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Regulators continue to debate how to define cryptocurrencies, such as bitcoin, and whether they are securities, commodities or properties, etc., which is critical for how regulators choose to enforce those regulations.

At the recent National Association of Attorneys General Consumer Protection Conference in November 2021, Hester Peirce, commissioner of the U.S. Securities and Exchange Commission (SEC), commented on the issue, saying the view we are taking these days is that pretty much everything is a security.

While the public has closely scrutinized nebulous and sometimes contrary statements made by federal regulators regarding cryptocurrency enforcement, two recent actions against BlockFi and Celsius companies that let consumers buy, borrow and trade bitcoin make it clear that state regulators are taking coordinated action to regulate bitcoin-related investment products and exchanges offering unregistered securities.

State regulators unwillingness to sit on the sidelines and watch the feds opine on the proper regulatory regime is consistent with how states have affirmatively led the charge to regulate other emerging technologies related to Bitcoin. State regulators are not scrutinizing bitcoin itself in the recent enforcement actions, instead they are targeting the technological innovations that are spurred by Bitcoin.

These technologies being investigated often involve bitcoin and other cryptocurrencies, which adds to the inherent risk to investors and consumers investing in bitcoin. Due to the volatility of bitcoins price, legal probes into emerging technologies may affect the price of bitcoin and thus, emerge as a consumer protection requiring further actions by state regulators.

All players in cryptocurrencies should be keeping an eye on the states policy priorities, because the states are clearly keeping an eye on them.

In recent years, state regulators primarily attorneys general and securities regulators have led the charge to regulate perceived consumer harms. They act to fill a perceived void left by the federal government that they believe is too slow, legally limited or disinclined to do so itself, depending on the administration. Examples are abundant and include data privacy, e-cigarettes, cannabis and social media. Similarly, given the lack of comprehensive regulation from the federal government concerning cryptocurrency, state regulators are actively pursuing enforcement against interest-bearing cryptocurrency accounts.

Up until April 2018, state enforcement of cryptocurrency was relatively minor and focused on remedying overt consumer scams. That changed in April 2018, when the North American Securities Administrators Association (NASAA) initiated Operation CryptoSweep, where 40 securities regulators across North America organized a task force to share information and coordinate actions against various cryptocurrency companies trading bitcoin and other virtual currencies.

It is not a coincidence that in the same month, the New York Attorney General launched an investigation of 13 large cryptocurrency platforms, seeking a better understanding of each companys internal controls and safeguards of consumer assets.

In a little more than three-and-a-half years, state securities regulators have issued more than 50 cease-and-desist orders to currency-related investment products, mostly related to initial coin offerings (ICOs) for failure to register and to provide resulting statements to investors. These enforcement actions are traditionally brought by one state and have resulted in the voluntary cessation of the ICO with monetary fines and promises not to offer unregistered ICOs in the future.

The breadth of who can be charged with oversight of the safety and soundness of a cryptocurrency product was expanded in September 2020, when the Massachusetts Attorney General prosecuted payment processor, Stripe, Inc. for allegedly inappropriately facilitating transactions by individuals engaged in the PlexCoin ICO, resulting in the fraudulent and unregistered offer and sale of cryptocurrency. To resolve the claims, in addition to a $120,000 payment, Stripe committed to improve its risk monitoring procedures.

The last few months have seen states moving from individual action to multistate enforcement actions against two of the largest cryptocurrency platforms: BlockFi and Celsius Network. Both companies were charged with offering unregistered securities under the guise of high interest-bearing accounts, allowing investors to use cryptocurrency such as bitcoin to earn interest at higher annual percentage yield than traditional banking institutions. Both companies use the accounts to fund their lending operations and proprietary trading. The actions stemmed from state regulators concerns over increased levels of risk to investors.

Underscoring the seriousness of this expansion in regulatory enforcement, these actions were coordinated by multiple states that typically fall across the political spectrum. In July, New Jersey, Texas, Alabama, Vermont and Kentucky issued cease-and-desist or show cause orders against BlockFi. In September, New Jersey, Texas, Alabama and Kentucky again united to file similar actions against Celsius. In October, Celsius announced that it received a request for information from New York.

Notably, New Jersey and Kentucky issued cease-and-desist orders against BlockFi and Celsius, requiring them to cease offering interest bearing accounts, as they are classified as unregistered securities. New Jerseys orders classify the accounts as offering unregistered securities because the [i]nvestor relinquishes control over the deposit cryptocurrency and BlockFi and Celsius are free to use those assets as they see fit. The accounts are not registered with any state or federal securities regulator. The orders highlight that, due to the lack of regulatory oversight, these programs appear to pose higher levels of risk to investors.

The states harmonized actions communicated a unified emphasis on protection of investors. In a September 17 press release, acting New Jersey Attorney General Andrew Bruck said the action was intended to send a broader message: Financial companies operating in the cryptocurrency marketplace are on notice. If you sell securities in New Jersey, you need to comply with New Jerseys investor-protection laws. Companies dealing in cryptocurrencies are not immune from oversight.

Based on past experience, we expect that additional enforcement actions will be taken against other bitcoin platforms, to the extent they employ similar business models.

This year, one in ten Americans invested in cryptocurrency and bitcoins price rose to an all-time record in November 2021. The rise of cryptocurrency also means a rise in regulatory scrutiny, especially from state regulators who focus on consumer protection. The fact that states are taking joint coordinated action is commonplace. State regulators have biweekly or monthly calls to discuss companies they are investigating or enforcement actions they are taking. It would be unwise to think that the 46 state regulators that did not take action against BlockFi and Celsius are not paying close attention to these actions.

Yet, each of these regulators is a distinct sovereign. Even when four or five sovereign entities take coordinated action, each action must be consistent with each states goals and priorities. Observers should not make the mistake of thinking that coordinated action equates to like-mindedness on all issues even in just one industry.

One thing is clear, however: when states share a common goal of consumer protection and are unified in believing a particular action will achieve that goal, states will not hesitate to act in a coordinated way across the aisle to target perceived offenders. For this reason, we are likely to see continued coordinated enforcement actions by states to regulate perceived violations of existing state laws.

This is a guest post by Stephen Piepgrass, James Stevens, Chris Carlson and Namrata Kang. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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State Coordination Will Continue To Regulate Use Of Bitcoin - Bitcoin Magazine

Robinhood has started rolling out its long-awaited bitcoin withdrawal feature. The company said in a Thursday statement that some users in the WenWallets waitlist have begun taking part in the functionality as beta testers, trying out the new cryptocurrency wallets.

This is the second major milestone in our Wallets rollout, which will enable Robinhood customers to send and receive their crypto from Robinhood to external crypto wallets, and fully connect Robinhood crypto holders to the greater blockchain ecosystem for the very first time, per the statement.

The feature is core to the experience of owning bitcoin because self-custody is the only true way for a user to have control over their funds.

Robinhood said it started rolling out the cryptocurrency wallets on Thursday to 1,000 users from the top of the waitlist, incrementally inviting more users until reaching the 10,000 testers mark by March, at which point the company plans to roll out the feature to the rest of the users in the waitlist.

Beta testers will help us test core functionality and provide critical feedback to inform the final version of the product, per the statement. Over the duration of the Beta program, we will finalize the send and receive flows, add delightful QR scanning experiences, improve the transaction history interface, and add block explorer support to provide more insights into their on-chain transactions.

Robinhood said it would also include the ability for a user to calculate dollar amounts of their cryptocurrency holdings when sending and receiving funds. However, beta testers will have a daily limit of $2999 worth of bitcoin to withdraw in at most ten transactions. Two-factor authentication will also be required.

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Robinhood Starts To Allow Bitcoin Withdrawals - Bitcoin Magazine

Google is tiptoeing into Bitcoin and cryptocurrencies as the companys payments division struggles to gain significant market share in the payments industry and touts adding custody capabilities of such assets to its digital cards, according to a report by Bloomberg.

Crypto is something we pay a lot of attention to, said Bill Ready, Googles president of commerce, per the report. As user demand and merchant demand evolves, well evolve with it.

According to the report, Google has formed partnerships with cryptocurrency exchange Coinbase Inc. and cryptocurrency payment processor BitPay to enable the new functionality. The executive told Bloomberg that his team is looking for additional partnership opportunities, though the company still isn't accepting bitcoin for transactions.

Googles cryptocurrency integrations allow its customers to hold BTC in their digital cards while spending fiat currency, an arrangement that doesnt precisely use the peer-to-peer asset as a medium of exchange but enables users to spend their bitcoin holdings.

Given Bitcoins astronomical rise in purchasing power over the past decade, it is hard to conceive a scenario where Bitcoiners would want to get rid of part of their BTC stack, as the opportunity cost to hold it and spend fiat currency directly instead rises.

The news comes after the company in October turned its back on a previous push into banking, hiring former PayPal executive Arnold Goldberg to run its payments division. According to Ready, Google wants to become a connective tissue for the entire consumer finance industry.

Were not a bankwe have no intention of being a bank, Ready told Bloomberg. Some past efforts, at times, would unwittingly wade into those spaces.

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Google Cards To Store Bitcoin And Crypto: Report - Bitcoin Magazine

Source: Nym Technologies SA

Bitcoin was initially thought by many to be anonymous digital cash due to the fact that all transactions are conducted as peer-to-peer transfers between wallet addresses which serve as pseudonyms. However, the public nature of Bitcoins ledger of transactions (the blockchain) means anyone can observe the flow of coins. This means that pseudonymous addresses do not provide any meaningful level of anonymity, since anyone can harvest the counterparty addresses of any given transaction and reconstruct the chain of transactions.

This lack of privacy in Bitcoin has led to an important stream of work to make Bitcoins blockchain ledger itself private: ranging from centralized tumblers that mix coins in order to obscure their origin for a small service fee and extra delay; to sidechains with Confidential Transactions (as deployed by Blockstreams Liquid) that hide the amount of a transaction on-chain using homomorphic encryption; to non-custodial mixing softwares like CoinJoin, in which a large group of users cooperates to combine multiple Bitcoin payments into a single transaction, to obfuscate the information of which spender paid to whom.

One simple solution is to get rid of self-surveillance of transactions by getting rid of the blockchain as much as possible. So another solution are the Layer 2 protocols, like the Lightning Network, a payment channel network where users can make, arbitrarily, many off-chain payments between themselves without the need to broadcast these individual transactions to blocks included in the Bitcoin blockchain.

However, the Achilles heel of Bitcoin privacy is actually its peer-to-peer broadcast. In detail, Bitcoin is built on top of a peer-to-peer broadcast at the level of TCP/IP packets, where both new transactions and blocks are announced to the rest of the Bitcoin network, making Bitcoin resilient against censorship. Yet, being resilient against censorship does not make one resistant against surveillance. Your IP (Internet Protocol) address leaks your approximate geolocation with every packet.

When a Bitcoin transaction is broadcast by a full node, an attacker can link transactions to the IP addresses of the originating user, as well as the timing and size of the transactions of the user. Anyone can do this by simply running a full supernode that connects to all of the thousands of Bitcoin nodes as well and simply observing the network traffic. Randomized delays in the P2P traffic as implemented by Bitcoin help a bit, but ultimately are capable of being defeated.

Similarly, an IP footprint is left at crypto exchanges and bitcoin payment providers. In fact, this kind of traffic analysis can even be applied to the Lightning Network. Not only can government agencies like the NSA commit these kinds of attacks, but even a local Internet Service Provider (ISP) can do traffic analysis on your connection to the internet from your home.

Without the network-level privacy of the peer-to-peer broadcast, any privacy solution for Bitcoin is like building a castle on top of sand, using fancy cryptography on the blockchain itself including through so-called privacy coins like Zcash, and even Monero when the fundamental peer-to-peer broadcast of Bitcoin is exposed for the whole world to see.

What can be done to provide privacy for your peer-to-peer broadcast on Bitcoin?

One solution to obfuscate the IP address is to use a VPN (Virtual Private Network, but better thought of as an encrypted internet proxy). In a nutshell, VPN software builds an encrypted tunnel between a client device and a server run by a VPN provider, which acts as a proxy that forwards the network communications. Thus, your local IP address doesnt get linked to your wallet address or your identity on a KYC-supporting crypto exchange.

Yet, weve pointed out that VPNs are not actually anonymous. Although VPNs can hide your IP address, they suffer from inherent weaknesses due to their centralized trust model. A VPN provider acts as a trusted proxy and hence can easily link all of your activities at the network layer. The VPN itself also doesnt need to monitor you, as anyone watching a VPN carefully can also link your transactions. Such network eavesdroppers can observe the network traffic flowing to and from the VPN proxy and simply track the routed network traffic based on the size and timing of the data packets, and thus easily infer your IP address even when the VPN is hiding your IP address from the website or Bitcoin full node you are accessing.

Most people dont run a full Bitcoin node. Many people use exchanges, and even hardcore Bitcoin users who tend to use self-custodial wallets run light clients, where a full node acts like a trusted proxy like a VPN. However, dont be fooled into thinking this full node provides privacy. The full node, and anyone watching the full node, can correlate your Bitcoin broadcasts and your transactions with your light wallet and thus your IP address and transactions to you!

In contrast to centralized VPNs, Tor builds a decentralized network of nodes so that no single node knows both the sender and receiver of any network packet. Tor forwards traffic via a long-lived multi-hop circuit as follows: Each connected user opens a long-lived circuit, comprising three successive, randomly-selected relays: entry guard, middle relay and exit relay, and negotiates symmetric keys which are then used to encrypt each of the communication packets. While the message travels along the circuit, each relay strips off its layer of encryption, giving Tor its name as The Onion Router. If a Bitcoin transaction was sent over Tor, it appears to have the IP address of the last Tor exit relay.

Although much better than any VPN, Tor was designed to defeat local adversaries that observe only small parts of the network. Since packets still come out of Tor in the same order they came in, a more powerful adversary that can watch the entire network can use machine-learning to successfully correlate the pattern of internet traffic so the sender and receiver of a transaction can be discovered. This kind of attack can easily be applied to Bitcoin transactions over Tor, and recently, there has been evidence that large amounts of exit nodes have been compromised by a single entity. In fact, early Bitcoin developers preferred a pure peer-to-peer broadcast over using Tor for precisely this reason. Circuits in Tor also last ten minutes, so if more than one Bitcoin transaction is sent via Tor in this period, these transactions will all have the same IP address of the last Tor exit relay. New circuits can be built with every transaction, but this behavior stands out from Tors default and so is easily identified using machine learning.

Techniques like Dandelion that are used by Bitcoin resemble Tor, with each new packet being sent a multiple number of hops before being broadcast, where the hops are a stem and the broadcast are the flower, and so resembling a dandelion. Although it is much better to use Dandelion than to not use it, a powerful adversary can simply observe the building of the randomized Dandelion circuit and use that to de-anonymize the sender and receiver.

Unlike Tor and VPNs, a mixnet mixes packets. This means that, rather than packets coming out of a node in the mixnet in the same order the packets came in, packets are delayed and then mixed with other packets, so the packets leave the mixnet in a different order.

As pioneered by David Chaum in his pre-Tor paper that invented mixnets in 1981, one way to think about them is that at each hop in the mix network, the mix node shuffles the packets like a deck of cards. Like Tor, a form of onion encryption is used and the packets are all made the same size using the Sphinx packet format. This is the same Sphinx packet that is used in the Lightning Network, but was originally built for mixnets.

Nym is a kind of mixnet where the packets are delayed using a statistical process that both allows an estimate of the average delay of a packet but provides maximum anonymity as it is unknown when any given packet is finished mixing. Packets are sent from a program like a Bitcoin wallet through a gateway, then three mix nodes, and finally out of a gateway. Unlike Tor and VPNs, the packets are each sent routed through the network individually. With Nym, dummy packets are added to increase the anonymity of packets.

Compared to Tor and VPNs, mixnets are well-suited for Bitcoin. Bitcoin packets naturally fit within Sphinx packets, as weve seen with the Lightning Network, and it makes more sense to route Bitcoin packets individually rather than through a circuit needed for a webpage.

Like VPNs and Tor, mixnets hide the IP address of the packet, but unlike Tor and VPN, each packet can be given a new route and exit IP address. Due to packets being sent out of order and fake packets being added, it is likely harder for machine learning to identify the sender and receiver of a packet. Bitcoin connections from wallets to full nodes would benefit from using a mixnet, as the broadcast would be much more thoroughly defended against attackers than just using Dandelion.

Although the re-ordering of packets naturally tends to make mixnets like Nym slower than Tor, the delay can still achieve reasonable anonymity as long as enough people are using the mixnet! within seconds to minutes. One way to view mixnets is as a slower, but more anonymous version of the Lightning Network.

Lastly, mixnets are not only for Bitcoin. Just as Tor is suitable for web browsing using synchronous circuits, mixnets are suitable for any kind of traffic that naturally fits into asynchronous messages such as instant messaging. One killer use-case of mixnets before Bitcoin was email remailers that forwarded email anonymously.

Early cypherpunks like Adam Back tried to bring mixnets to market to allow anonymous email in the Freedom Network. Back invented proof of work via Hashcash in part to prevent anonymous email spam, where even a small amount of work like solving a hash puzzle would prevent a malicious spammer from flooding people with anonymous email.

Cypherpunks ended up using mixnets like Mixmaster, co-created by Len Sassman, and Mixminion, co-created by George Danezis and the founders of Tor (before they started working on Tor), in order to hide their identities online. So, it should come as no surprise that concepts like proof of work that originated with attempts to create anonymous email with mixnets ended up in Bitcoin. It would not be surprising at all if Satoshi Nakamoto used a mixnet to hide their own identity on email discussion lists when releasing Bitcoin.

Right now, Tor and Dandelion are the best solutions we have for network-level privacy for Bitcoin, yet the return of mixnets will be necessary in order to allow Bitcoin to achieve true privacy and security against powerful even nation-state level adversaries.

Len Sassaman, cypherpunk co-creator of Mixmaster mixnet, immortalized in the blockchain. Source.

This is a guest post by Harry Halpin And Ania Piotrowska. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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Achieving Network Privacy In Bitcoin: VPNs And Tor Help, But Mixnets Are Needed - Bitcoin Magazine