Kraken has published its response to the Treasury’s midnight rule on self-custodied wallets. The response is not short. It is not polite. It concludes with an important message:

Regulating crypto companies punishes the regulator.

How? Read on. 1/ https://blog.kraken.com/post/7379/kraken-files-response-fincen-crypto-rules/

Regulating a traditional bank is easy: If a proposed regulation forces the bank to provide the information the regulator wants, then implement the regulation and collect the information. EZPZ. /2

Doesn’t matter if compliance is costly. Regulator still gets the info it wants. Doesn’t matter if those costs are passed on to the customer. Regulator gets its info. Makes the UX cumbersome? Doesn’t matter. Regulator gets info. Risky for users? Too bad. Regulator gets info. /3

After all, customers don’t really have a choice. You need a bank to send a wire. You need a check casher to turn your paycheck into dollar bills. You need a savings account to store large sums safely. You NEED financial institutions to use traditional currency effectively. /4

Sure, FIs always argue that overregulation will drive business offshore where information can’t be collected. The objection is rarely persuasive. Regulation of traditional FIs almost always translates, net-net, into more information for law enforcement. /5

What would happen, though, if the customer didn’t actually need to use the financial institution? /6

What would happen to the flow of information to the regulator if the customer didn't need any financial institution at all?

What if the customer could just… opt out and do it all themselves? /7

Well, as a regulator you wouldn’t actually get access to the information you wanted, for one thing.

Worse, you would *create* a bunch of information you would *never* get access to.

Wait wut? How? /8

The more requirements you place on a monopoly, the more info you can get about its users. The more requirements you place on an opt-in service, the more costly, cumbersome and insecure the service becomes, the less people will use it and simply… do it themselves instead. /9

Create a regime burdensome enough and an entire shadow ecosystem springs up consisting of those who have opted out. The economy is cleaved into two: one economy that follows the rules and one with no desire or obligation to follow the rules. /10

In this way, regulating crypto companies is completely unlike regulating traditional banks. The creation of the regulation *works against* the regulator – both limiting the amount of available information and growing the amount of forever unavailable information. /11

So, can we stop regulating crypto companies now? Of course not. But we'd better be careful. This phenomenon is outside the control of crypto companies and even governments. /12

There's little that even compliant companies like Kraken can do to slow the phenomenon. We have to be very, very careful about regulating in this self custody/hosted area of overlap. /13

Doing good crypto policy is just really, really hard. You should file your own comment and tell the regulators how to do it better. You can do it right now, online, without even identifying yourself, at https://beta.regulations.gov/document/FINCEN-2020-0020-0001 /14

Seriously. Stop reading and do it.

Well OK go back and RT my first tweet and then go do it.

No excuses now. /15