The Breakdown - Why Coin Center Is Suing the US Government

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, June 18th, and that means it's time for the weekly recap. Before we dive into the weekly recap, however, a quick bit of housekeeping. There are two ways to listen to the Breakdown podcast. It comes out each afternoon on the Coin Desk podcast network, which features both the breakdown as well as other great CoinDesk shows, and then it comes out in the evening on the breakdown only feed. Wherever you are listening, if you would be so kind as to go leave a

Starting point is 00:00:49 five-star rating or a review, it makes a huge difference, and I really appreciate it. Lastly, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Now, there has been a ton going on in the crypto space that with everything happening on that larger macro scale, we just haven't had as much of a chance to dig deep on as I'd like to. So let's start today's show with the title story why Coin Center is suing the U.S. government. A couple weeks ago, I did a show called the crypto industry's appetite for legal battles is growing. The argument was basically that there are some questions that the crypto industry feels that it has not gotten correct answers on. Or in other cases, specific licensure that it feels like it's being held up on. It is now increasingly willing

Starting point is 00:01:37 to avail itself of the legal system to demand some answers. There were two examples that I gave on that show. The first was Custodia Bank, which used to be called Avanti Bank, from Caitlin Long, suing the Federal Reserve around its application for a Fed Master account. That's a direct account that is held with the Federal Reserve that would allow Custodia Bank to work with them directly without having to work through an intermediary. They contend that the application has been held up far longer than is customary and well outside the Federal Reserve's own statutes. The second example wasn't a specific legal action, but more of a preparation for legal action that came from Grayscale. They tweeted around their application to convert the Grayscale Bitcoin

Starting point is 00:02:16 Trust into a Bitcoin ETF that they had hired Donald Verili, a former Solicitor General of the U.S., just in case legal action was necessary. Now, this is a line of discourse and discussion that I've seen for some time coming from a number of different parties that at some point with some of these questions, we were just going to have to make it legal. One of the parties that I had seen making that argument that sometimes things were going to need to be decided in court was Coin Center, the DC-based advocacy group that fights for the industry as a whole, and now they are putting their money where their mouth is. During the infrastructure bill battle from last summer, almost everyone was focused on the broker provision. It was a new definition of broker that would force

Starting point is 00:02:57 almost every type of factor in the crypto ecosystem, including miners and network validators, to report custodial KYC data about the people using the network. The goal from the administration's point of view was to crack down on tax evasion and make some money back that they could then use to pay for the bill. It was in that pay for section. The problem, of course, is that actors like minors and validators don't have custodial customer data, and that's what led to that big hullabaloo. Because there was so much attention on that section, though, another part related to crypto tax reporting snuck through virtually unnoticed. The amendment in question is 6050I, and the most controversial measure was a requirement that

Starting point is 00:03:36 any business or individual receiving $10,000 or more in crypto must report the transaction to the government, including not only the name of the sender, but also their date of birth and social security number. This is the section that CoinCenter is now suing the Treasury and the IRS over. They start their complaint. In 2021, President Biden and Congress amended a little-known tax reporting mandate. If the amendment is allowed to go into effect, it will impose a mass surveillance regime on ordinary Americans. The lawsuit claims that this reporting requirement is unconstitutional in two ways. Under the Fourth Amendment, which prohibits unreasonable search and seizure, and under the First Amendment, which protects freedom of association for political organization.

Starting point is 00:04:16 From the Coin Center press release, quote, Our suit leads with two major claims. One, forcing ordinary people to collect highly intrusive information about other ordinary people and reported to the government without a warrant is unconstitutional under the Fourth Amendment. Two, demanding that politically active organizations create and report lists of their donors' names and identifying information to the government is unconstitutional under the First Amendment. Here's how they explain it a little bit more. First, they discuss the Bank Secrecy Act.

Starting point is 00:04:44 They point out that the BSA has been constitutionally challenged over the last 50 years, but the reason that it has been allowed in courts is something called the third-party doctrine. Based on this doctrine, if a business is gathering data on a customer for a legitimate business purpose, then the government is allowed to make laws that require that data to be handed over. Coin Center argues that the crypto reporting requirements is fundamentally different in nature. Instead of a third-party business collecting information for business purposes, this amendment requires private citizens participating in a peer-to-peer transaction to report those transactions to the government. In other words, there is no third-party intermediary gathering data

Starting point is 00:05:23 for legitimate business purposes in these transactions. There is just, as they put it, a government compelling private citizens to report their fellow citizens' private financial transactions without any suspicion of wrongdoing. They argue that if wrongdoing is suspected, then law enforcement needs to get a warrant to access that information. Quote, as we've argued before, no third party to a transaction, then there's no third party doctrine to obviate the need for warrants. If the government wants us to report directly about ourselves and the people with whom we transact, it should prove before a judge that it has reasonable suspicion warranting a search of our private papers. Nuresh, the comms director for Coin Center, sums it up super simply.

Starting point is 00:06:01 He writes, we are challenging the government's unconstitutional financial surveillance in court. We've come to accept surveillance via third party, though I question that too. forcing two parties to surveil each other is too far and clearly unconstitutional. However, there's also a civil society and political dimension to this. Quote, the 6050I provision may require civil liberties groups, coin center included, to list and report the supporter information that would enable the government to monitor an even wider range of expressive activity. It would substantially chill political association and therefore is unconstitutional.

Starting point is 00:06:34 Now, what's important to note is that these guys aren't doing this for publicity. Jerry Brito, the executive director at CoinCenter, said we intend to win this challenge, even if it's necessary to go to the Supreme Court. That promise has people even outside of crypto paying attention. Nick Anthony, a policy analyst at the Cato Institute, says if CoinCenter's case goes to the Supreme Court, there's a real chance that the law will not only be ruled on constitutional, but also that the case will open the door for additional long-needed chances to strengthen Americans' constitutional protections. This also clearly matters for more than just the crypto community. Evan Greer, the Director of Fight for the Future, writes,

Starting point is 00:07:08 It is a clear overreach for the government to force citizens to spy on each other without a warrant. Yep, I'm fairly skeptical about crypto and blockchain generally, as most folks who know me know. But human rights activists need to pay attention to the policies surrounding it. Here's the statement and complaint from Coin Center, where they clearly explain why the 605OI provision included in the bipartisan infrastructure package amounts to an unconstitutional expansion of financial surveillance. It doesn't matter how you feel about cryptocurrencies, currencies, digital assets, Web3, blockchain, etc. Everyone who cares about basic rights should oppose

Starting point is 00:07:39 unconstitutional expansions of surveillance that will disproportionately harm marginalized and over-policed communities, period. I, for one, I'm looking forward to seeing this challenge have its day in court. Nexo lets you easily buy crypto with your bank card and earn industry-leading interest rates. Earn up to 16% on crypto and up to 12% on stable coins. Nexo makes passive income easy, interest paid automatically and daily. With Nexo, you can also borrow against your crypto at 0% APR and exchange over 300 pairs. Receive a welcome bonus of up to $150 in Bitcoin until June 30th at nexo.io. That's nexo.io. This episode is brought to you by Mir, a climate neutral, high speed, and low transaction fee, layer one blockchain platform. MIR is a blockchain for a world

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Starting point is 00:09:25 Download the FTCX app today and use referral code Breakdown to support the show. Next up, let's talk TBD and Web 5. I will say right now that this deserves way more time than I'm going to give it today, but it's been a week and I haven't had a chance to mention it, and I didn't want you guys to think that I was ignoring it for any particular reason. TBD is the division of Square, which is now called Block, that is focused on creating effectively Bitcoin-based defyphi. When Jack announced it, he said Square is creating a new business, joining seller, cash app, and title, focused on building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services. Our primary focus is Bitcoin.

Starting point is 00:10:06 How is this different from Square Crypto? Square doesn't give direction to Square Crypto, only funding. They chose to work on LDK and are doing an incredible job. TBD will be focused on creating a platform business and will open source our work along the way. So that is TBD, and recently they've been teasing a big announcement, and last week they announced Web5. Let's ignore the joke about where Web4 is for a second and talk about what it actually is. The vision is definitely big. Essentially, they are trying to decentralize, well, everything.

Starting point is 00:10:36 They want to deliver on decentralized infrastructure and establishing interoperable standards that others can build on. And importantly, it isn't about financialization or tokenization. It's more about re-architecting the way the internet works. Blockchains are a tool that can be used where necessary, but won't be the exclusive tool and the architecture will be built on the Bitcoin blockchain. Now, a really key point in differentiation from Web3 is that this obliterates tokenization. Mike Brock, who leads TBD at the block, says, let me clear this up right now, everybody, no. There are no tokens to invest in with Web 5. Okay, thanks.

Starting point is 00:11:12 He goes on, some people seem to think we are joking about Web 5, and we are not for real working on it. I promise you that we are for real working on it. It will actually exist, unlike Web 3. If you're getting a sense of the antagonistic tone, you are not wrong. Namakos from Bitcoin Magazine did one of the best little summaries that I found, so I will just read it for you guys. Jack Dorsey's TBD unit has just announced its building Web 5. This new decentralized web, leverages Bitcoin to put users back in control of their data and identity once and for all. Web5 takes a different approach than Web3. While Web3 aims to blockchain and tokenize all things, Web5 uses just one blockchain,

Starting point is 00:11:47 Bitcoin for one specific use case, identity. Blockchains are not efficient, and as such, it might not make sense to use it for everything. TBD's Web5 is made up of software components. These pieces let developers focus on building user experiences, while enabling decentralized identity and data storage and apps. It leverages existing decentralized tech with no blockchains, than Bitcoin. The components are decentralized identifiers, D-I-Ds, Web5 leverages ion, an open public and permissionless D-ID network that runs atop the Bitcoin blockchain. It's based on the side tree

Starting point is 00:12:17 protocol which doesn't require tokens, trusted validators, or additional consensus mechanisms to function. Decentralized web node D-WN. Web5's D-WN is a reference implementation of a draft specification. It's a mechanism for data storage and message transmission that participants can use to locate data link to a given D-D. Self-S sovereign identity service. The SSIS interacts with verifiable credentials by creating, signing, issuing, curating, requesting, revoking, exchanging, validating, and verifying them. It wraps the next component on the list, the self-sovereign identity SDK.

Starting point is 00:12:49 The SSI SDK encapsulates self-sovereign identity standards. It aims to provide flexible functionality based on standards for building DID apps in a modular way with limited dependencies between components. Now, I know that's pretty technical, but I wanted to give you that overview. So let's talk now about reactions. Those in the Ethereum community were none too thrilled. Scott Lewis, the co-founder at DefyPulse, said Jack is copy-pasting the ideas of the Ethereum movement, and rather than giving credit, he chooses to ridicule everyone from whom he has appropriated.

Starting point is 00:13:19 He did not invent Web 5. He's building Web 3 just with more anger. Jacklist responded to that Namikos thread I just read, saying, yeah, I was thinking, how cool would it be if we could do a small fraction of what we can already do with Ethereum, except we use an energy-gobbling P-O-W chain that isn't built for applications. We should all embrace this massive step backward just because Jack doesn't like Eith. Zero-X-Gung says Web5 stuff like decentralized idea nodes, TB decks, and DWA is just a fancy rebranding of what devs already built on Web3. Instead, devs on Web3 built with freedom of choosing different chains and let the market

Starting point is 00:13:52 do the Squid Game. I don't like how Web5 gives no choice to the users. Now, when it comes to Bitcoiners, some were skeptical. There is at least a small conversation about whether Jack being the person who builds everything on Bitcoin is ultimately good for Bitcoin, but that was a very, very small part of the community. And of course, for sanity's sake, I will ignore those who dislike anyone trying to do anything with Bitcoin. Those who were interested were interested in how it differed from the Web3 vision. Responding to Mike Brock's no tokens to invest in, Lynn Alden said so providing actual utility

Starting point is 00:14:23 without unnecessary seniorages to benefit token VCs while using exit liquidity on retail like Web3. responding to Scott Lewis's argument that it was appropriating Ethereum ideas without giving credit, Nick Carter stated, the Ethereum movement, quote-unquote, doesn't have a monopoly on ideas. If you look carefully, you'll see that a lot of Ethereum culture is downstream of Bitcoin culture, but you don't see us complaining about cultural appropriation. If you really believe in the principles of Web 3, whatever that means to you, you should be happy Jack is embracing those ideas, even if he's not doing it on your preferred substrate.

Starting point is 00:14:54 Muneb, who's the founder at Stax, who's obviously already building DFI-type things on Bitcoin, argued, quote, at a high level this design space is totally opposite to modern smart contract platforms. This is more peer-to-peer and arguably complementary to smart contract platforms. This is not an Ethereum competitor. One fairly dispassionate take that was somewhat skeptical came from Punk 6529, who said, I don't mind the Jack Dorsey Web 5 attempt. The underlying ideas, decentralized IDs, verifiable credentials are not new, never took off, and would be good if they do? The funny part is that the companies in the space will fund via equity, meaning, of course, VCs. The point that I think he's making is that if Jack's beef with Web3 is VCs, that maybe this isn't

Starting point is 00:15:36 all that different? So what then about my initial takes? Well, first, I will say I empathize with those who are raw about how out of his way Jack goes to shit all over everything and then proposes some similar things. Holding aside the merits of his arguments, his animosity towards Web3 feels very personal to me, like an interpersonal Silicon Valley fight that has roots that have nothing to do with tokenization and specific, and everything to do with the power of venture capitalists. Now, frankly, that doesn't mean that that fight is wrong to have. Asking about VC power concentration and protocols and always examining incentives is healthy. But it has felt personal to me in a way that I don't love. But whatever, that's very, very incidental to this

Starting point is 00:16:17 whole thing. When it comes to substance, I haven't even begun to get close to having a perspective on the there there, which makes my take fairly useless. What I will say, though, is watching this all, I've had that line from the Ross Stevens, Nick Carter and Allen Farrington piece recently circling around in my head. The line was, the concept of decentralized finance is powerful, noble, and worthy of a lifetime of focused efforts. In my interview last week, Nick said this came from Ross Stevens who leads Nidig. I agree, wholeheartedly with the message of it, and even as someone who doesn't necessarily share the base skepticism or outright rancorous animosity to the tokenized Web3 vision that has been

Starting point is 00:16:57 explored so far, I think that the notion of coming at a different era of finance and a new infrastructure for the internet from multiple vantage points that prioritize and value different things is tremendously valuable and likely to produce much more interesting things for the market and humanity at large. Tokenized Web3 platforms may find that some of their thesis are correct, and that composable value-integrated building blocks open up really interesting opportunities for new types of social applications. They also might discover, though, that there are a variety of highly sensitive use cases that those things are less good for. This identity-focused, non-tokenized version of decentralized finance then may fill in some incredibly important gaps that the current

Starting point is 00:17:36 design of Web3 wouldn't otherwise fill, at least not without risk. Or it could all be often, there might be new ways of organizing things that we haven't even come across yet. What I know for sure is that homogeneous thinking and orthodoxy, even if the orthodoxy is recently formed, rarely leads to wonder, creation, or true innovation. I often think that the saddest thing in crypto is watching groups who feel genuinely like heretics actually just become a new orthodoxy. And that's a critique that I think you could apply to almost any chain affiliated group at times. So to me, the idea, the concept, the underlying principles of decentralized finance, the word, not the term as we've come to know it, not being owned by any one section of the space a priori,

Starting point is 00:18:21 and actually being an open sandbox for exploration, is a pretty good thing. For now, I want to say thanks again to my sponsors, nexus.io, neir and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why Coin Center Is Suing the US Government

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