Cryptocurrency off-ramps, and the shift towards centralization

by Molly White on
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As I wrote in “Anonymous cryptocurrency wallets are not so simple”, a challenge with cryptocurrency arises when it comes time for someone to take a significant amount of it and cash out. Typically someone can’t use their crypto holdings to pay their student loans, pay the tax bill from all that crypto trading they did, or put a down payment on a house—they have to cash back out into traditional currency. Any reputable financial institution performing such an exchange has to abide by anti-money laundering laws, and so must evaluate whether to allow such a transaction to take place.

The simplest scenario for a financial institution is when a person who has verified their identity with a major platform makes a bank transfer to buy cryptocurrencies, doesn’t do a whole lot with them, and then cashes back out. The institution can see that the funds were probably legitimate when they came in (since they came from an established bank account), and that nothing shady happened with them while they sat around in cryptocurrency form, and so can pretty confidently cash them back out. But the farther a user strays from this simple case, the more risk a financial institution takes on by allowing the transfer, and it seems that the major players are becoming increasingly wary of this risk.

Although some people are perfectly happy to use a major cryptocurrency exchange with KYC,1 transfer to and from an established bank account, and engage only with other large crypto platforms that take steps to prevent criminal activity, that is hardly the ideal scenario as presented by most proponents of web3. Web3 is pitched as a place where power won’t be concentrated in the hands of only a few platforms that control who can transact and how. Many cryptocurrency projects explicitly aspire for their transactions to be free from interference from corporations and banks and governments. Proponents say that traders will be able to be as pseudonymous as they like, known only by their random wallet address. But it seems like the “off-ramps” from crypto—that is, the firms who will exchange your cryptocurrencies back into traditional currencies—are increasingly taking the position that is so common and so flawed in discussions about privacy: “if you’re not doing anything wrong, what do you have to hide?” as well as its complement: “if you’re hiding something, you must have done something wrong.” And although those fighting for things like strong encryption have enjoyed some hard-fought (and continuously-fought) victories in favor of privacy, that is not a stance commonly favored in the financial system.

Because the actions that enable privacy and anonymity with crypto are the same as the ones that enable criminal behavior—using cash to buy crypto, mixing currency through tumblers, and using less-popular and less-centralized exchanges and platforms, for example—cryptocurrency exchanges and financial institutions appear to be increasingly unwilling to allow anyone who engaged in these behaviors to cash out, particularly as regulators begin to turn their eyes to the space. It seems that people who wish to engage with cryptocurrencies are more and more being pressured into using only the parts of the system that look a whole lot like traditional banking (but with fewer protections): a small number of highly-centralized platforms with strong KYC. If they don’t, they have to accept the risk that they may not be able to cash their money back out down the line: issues that people are increasingly beginning to encounter.

In 2013, a woman deposited around $3,250 in cash to a cryptocurrency exchange, then used it to buy Bitcoin. In 2021, when the investment was worth 100× more, she decided it was time to cash out and use the funds to help one of her children buy an apartment. However, because the original purchase started with a cash deposit, her bank was not sufficiently convinced that the money didn’t come from criminal activity, and refused to process the transaction.2

In February 2022, a Bitcoin holder decided to try to use a cryptocurrency lending platform called BlockFi to take out a USD $300,000 loan, putting up the equivalent of $600,000 in Bitcoin as collateral. However, the BTC he bought didn’t come from an exchange—he said that he bought it from a “private source”, and that he chose that route after reading the Bitcoin whitepaper (which touts the privacy benefits of cryptocurrencies). It turned out that the “private source” had passed them through a cryptocurrency mixer—a technology that helps obscure the source of funds, and as such is used for legitimate privacy reasons as well as by criminals to “clean” funds that are known to be stolen or otherwise tainted.3 BlockFi called back the loan, and the holder found themselves $300,000 poorer with little recourse.4

While some may be willing to put money into cryptocurrencies with no promise of being able to cash back out into traditional currency, this is not a common position, nor is it a feasible one for most people. It doesn’t seem particularly realistic for proponents of cryptocurrency to expect people to invest now, without worrying about transforming their crypto back into cash, with the promises that maybe, someday, goods and services will be exchanged for cryptocurrency rather than traditional money.


Disclosures for my work and writing pertaining to cryptocurrencies and web3 can be found here.

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