In what could be a new trend, Tezos Foundation demands KYC to redeem ICO tokens
By DanielPenfield [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], from Wikimedia Commons
For those who have been following Tezos there is a new controversy brewing. It seems due to legal necessity the foundation is required to do KYC. This is in my opinion going to be a new trend as governments seek to crack down due to money laundering fears. The SEC specifically signalled and it appears they want developers to bake-in regulations into the smart contracts. Will we see AML/KYC and biometric identity verification as part of smart contracts and as a result all transactions? Are we seeing the crypto community dividing into two castes? This blog post will discuss the implications.
Tezos Foundation Virtue Signalling
I interpret this move by the Tezos Foundation as a perfect example of a virtue signal. I discussed virtue signalling in my last few posts. In fact I encourage everyone to read my post titled: "Signalling Theory, Radical Transparency, and the death of genuine communication" to understand why what we are seeing now with Tezos is going to become a trend.
- All blockchain projects and ICOs in particular will be pressured to do KYC. This means we can expect to see KYC requirements for SMTs on Steem for instance.
- The push for KYC is part of a strategic effort to bring transparency to the blockchain space. In fact this may bring even greater transparency to the blockchain space than we see in banking or in any other space due to the nature of the blockchain.
- Tezos and other projects which announce they are implementing KYC are in essence giving out a virtue signal to show to regulators and "legitimate institutions" that their community is law abiding and respects the legal jurisdiction of the US government (and other governments).
What I expect the Tezos community and all similar projects to do going forward
I predict that Tezos is going to be forked immediately after mainnet launch. There will be Tezos and Tezos Classic. I expect that all projects which implement KYC in this manner to be similarly forked. This will create a two caste society within crypto. The whitelisted caste who have tokens which can be transferred to exchanges and used in legitimate ways (Coinbase, Circle, Gemini, and all other platforms which virtue signal in respect of regulatory institutions). And the blacklisted caste which will have tokens which will be useful for more underground shady activities. This two caste system will ultimately boil down to "black" and "white" chains.
Black and white blockchains
Any chain which does not put in place KYC could find itself delegated to the status. All legitimate institutions will simply not do business with any black tokens. SMTs will be separated into black and white tokens as well and this could quickly result in token holders not wanting any association with black tokens due to fear that they are signalling to law enforcement that they are in favor of money laundering. Accounts which are under pseudonyms will be the only accounts which can safely interact with black tokens without risking their reputation with white chains.
I call it a token caste system because in a way it is. It will be very similar to how there is the good and bad neighborhood, or good and bad credit can effect an account holder. The scary thing is not that we will have legitimate and illegitimate tokens but where it could ultimately evolve toward. The whole idea of social credit which we see in places like China relies on a level of gamification with scores. Unfortunately the blockchain technology we help create and define could be used to produce something which makes what China is doing look like child's play.
So in my opinion we should figure out a way to limit as much as possible the risks people face whether they are in the legitimate side or the illegitimate side. Pseudonyms should have the same benefits of safety and security as verified accounts. Traditional institutions such as the SEC seek to do a job but not everything they do is without controversy. An example would be the whole "accredited investor" rules which in effect create an unfair opportunity gap between rich and poor investors. If KYC as a process is restricted to only apply to money laundering or if individual investors can waive aware their SEC "protection" then that is one example of reigning in the negative effects of what some could call excessive levels of transparency.
How will Steem respond to this trend?
Now that we can see it playing out in the Tezos community what can the Steem community do to prepare for or at least analyze the situation? What lessons can the Steem community learn from this? For one because Steem accounts can easily be verified and because Steem by design is very transparent from the beginning there is less of a sense of betrayal compared to what we see in the Tezos community. The Steem community (and EOS) already is adopting the values of transparency but the question remains on how to protect against the negatives?
Transparency has positives and negatives. Privacy has positives and negatives. The SEC can only do what it is legally required to do by law. The laws themselves may not always be well thought out and may produce negative consequences. We will in my opinion see virtue signalling where different projects take one side or the other to the extreme (radical transparency or radical privacy).
Neither of these extremes in my opinion are based on what the mainstream users might actually want but are likely virtue signals to different factions, different fringe demographics. In my opinion it is important to remember that ultimately these fringe demographics have their own agendas (whether we are talking about people trying to actually money launder and do Silk Road type businesses, or we are talking about the law enforcement agencies trying to investigate them). The majority of people who are the mainstream are caught in the middle between these two fringe groups or societies within society.
Law enforcement communities and government agencies are primarily concerned with making their jobs easier and reducing the costs of enforcement. This demographic merely wants to enforce the laws even if the laws have some particulars which do more harm to the space than good (perfect example being the accredited investor and similar rules). These communities simply do not have the tools or expertise to do anything other than what they are mandated to do.
Criminals on the other hand don't care if mainstream adoption is ever achieved. They just want to use crypto to make money or to launder money. They don't care about the technology or about crypto itself but merely use crypto as a vehicle for their criminal operations. This can include scammers, hackers who steal large amounts of tokens and dump them on exchanges, and market manipulators who pump and dump for profit. All of this activity hurts the chances at mainstream adoption and has the negative side effect of suppressing the price as a result.
So the choice may be between mainstream adoption and mass appeal vs an isolated fringe technology. In my opinion some regulation is necessary for mainstream adoption to take place. In my opinion some privacy is also necessary for mainstream adoption to take place. As I don't think the goal should be to maximize the effectiveness of law enforcement to enforce every particular rule on the books. At the same time I do think if mainstream adoption is to be possible then there has to be a consensus between the majority of the crypto community and the law enforcement community on what is absolutely necessary for the success of both communities.
Too much push from one side or the other will only result in cat and mouse as the technology will evolve to function for an underground society with enhanced privacy features of law enforcement pushes too far. If the privacy is pushed too far then the tokens themselves will not be accepted by the commercial businesses which have names, which have reputations, which can be pressured by law enforcement or governments. Just as Chinese businesses are required to comply with the whims of the Chinese government (due to pressure) the businesses in US and European countries will also be forced to comply with the whims of the US government for better or worse.
My questions for the communities involved (crypto and law enforcement):
- How far is too far? That is how much privacy should law abiding participants be able to expect and how much transparency do law enforcement agencies demand?
- Does the impact of a particular regulation matter or is the goal merely to enforce the law exactly as it's written?
From what I can see I don't see either side sufficiently discussing that first question. The second question I see signals from both sides. I see projects adopting KYC, and I see the SEC allowing Ethereum and other crypto projects which are doing more good to continue without harshly cracking down for securities violations. This indicates perhaps there is some room where both sides can discuss and negotiate.
To the SEC or those who are involved with them:
- If we set up ourselves as a non profit and accept donations are we now required to do KYC? Tezos Foundation seems to imply that non profits must know the identity of their donors. Has this always been the case?
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Well articulated post, I particularly like the proactive approach you encourage for the Steem community but regard to Tezos Foundation I can smell some bullshitting...First off--> I see it a way of taking the attention away from their own controversy and use this market situation to ploy their games to buy time to come up with their next gimmick... Its a well orchestrated move to gain regulators favors but folks must continue to press them about their financial health and most importantly the product delivery.... Lots of these projects made big promises and reality is we don't have that pool of developers to develop the products, I sense this is the case with this project...this is the first of a series of playing with the emotion of the crowd and enthusiast should demand refund, the next ploy would be declare your source of fund or some bullshit claw about it being considered a security and due to regulatory uncertainty we can't deliver and unto the next bullshitting story while milking folks of their hard earn money.... These "playing the regulatory uncertainty game" would become the norm soon enough...
The tokens are already way up from the ICO price. A refund would mean a lot less in $ value for token holders. If they can launch to mainnet it is also lieky they'll fork which means two tokens so this could allow for additional money to flow.
Fingers cross, lets see how this plays out but i sense bullshit, dont fall for token value above ICO price, any market maker can get it done...
Hi sir do you have any idea why market is crashing, maybe these are the reasons.
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Great post. I really like the Enigma project. They're one of the few coins I beleive will be left standing in the end.