The Problem With Bitcoin Banks
As has recently come to light, Coinbase spies on its users. Not just a little, either. Coinbase has shut down user accounts for a variety of snooping-related reasons. Examples include gambling online (legal in the US), buying marijuana, and just plain buying too many Bitcoins.
“Because I buy a few bitcoins a week from Coinbase (although sometimes I will go months without buying any) I was flagged as having enough volume to potentially be a Money Services Business (MSB) and the Coinbase ‘compliance team’ mounted an investigation against me. They determined that ‘they have reason to believe’ I am selling Bitcoins on LocalBitcoins, even though they haven’t said what that reason is, and therefore are suspending my account.”
“I have been a long time coinbase customer, buying 1-3 times per month, I got an e-mail today saying they are banning me from using their services because of a ToS violation. I e-mailed them back to ask what the violations [were] and they told me that they have evidence that I used some of the BTC I bought for cannabis/cannabis seeds. They gave me a specific BTC transaction and said it was for drugs and wouldn’t listen to anything I had to say.”
Many of the users in question claim to be innocent, but I frankly don’t care. The underlying issue runs much deeper than whether Coinbase is good at spying on their users. In fact, it runs right to the heart of what Coinbase is.
When visit the front page of Coinbase, the first words you see (in big block Helvetica) is “YOUR BITCOIN WALLET.” That’s how Coinbase talks about its service – as a “wallet.” If you were new to Bitcoin, you could be forgiven for assuming that they were talking about wallets the same way that everybody else talks about wallets. That is, secure cryptographic secrets, which you can plug into software to make transactions.
You’d be wrong though, because what Coinbase calls a “web wallet” is also known as a “bank account.” When your money is stored in a Coinbase wallet, you don’t control its private key. It isn’t really yours. As Mt. Gox taught us, until you actually cash your Bitcoins out to a real wallet, you can only have so much confidence that they still exist.
Coinbase is a bank. They’d rather you didn’t say it, but it’s true. And, in the modern financial world, being a bank has consequences. It’d be easy to raise a huge fuss, and boycott Coinbase over its behavior – but we’d be missing the point. Coinbase isn’t doing this because they’re snoopy, or moralistic. They’re doing this because they’re terrified. Bitcoin is going mainstream. Among other things, that means that the burning eye of financial regulators is finally turning towards it. Coinbase is spying on its users, because (as a financial service company) they are legally required to. Regulation, at least these days, implies surveillance and inconvenience.
One of the advantages of Bitcoin is that it provides an escape from this kind of nonsense. Your money is yours. Your wallet belongs to you. It can’t decide that you don’t get to spend money on certain things, and it can’t tattle on you. It can’t arbitrarily limit your money transfers. It can’t vanish with your money. You don’t have to trust it. Bitcoin offers the freedom of cash, with the portability of credit cards. Not Freedom with a capital F, the pie-in-the-sky Libertarian ideal. Just the mundane little-f freedom that people actually care about.
That’s a value proposition that Coinbase, as a regulated institution, cannot compete with. The situation is only going to get worse as time goes on. Bitcoin is getting big, and stuff like BitLicense isn’t going away. As Bitcoin gets more regulated, Bitcoin banks are going to have to impose more and more dumb restrictions on their users.
What’s the solution? Well, mostly, stop using Coinbase and other Bitcoin banks! Get thee to a nunnery, or at least a good multisig wallet. Get a Trezor! Sign up with Copay, if you’re worried about theft. Take some control of your money. Stop letting putting your money anywhere that Uncle Sam can have an opinion about it.
Bitcoin isn’t about replacing one set of stodgy financial overlords with another. It’s about freeing money up from centralization. It’s about making cash relevant to the 21st century. It’s about protecting people from people who want to protect people from themselves. If you needed another reason to stop trying to put stamps on emails, this Coinbase debacle is a good one.
I don’t think getting a private wallet where you hold the private key is enough. Coinbase will just snoop on transactions to your wallet and say it’s a violation. We need a few other exchanges to use as an alternative. Are exchanges out of Europe better? Thanks.
Welcome to the world of regulated US financial business. Kudo’s to Coinbase.
Very good article. This is exactly what everyone should think about bitcoin.