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Coinbase CEO Claims Non-Custodial Wallet Regulation is Bad for DeFi

2 mins
Updated by Ryan Smith
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In Brief

  • Possible new US regulation could strengthen KYC requirements.
  • The proposal may be detrimental to smart contract based DeFi.
  • Some crypto-community pundits hope that the Biden administration will be crypto friendly.
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In response to rumors over potential new crypto regulations in the United States, Coinbase CEO Brian Armstrong has stated why this could be bad for the industry, especially decentralized finance (DeFi) which thrives on openness.

In a lengthy tweet, the Coinbase boss has responded to Steve Mnuchin’s plans to rush out new regulations regarding self-hosted crypto wallets before the end of his term.

The proposed regulations would require financial institutions and crypto exchanges to verify the recipient and owner of self-hosted or non-custodial wallets.

In doing so, they would collect identifying information on that party, before a withdrawal could be sent to it. It’s a form of KYC (know your customer) for decentralized wallets that would make them, well, not decentralized.

Detriment to DeFi

Non-custodial wallets are a key element of the DeFi ecosystem because they allow anyone, anywhere to use this new technology to access basic financial services. Armstrong added that the open nature of crypto and DeFi powers innovation and ‘levels the playing field globally:’

“It is what is fueling innovation, such as in Defi. It has the potential to bring down the cost of financial services, and improve accessibility.”

He stated that new identity tracking regulations would be impractical and a bad idea for a number of reasons.

In the case of DeFi, many crypto users and yield farmers send assets to smart contracts so they can use dApps in the ecosystem. A smart contract is not necessarily owned by any individual or business that could be identified to satisfy these new requirements.

In addition, many people now use crypto to make payments online to various merchants, so their identity would be revealed.

Some users in emerging markets that send or receive crypto may find it difficult to provide the required proof these new rules would demand. Armstrong concluded:

“Finally, 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.”

Coinbase: Walling Off the U.S. a Financial Risk

He stated that this would reduce the number of transactions between non-custodial wallets and crypto exchanges, such as Coinbase which recently halted margin trading, effectively eating into its profits.

It would also put a wall around the U.S., cutting off access to the innovation happening elsewhere. Armstrong added, “I believe this would put America’s status as a financial hub at risk.”

Some hope the new Biden administration would be more open to the crypto industry and its drive for financial innovation. There has been no further confirmation as to when these regulations would come into effect.

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Martin Young
Martin Young is a seasoned cryptocurrency journalist and editor with over 7 years of experience covering the latest news and trends in the digital asset space. He is passionate about making complex blockchain, fintech, and macroeconomics concepts understandable for mainstream audiences.   Martin has been featured in top finance, technology, and crypto publications including BeInCrypto, CoinTelegraph, NewsBTC, FX Empire, and Asia Times. His articles provide an in-depth analysis of...
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