bitcoin and law, what to expect, what we can do as Bitcoiners to help good outcomes for Bitcoin and the law?

Jake Chervinsky:

Yeah. I guess my closing thoughts, I’ll echo something that Rafael said earlier, which is if you care about these issues, learn how to take custody of your own Bitcoin and learn how to protect your own privacy, right? The best way to signal to govern­ment that these things matter to us is to do them. Also as Rafael said, if we’re going to prepare for the worst, then you better get your Bitcoin into your own wallet while you still can while you don’t have those restric­tions. I think that’s a worst case scenario, but it’s at least worth saying, if nothing else, to motivate people to learn how to do that. I would say follow me on Twitter.

I’m hoping to put out some more infor­ma­tion as time goes on about what people can do to get involved in this fight. I do think this is something that will benefit from grass­roots support. I do think there’s an oppor­tu­nity for us to influ­ence policy makers and explain to them why they should not sacri­fice our individual Liberty in the name of some vague, ambiguous, theoret­ical advan­tage for law enforce­ment that I think ultimately won’t bear out anyway. I’m @jchervinsky on Twitter, and I’ll try to keep folks updated on that. Beyond that, that’s pretty much all I got.

Brady Swenson:

Thanks so much, Jake. Rafael?

Rafael Yakobi:

Sure. I guess my final thought, because Jake covered the essen­tial stuff, is that … Okay. It’s a very short story, but I had an inter­ac­tion with the DOJ on behalf of a crypto client, and they were asking me all this infor­ma­tion about things that the client was doing that seemed obvious that they would be able to figure out. I asked them and I was like, “Why are you even asking me this stuff? Right? Don’t you have … Aren’t you recording all of our phone calls and reading all of our emails and watching every­thing that we do anyway? Don’t you have unlim­ited resources to be able to see what we’re doing? And why you’ve been asking me, right? If you already know the answer.” Basically, their sarcastic response was that’s exactly what we want you to think. So please continue to believe that.

If there’s some kind of silver lining or a possible, we always think about adver­sar­i­ally and think about what the poten­tial downsides are, but it’s also possible that a lot of the time the govern­ment is incom­pe­tent and unorga­nized and doesn’t actually have a lot of the surveil­lance where­withal to really get it done in a meaningful way, and that a lot of their ability to enforce laws that they feel are impor­tant is really just based on our paranoia that they’re watching, right? They don’t actually have to watch. We just have to think that they’re watching and then people will comply. I don’t know, I thought that was an inter­esting inter­ac­tion with them. Hopefully, things are not as bad or don’t trend to be as bad as they seem like is possible, right.? There’s always … Obviously, Bitcoin succeeding this far was an unlikely outcome, or at least seemingly unlikely outcome. Who knows what other unlikely positive outcomes can be possible?

Brady Swenson:

Awesome. Thanks guys. This is a fantastic way to wrap it up. Go Bitcoin, keep Bitcoining, and keep stacking, keep educating yourself, take control of your own private keys. Of course, we have Swan encourage the withdrawals and automatic withdrawals. So you can just set it up and all you do is click and approve on an email whatever your withdrawal inter­val’s set up, and your keys will move over into your posses­sion. We make that as easy as possible for you to stack and to take the keys. Again, lots going on at Swan right now. You can go to, and help us test out our buy now function­ality you guys have been asking for for a long time.

In addition to stacking sets automat­i­cally regularly every day or week, you can top yourself up when you feel the need to smash buy. That’s coming soon to your Swan account. Again, lots of more coming as well. Several other big announce­ments coming in the next couple of weeks. We’ll keep you updated on the Twitter, @SwanBitcoin, and of course, here on this show. You can also check out Bitcoin TV at Swan’s YouTube channel. It’s You’ll see the Bitcoin TV channel running 247. We’ve got the best content on the web running there in a loop. Right now I think there’s 40, 50, 60 hours, something like that. We have plans to add a lot more and it’s going to loop around. We’re going to improve it a lot.

This is just the begin­ning. We’re working on how to present it better, organize it better and creates the go-to source for live Bitcoin edutain­ment. There’s some great stuff on there. Very educa­tional, also very enter­taining. You can hang out and chat. That’s been the magical thing for me, is popping into Bitcoin TV, seeing what’s on and chatting with Bitcoiners in the live chat about it. So check that out. It’s on our YouTube. You can also just go to It’ll take you right there. All right, that’s it for this week. See you guys next week. Take care.

Past Episodes

Episode 8 –Andy Edstrom and Ansel Linder

Episode 9 –Rockstar Devel­oper and Jeremy Rubin

Episode 10 – Bitcoin TINA and CK Snarks

Episode 11– Gigi and Knut Svanholm

Episode 12 –Adam Back and Preston Pysh

Episode 13 –Alex Gladstein and Matt Odell

Episode 14 –Robert Breedlove and Tuur Demeester

Episode 15 –Isaiah Jackson and Max Keiser

Episode 16 –Gigi and Udi Wertheimer

Episode 17 –Aleks Svetski and Jimmy Song

Episode 18 –Stephan Livera and Marty Bent

Episode 19 –Mark Moss and Ben Prentice

Episode 20 –Samson Mow and Parker Lewis

Episode 21–Lyn Alden and Jeff Booth

Episode 22– Robert Breedlove and Cory Klippsten

Episode 23 — Saifedean Ammous and George Gammon

Episode 24 –Jameson Lopp and Eric Martindale

Episode 25 –Preston Pysh and Andy Edstrom

Episode 26 –Lyn Alden and Nic Carter

Episode 27 — Erik Townsend and Yan Pritzker

Episode 28 — Max Keiser and Tone Vays

Episode 29 –Preston Pysh and Andy Edstrom

Episode 30–Raoul Pal and Vijay Boyapati

Episode 31–Dan Tapiero and Dan Matuszewski

Episode 32–Robert Breedlove and Parker Lewis

Episode 33– Danielle DiMartino Booth and Michael Saylor

Episode 34– Jeff Deist and Stephan Livera

Episode 35–Will Reeves and Yan Pritzker

Episode 36– Alex Gladstein and Marty Bent

Episode 37– Brandon Quittem and Robert Breedlove


Swan Bitcoin

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Jake Chervinsky

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Rafael Yokobi

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This blog offers thoughts and opinions on Bitcoin from the Swan Bitcoin team and friends. Swan Bitcoin is the easiest way to buy Bitcoin using your bank account automatically every week or month, starting with as little as $10. Sign up or learn more here.

Brady Swenson

Brady Swenson

Brady is the Head of Education at Swan Bitcoin, the best place to buy Bitcoin with easy recurring purchases straight from your bank account. Brady also hosts Citizen Bitcoin, a podcast focused on documenting his journey learning Bitcoin, featuring some of the biggest names in the Bitcoin world.

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Calabasas, CA USA

Swan Bitcoin does not provide any investment, financial, tax, legal or other professional advice. We recommend that you consult with financial and tax advisors to understand the risks and consequences of buying, selling and holding Bitcoin.