Building The Bridge: Why Compliance Is Key To Digital Currency’s Success
I occasionally see people in the digital currency industry question the value of compliance. By this I mean working with regulators, law enforcement, banks, etc.
This isn’t surprising given that many of the early adopters of bitcoin are privacy advocates, and much of the world of compliance is about knowing your customer.
However, I think it is short sighted for privacy advocates to oppose embracing compliance, as they may be the ones who stand to gain the most from it.
Enabling Access To A Network
For digital currency to succeed, people need connectivity into the bitcoin and ethereum networks. If their current assets are in dollars, euros, yen, or something else (like real estate), they need a simple way to convert those assets into digital currency.
There are many ways to obtain digital currency, and not all of them involve disclosing your identity. For example, you can mine it, use LocalBitcoins, or earn it by doing work. But these methods can be cumbersome for the average person. What if you can’t find someone willing to pay you in bitcoin or don’t know how to set up a mining rig?
Many people in the world prefer to buy digital currency with a common payment method such as a credit card, wire transfer, or bank transfer. These remind them of services they already use (like Amazon.com, Paypal, or Fidelity) and lower the barrier to entry.
Enabling convenient payment methods requires digital currency companies to comply with existing laws. We can’t have one without the other. If we want a convenient way for people to move large amounts of money into digital currency, we need digital currency companies who embrace and excel at compliance. Specifically, they need to be able to block criminals from using their systems to stay in business.
Once this new network is thriving, there will be many opportunities to create new products and services in a purely digital currency world (without any ties back to finance 1.0), and some of those will appeal to privacy advocates. But the network needs to be bootstrapped first to have a chance of succeeding.
To put it simply: if you own bitcoin, you should be supportive of people buying bitcoin in any way they can (whether you use those services or not), because the network effect makes the value of your bitcoin go up. Or to make it even simpler: compliance will make you money!
Building A Bridge
You can think of digital currency as an island, and an exchange like Coinbase is a bridge to that island.
In the early days, this island didn’t have any convenient bridges (maybe taking a small raft or an expensive helicopter were the only ways to reach it). Some early bridges were hastily constructed and have long since collapsed. But as sturdy bridges have come into existence, the flow of people to and from the island has dramatically increased. Coinbase alone has helped 4M people exchange about $4B into and out of digital currency (at the time of this post).
An important quality of bridges is that they are connected to the mainland. Bridges require stable and secure footing on both ends, so bridge builders need to understand and respect the cultures and norms on each side, speak both languages, and adhere to local laws and customs. The bridge builders may not be just like you, but they are your ally and can help you accomplish your goals on the island.
ISPs are to Web Browsers as Exchanges are to Wallets
While Internet Service Providers (ISPs) provide connectivity to the internet, digital currency exchanges provide connectivity to blockchains.
It’s no accident that many early bitcoin entrepreneurs have also started ISPs (Wences Casares, Joi Ito, Justin Newton, and Austin Hill).
Web browsers speak the underlying protocols to help people use the internet, just as wallets speak the underlying protocols to help people use digital currency.
I think it’s an important feature of web browsers that they offer you some level of privacy. The same is true for digital currency wallets. These are just pieces of software that you can run on your own devices (aka clients). But ISPs and exchanges are different. You have a personal relationship with these entities, and although you have data privacy and other legal rights, your use of ISPs is not anonymous or unrestricted.
In the early days of the internet, ISPs and web browsers were sometimes linked as one (AOL), but they eventually separated, and with good reason.
If you’re looking for anonymity, you probably won’t find it in any exchange that links to the traditional financial system. But you may find it in a bitcoin wallet. And one enables access to the other. As I’ve written elsewhere, Coinbase is an exchange and not a wallet.
Conclusion
A compliant digital currency exchange that links to the traditional financial system is a necessary piece of infrastructure to help digital currency grow.
And it is quite difficult to build (look no further than the various enforcement actions and security breaches in the industry to get a sense — BitInstant, Ripple, Bitfinex, etc — in addition to the multitude of regulations such as BitLicense, eMoney, MTL, FinCEN guidance, etc).
At Coinbase, about 20% of our staff works on compliance in some form. There are many difficult and exciting problems to solve (especially from a data science and machine learning point of view) to measure and mitigate risk. If you’re an engineer or compliance/risk professional who is interested in helping build this bridge we’d love to speak with you.
We’ve spent many years and millions of dollars working to become the best in the industry at compliance, and we’ll continue to work tirelessly to keep the bridge open. Please join us in being supportive of compliant digital currency companies. They are a necessary component to make digital currency a success for us all.
Thanks to Dan Romero, Erin Coppin, Fred Ehrsam, John Yi, Juan Suarez, and Soups Ranjan for reading drafts of this post.
