The freshly-licensed Coinbase is a bellwether of what to expect from centralized bitcoin exchanges. This is true not only in the U.S. but wherever regulation forces exchanges to serve the state and crony-banking system from which bitcoin offers escape.
No wonder decentralized exchanges, like Localbitcoins, are breaking their own volume records on a weekly basis. The peer to peer exchanges are imperfect. But for the cautious and the informed, they are a return to the privacy and financial freedom that made bitcoin a beacon.
The Threat Of Coinbase
Late in February, a Reddit thread on Coinbase erupted. The exchange had implemented a new method to verify identities. The first post in the thread captured the change and the dominant reaction to it.
Just tried to help a friend register an account and they’re demanding access to her webcam?!?! “we will require you to take a photo of yourself with your webcam”….but no law or regulation requires this. I have accounts with 3 brokerage firms, 2 banks, and Gemini, and none have ever demanded access to my computer’s hardware. Coinbase, what are you trying to pull here? Accessing our computer’s hardware is not required by… laws/regulations. What’s your true endgame?
Coinbase’s accelerated ID verification is part of its commitment to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) laws – two incredibly invasive measures that destroy financial privacy. Coinbase’s new layer of verification uses facial recognition technology to correlate a live real-time face shot from a webcam or smartphone with the image of ID being submitted at the same time by an account applicant or with the data already on file for an account holder. (The process is described with images here.)
Not everyone seems to be subjected to the increased scrutiny. Perhaps those who appear suspicious. Perhaps they belong to a ‘wrong’ category such as ‘non-American.’ Or Coinbase may be gradually implementing the technology in order to iron out the myriad problems being experienced by users. A Reddit poster with an existing Coinbase account wrote;
I’ve had an account for three months and all of a sudden when I went to but [sic] more Bitcoin I was taken to a page to verify my identity again. I had already done that by uploading my license. This time they made me use my webcam and it took me eight tries because they kept saying it was too blurry.
Whatever the reason and unless there is a considerable downside, Coinbase is unlikely to forgo a process that protects it from government and provides commercially valuable data. The process is more likely to become the norm for centralized exchanges.
The Long Path To Your Identity Strip Search
The change has been coming for some while. Jumio, an online mobile payments and ID verification company, unveiled its new Face Match feature in September 2013. In March 2014, a Coindesk article announced Jumio’s Bitcoin Identity Security Open Network (BISON) which targeted a client base “of bitcoin exchanges, wallets, and ATM providers worldwide.” The article indicated future data-sharing plans, which may or may not be optional; the description is confusing and gathered data is often shared despite guarantees to the contrary. The article continued, “BISON client businesses will also have access to regularly updated data regarding success rates, failure rates, account openings, transaction failures and fraud attempts within the network…”
In November 2016, Biometric Update heralded Jumio’s innovative melding of Face Match with a bitcoin focus; Coinbase was specifically mentioned.
Jumio’s Netverify now includes Face Match and ID verification, a three-pronged approach to the…[KYC] process on mobile devices by confirming an identity and the validity of the person presenting the ID….[Coinbase can] ensure the person with the ID matches the identity on the card before approving increased buy/sell limits within the marketplace.
This February, Netverify Document Verification was publicly unrolled and declared to be the “first web and mobile document verification solution to meet KYC and AML requirements for pertinent account information.” Coinbase implemented the system in that same month, but the exchange does not seem to restrict its application to “increased buy/sell limit” requests.
Centralized exchanges are becoming unapologetic arms of the state. They are rushing to over-comply with laws that gut the privacy and protection of their customers.
The Unbearable Lightness of Peer to Peer
My experience in opening a Localbitcoins account stands in sharp contrast. It took me less than two minutes yesterday morning to register. A follow-up email contained a link upon which to click and constituted the only ID verification. Presumably, an anonymous but valid email address would have sufficed. In a February 12, 2017, Bitcoin.com article, Jamie Redman added, “There is an option to upload a state-issued identification card, license, and a phone number. Verifying these IDs does add more trust to the buying and selling process as far as reputation is concerned. However, users can opt out of these verification processes and still conduct trades on the platform.”
How does Localbitcoins function? Established in 2012, it is a type of Craigslist that connects individuals within certain regions who wish to sell or to buy bitcoins. Sellers advertise on the website where they state details such as the selling price and the payment methods accepted. Buyers reply and either meet the seller in person with cash or arrange for alternative payment — for example, through Paypal, gift cards, or Western Union. Localbitcoins offers escrow and conflict resolution as well as a feedback mechanism by which traders can be rated.
As of August 2016, about 1.35 million members were reportedly registered from 249 countries, and the value of weekly transactions exceeded $14 million.
Localbitcoins is not the only peer to peer exchange. Three others often mentioned favorably are Bitquick, Bitsquare, and Wall of Coins.
Every way of transferring wealth has risks. Forums on peer to peer trading are rife with tales of scams but, then, so are forums on mainstream exchanges. Coinbase has been accused of arbitrarily closing accounts and of canceling transfers when a change in bitcoin’s price acts to its disadvantage.
But the greatest risk is the regulation of bitcoin which peaks when governments, like Venezuela, crackdown with brute force. The greatest threat to financial freedom is the coalition of governments and central banks, both of which need your cooperation and data to function effectively. Centralized bitcoin exchanges are fast becoming a means to gather both. They are fast blurring into banks.
Images courtesy of Shutterstock, and Pixabay.