Who Has Right to Anonymity? Analyzing Meaning of ‘Digital Freedom’ in Web3 Era

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by Alexander Borodich · 6 min read
Who Has Right to Anonymity? Analyzing Meaning of ‘Digital Freedom’ in Web3 Era
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The total capitalization of cryptocurrencies exceeded $2 trillion. As a result, a huge tsunami has hit around the world from regulators who want to take their piece of this crypto pie.

“The world has fallen out of love with democracy. The world has become disappointed with the ruling elites. The world has begun to turn to dictatorship”.

These words were uttered by the editor-in-chief of “Novaya Gazeta” Dmitry Muratov during the Nobel Peace Prize ceremony. According to him, there is an illusion that progress can be achieved by using technology, and not by respecting fundamental human rights: Right to liberty, Right to freedom of thought, Right to privacy.

These ones are relevant in the field of blockchain. We can ask a rather insurgent question: “Does the user have a real right to Anonymity and Privacy in 2022?”.

“I am your State!” said the King.

The first ideas for cryptocurrencies originated among cryptopunks, who gathered an informal group of people interested in maintaining anonymity about 25 years ago. They communicated through a network of anonymous remailers when the final recipient is deprived of the opportunity to find out who is the author of the message.

The goal of this community was to achieve anonymity and security through the active use of cryptography.

A lot has changed since then. However, 20 years later, we can say with full confidence that KYC procedures and anti-money laundering (AML) legislation have become integral parts of the modern crypto-system since the thesis has formed that Anonymity is bad by default.

 It hides “elusive hackers”, drug, gun trafficking and other unpleasant things. Due to the government’s logic, any user who wants anonymity has dirty goals and intentions.

What trends shall we face this year? Firstly, this is a trend towards cooperation with regulators.

Vladimir Smerkis, CEO of Binance Russia, said the company looks forward to dealing with regulators to help develop rules that protect users and encourage innovation. Binance is working closely with regulators such as the US Tax Service and the UK Office for Combating Organized Crime to stop “criminal activities” on their platform. The exchange intends to double the staff of compliance specialists as well as expand partnerships with Interpol. In theory, you may not follow the updating rules, but who wants to play a “Squid game” with the State?

The total capitalization of cryptocurrencies exceeded $2 trillion. As a result, a huge tsunami has hit around the world from regulators who want to take their piece of this crypto pie. The fifth directive of the European Union on combating money laundering, obliged crypto platforms to register with supervisory authorities, identify their customers and transfer the addresses of users’ wallets to the authorities.

US President Joe Biden also signed a bipartisan bill to raise $1.2 trillion to upgrade US infrastructure. What does this mean for the crypto market?

Depending on the interpretation of the term “broker”, miners and node operators in blockchains, wallet developers, and liquidity providers in DeFi protocols may be required to report to the Tax Service on the activities of their users. The words “Regulation”, “AML” and “Know Your Customer” have become a good set of tools for a gentleman. Are there any exceptions?

When Anonymity Is More Than Just Right

Every year, “Reporters Without Borders” publishes an Index of Press Freedom in the world, which describes 180 countries by the criterion of safety for journalists. According to the latest report, press freedom is under threat in 75% of countries – the situation in them is described as “problematic”, “bad” or “very bad”. On the report of the “Committee to Protect Journalists”, 1,422 journalists were killed in connection with their duty from 1992 to 2021. Dmitry Muratov stressed this one during the presentation of the Nobel Prize.

А new generation of journalists is able to work with big data, sources in the darknet and create NFT magazine covers.

On the other hand, in many countries, human rights activists, opinion leaders, and programmers are faced with a situation where the right to anonymity has a completely different meaning

  1. This is the Right to work safely with your sources of information. 
  2. This is the Right to protect yourself from the State because there are many nations where opposition leaders and journalists are in danger. 

The worldwide trend towards deanonymization and KYC can lead to real problems for publishers and their readers. This challenge is global.

How to Tighten the Screws

 Does the user have the right to anonymity in 2022? I suppose yes. Does the State have the right to the KYC procedure? Yes, it does, but any rule should have some exceptions. Shouldn’t it? 

 The Financial Action Task Force (FATF) has released a guide on virtual assets, which updates new KYC standards that can change the crypto industry around the world.

This guide does not make exceptions for journalists or human rights organizations.

In particular, if a company

  • exchanges virtual assets and fiat currencies,
  • transfers of digital assets,
  • exchanges between several forms of virtual assets
  • suggest storage or technical support,

then the organization must implement an anti-money laundering (AML) and anti-terrorism program, have a license and monitoring system.

In accordance with the UN Security Council resolution, FATF submissions are mandatory international standards for all member states. As a result, both centralized and decentralized projects will experience increasing pressure from regulators and provide large amounts of information to government agencies.

If we move away from global rule-making initiatives and go through the main jurisdictions, then the situation is as follows. The US Treasury has proposed requiring any businesses to report crypto assets in excess of $10,000. Presumably, the new measures will take effect from 2023.

The Swiss Financial Market Supervisory Authority (FINMA) moves amending the client identification threshold values to $1,000 for exchange transactions in cryptocurrencies.

There are now more than 10 “unicorns” worth more than $1 billion in Swiss “Crypto Valley”: Aave, Ethereum, Cardano, Cosmos, Polkadot, Solana, Tezos, Near, Dfinity, Nexo, etc.

In consequence, a good initiative to fight criminals and terrorists hits small startups that do not have the financial capacity to fulfill a large amount of bureaucratic requirements. 

 To be quite honest about it there are lots of reasons for optimism.

 For example, venture capital firm Andreessen Horowitz is trying to build a bridge between the State and Crypto that the governments should go through.   

  • Establish a clear vision to maintain decentralized digital infrastructure,
  • Embrace multi-stakeholder approaches to governance and regulation,
  • Unlock the potential of DAOs and so on.

Silicon Valley experts do believe that government leaders should unleash the potential of decentralization and collaborate with other nations to “harmonize regulatory frameworks”.

It will clear tax rules for digital asset reporting, technical compliance solutions and increase the benefits from web3 that incorporates decentralization based on blockchains and human Rights. Paving the way for the Future Decentralized States

Guest Posts
Julia Sakovich
Author: Alexander Borodich

Alexander Borodich is CEO Universa.io, venture investor. He holds PhD in mathematics and electronics.

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