SEC, losing patience with anonymity, demands source info

  • By Tom Cleveland

  • February 9, 2019
  • 3:02 am BST

Crypto zealots have always held two things as holy in the blockchain ecosphere – privacy and anonymity. Any attempts by a national governmental authority to circumvent or compromise these two principles are seen as acts of war, but from the other perspective, the blockchain is already known to be used by organized crime to hide stolen goods, launder ill-gotten loot, and evade taxes on a global scale. The crypto industry’s reputation continues to be tarnished by massive exchange losses and fraud, aided and abetted by the very technology that is the underpinning of all cryptocurrencies.

Government agencies across the world are losing their collective patience. If crypto awareness and acceptance are to mature to the next level, there has to be agreement on some middle ground in this area or progress is doomed. In the interim, there will be broadside salvos leveled at the industry on a continuing basis by regulators, much as what just transpired in the U.S. market.

The SEC, according to reports, “has issued a ‘Sources Sought’ notice to acquire personal blockchain data for the purposes of ‘conducting market research’.” In the SEC’s own words: “The SEC is seeking information for potential sources to support the goal of acquiring data for the most widely used blockchain ledgers, including the universe of available information and transaction details.”

Speculation by Fundstrat’s Tom Lee is that the SEC is searching for tax dodgers. If the SEC can identify wallet owners and various transaction flows to specific blockchain addresses, then it would have gone a long way to assist the Internal Revenue Service (IRS) in collecting unpaid taxes that have been estimated to be as high as $25 billion.

The SEC has had an ongoing effort to acquire information of this type in the past. It has already pressured industry analytical firms like Chainalysis, CypherTrace, and Elliptics, to cooperate by handing over mountains of transaction data. It is unclear if the agency has assembled the intellectual firepower to delve into this information, but the blockchain data is public information. There is no reason why the SEC cannot perform similar analyses as these firms have already done.

In the SEC’s last annual report, it noted that delving into cryptocurrencies was a top priority for it and its Office of Compliance and Examinations (OCIE). Per their report: “In particular, through high-level inquiries, OCIE will take steps to identify market participants offering, selling, trading, and managing these products or considering or actively seeking to offer these products and then assess the extent of their activities.”

These recent actions by the SEC and the OCIE may be the initial steps in 2019 to fulfill its stated mission by attempting to pierce the veil of secrecy of the blockchain. The one problem that has not been discussed is that even exchanges do not have reliable information as ton the actual ownership of their accounts.

In a recent report by Chainalysis, the firm determined that two professional hacking gangs accounted for over a billion dollars of exchange compromise losses to date. The crooks were very adept at covering their tracks: “Each firm disguises their movement of funds by layering the activity among multiple exchanges and utilizing as many as 5,000 transfer transactions before converting to fiat currency for ready withdrawal.” The SEC may find that determining ownership is far more difficult than following the trail of money flows in the blockchain. It appears that the crooks may already be one step ahead of them.