In 2024, the push for regulatory clarity in the cryptocurrency market has inadvertently fostered a burgeoning Crypto Surveillance State, where every transaction is tracked and taxed, compromising the foundational principles of privacy and autonomy that originally fueled the crypto movement.

The cryptocurrency market is at a crossroads as we approach the midpoint of 2024.The promise of trillions flowing into digital currencies hangs in limbo, shackled by antiquated frameworks like the Howey Test and the broader tapestry of existing securities laws. This stagnation in regulatory clarity not only stifles institutional adoption but also leaves a throng of altcoin enthusiasts in the lurch, awaiting the green light for an Ethereum ETF — contingent on a regulatory consensus between the SEC and CFTC on how to handle the burgeoning population of 13,217 cryptocurrencies.

The crux of the matter extends beyond mere technicalities of regulation. A stark realization looms: every transaction — every purchase, trade, and sale within the cryptocurrency sphere — must be transparent, publicly visible. This visibility is deemed necessary to prevent malfeasance, yet it undermines the very principles upon which Bitcoin and its ilk were founded. The lack of fungibility, the traceable history of every token visible via public addresses, casts a long shadow on Bitcoin’s viability as a “dependable money type.” Privacy concerns abound as the potential for public exposure of wallet addresses linked to personal identities could make users targets for a myriad of security risks.

Gone are the days when Bitcoin championed the core cypherpunk principles of privacy, decentralization, censorship resistance, and individual liberty. Fast forward to today, and it’s clear that only a semblance of those ideals survives, with privacy — crucial for true individual liberty — being the most sacrificed. The original disruptors, the Bitcoin OG’s, have now pivoted towards compliance, unwittingly paving the way for the construction of a formidable Crypto Surveillance State.

This burgeoning surveillance state is methodically setting the stage for comprehensive oversight. It strategically employs a trio of surveillance mechanisms, already operational and primed to monitor, track, and tax the everyday investor ahead of the inevitable next bull market in cryptocurrencies. Many cryptocurrency exchanges operating in the U.S. are required to provide certain customer information, including transaction records, to the IRS as part of regulatory compliance The groundwork lies in the mandatory KYC/AML procedures enforced on every crypto exchange. These procedures are the basic requirements for entering into the crypto space similar to traditional banking practices in the TradFi markets. This was the start to normalizing the merger of the old legacy system with the new digital financial world. These measures link every transaction directly to an individual’s identity, effectively stripping away the any sort of anonymity once cherished in the crypto sphere.

But the surveillance doesn’t stop at the exchanges. Personal and hosted digital wallets are the next frontier for data collection. The IRS, citing a “loss of information” compared to traditional financial transactions, is pushing for expansive reporting requirements that would further erode privacy. Right now the pressure is on exchanges to implement policies for monitoring hosted wallet activities, but the next concern will be self-custody wallets. The first addition of crypto tax reporting came in 20222 with a single question on Form 1040.  Fast-forward to 2024, and Form 1099-DA is a new tax form being introduced by the IRS to report transactions involving digital assets, including cryptocurrencies, NFTs, and stablecoins. The form will be required to be issued by “digital asset brokers” such as cryptocurrency exchanges, digital asset payment processors, and hosted wallet providers, starting in January 2026 for transactions occurring in 2025. So, you see where this is heading right?

If that level of information wasn’t enough in some cases, the IRS may issue a John Doe summons to cryptocurrency exchanges and other platforms. This allows the agency to obtain information on all users who meet certain criteria, such as those who have conducted a certain number of transactions or exceeded a certain dollar amount in transactions. These proposed rules would compel brokers to disclose comprehensive transaction details to the IRS, tightening the noose around the necks of digital asset holders.

Moreover, the surveillance extends to monitoring the networks themselves, tracking every transaction for signs of suspicious activity. This revelation stems back to the classified documents from the U.S. whistleblower Edward Snowden which indicated bitcoin surveillance was and is a top priority for the U.S. National Security Agency (NSA). Unbeknownst to many, the NSA, in collaboration with blockchain analytics firms, has been intensively tracking cryptocurrency users for years, employing sophisticated tools like OAKSTAR and MONKEYROCKET. The Snowden revelation highlighted that the NSA had been monitoring the internet activities of bitcoin users since 2013 through a program codenamed OAKSTAR. During the initial leak it also suggested that with MONKEYROCKET, another sub-program under OAKSTAR, the NSA was moving closer to pinpointing users who initiated a cryptocurrency transaction. They then allegedly leveraged the XKeyScore system to gather and analyze vast amounts of data aimed at de-anonymizing users. The leaked documents hinted that the XKeyScore system – a powerful global internet monitoring system investigated bitcoin user information. If this type of information was brought to light over 11 years ago just imagine how advanced their technology is now. 

This trifecta of surveillance tools reveals a disturbing reality: the ongoing establishment of a perfect surveillance state under the guise of regulatory clarity and investor protection is ultimately a mechanism for control. As the economy teeters on the brink, burdened by a looming debt crisis, the government’s interest in cryptocurrency holdings intensifies. The drive to ensure comprehensive tracking and taxation of digital assets is not just about maintaining financial order but about asserting control, ensuring that when the time comes, every taxable value can be extracted to bolster state coffers.

This scenario paints a grim picture for retail investors, who may soon find themselves trapped in an unfavorable position, much like households subjugated by Wall Street’s monopolization of financial markets. The unanticipated issue of fungibility, or the lack thereof, emerges as the silent Achilles’ heel for Bitcoin and its peers, challenging the foundational promise of cryptocurrency as a liberating financial force.

Will the cryptocurrency sector turn into the legacy system over time? Leave a comment…

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