Headline:  What is an unhosted wallet?


Body:  So, it should be said that in Europe, they do things differently.  Police sirens sound quite different, the approach to marijuana is often different,  and their approach to cryptocurrency and related matters is also, quite different.  Much has been made on their embrace of a “right to be forgotten” and roughly what that means, is that as time goes on, they instill safeguards to make it less and less probable that Internet surfers will uncover things from the distant past.   For instance, if you went to the 2022 office Christmas party and drank a little too much egg nog, I fear to say that the footage of you sitting on the Xerox machine will likely be quite easy to get to.   But, let’s say, that 5 years before, you got soused again at that party and did an acapella version of “When I think about you, I touch myself,” you might very well be protected by a law requiring content hosts to  make this MUCH harder to find.   Now, if only we could figure out how to erase it from our buddy’s cellphone…

So, in general terms, the Europeans tend to be fairly progressive.   And, in line with that, there was a piece of legislation that was recently rushed into Parliament that would require a certain set of disclosures with respect to any cryptocurrency ICO.  The stated reasons for these disclosure requirements is largely to avoid money laundering, and these regulations could make it impossible to have an “unhosted wallet.”  (In other news, there is a new bill that is looking for support, to not allow the U.S. government to issue a Central Bank Digital Currency (CBDC).)

So, what is an unhosted wallet?

OK, let’s approach this from the other direction.   Let’s say I went to Coinbase and setup an online wallet with them, this would be a hosted wallet, as they are, for a fee, holding my digital assets.  But, let’s say that we didn’t trust Coinbase or any other, and we wanted to keep all of our digital assets in a cold wallet that we had possession of.  This cold wallet would be an example of an “unhosted wallet” and they are easily used for money laundering activities.    You can think of unhosted wallets as being the same as anonymous bank accounts.  The regulation being considered would force an intermediary to report when there is a significant transaction using cryptocurrency entering or leaving an unhosted wallet.  This is not without precedent.  When there is a cash transaction over $10,000, the Bank has to report this transaction..

If not for money laundering or other nefarious purpose, why would one use an unhosted wallet?

One might be totally unconvinced of the safety of online storage of your digital assets and instead, prefer holding them in a cold wallet, locked away in your fireproof safe at home.  One might just feel it important not to flash one’s identity all over the internet.  That said, cryptocurrency is perfectly situated to be an ideal vehicle for money laundering, so, this fear is understandable.

In other regulatory news…

Options allow the investor to bet on the direction and timing of a security’s valuation change.  For instance, if you think that Stock A will have a large swing up soon, you might purchase an option that gives you the right to buy a quantity of this stock at the current price.  If executed, the difference between the strike price and the market price would be profit to you.  Some very smart bankers have even developed options on cryptocurrency.   Some have tried to offer their options for purchase on the well-known Chicago Board of Trade.  Regulators just said that they couldn’t do this because there isn’t a properly surveilled market for the underlying asset.     It seems that the Grayscale Bitcoin Trust is trying to offer its own set of options, meanwhile, arming themselves for what might an epic legal battle.

Meanwhile, in the U.K., there is a similar battle brewing.  The Exchequer  (roughly equivalent to our Treasury Department) commissioned a report, and in this report, the conclusion was that unhosted wallets were not a problem.   To quote the report, “The government does not agree that unhosted wallet transactions should automatically be viewed as higher risk… and there is not good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.”   Nobody likes the IRS which represents the bulk of our Treasury Department, but, I have to think that they and the Exchequer across the Pond are probably fairly credible independent sources, and these reasonable sources seem to disagree at some level.  The boil-out seems to be that anything could happen.   So, grab some popcorn, and then buckle up because this is going to be interesting.

The Verdict

So, we have a fundamentally different understanding of the potential of cryptocurrency as compared to the U.K.  The question of why must be raised.   Of all of the articles I have read, the U.K. is on a rather extensive campaign to enforce policies to entice cryptocurrency firms to their shores.  In view of this, I think it’s quite possible to see why their internal report turned out so differently than our understanding of cryptocurrency.  The question remains, who holds the more profitable position as it relates to cryptocurrency?   We shall find out.




Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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