I want to comment on the suggested use of P2P exchanges to avoid the attention of the tax authorities. Some people seem to believe that personal (non-business) bank transfers are not scrutinized by the bank, especially if the transfers involve small amounts.

In the general case that is not true. The algorithms used by the banks to detect suspicious transactions and/or accounts are quite complex. They vary one jurisdiction to another and even from one bank to another. And you don't really know what is suspicious to the bank. Multiple small transfers coming from various unrelated people can easily flag your account as suspicious and it could be locked until you provide more information about the sources of these transfers, or you could just be silently reported to the tax authorities.

Also remember that all bank transactions are kept for at least 10 years and potentially forever. So they can easily come after you in 5 years.

The only kind of transfer that leaves very few traces is when the two parties meet face-to-face and exchange crypto for physical cash. And of course it has its own set of problems already mentioned by the other posters, the $5 wrench attack and fake cash being the most serious ones.

For the time being, crypto-to-crypto trades are not that difficult because we still have the no-KYC CEX exchanges and DEX exchanges. Obviously CEX exchanges give better liquidity and better prices, while DEX exchanges have lower risk of the crypto being locked for non-compliance with different regulations.

For the crypto-to-fiat trades it is more difficult. The only kind of trade that does not (or at least should not) leave a paper trail and leaves a small electronic trail is when the two parties meet face-to-face and side A gives side B cash and side B transfers the crypto to side A, possibly through some escrow service. The second-best option are  the no-KYC crypto ATMs, but their number is decreasing and in 2-3 years I think almost all of them will be gone. And they are more expensive than face-to-face trades.

I think that face-to-face trades will become quite popular when everything gets regulated, but they have their own risks (the famous five-dollar wrench attack). Also the earlier one starts establishing personal contacts with reliable people, the easier it will be to do the face-to-face trades. Then again, finding reliable people is not an easy task in and of itself given the amount of fraud in crypto land.

Do you mean that at this point the governments are used to the bitcoin transactions being transparent so if the developers add privacy features to bitcoin, then the governments will enact even more restrictive laws? That's probably true. However I suspect that governments will continue introducing more restrictive legislation until they turn crypto into just another kind of electronic bank money. And this will happen regardless of the presence or lack of privacy features in bitcoin. After all if all entities that make crypto transactions are required by law to demand KYC from the other party, then it doesn't really matter if the crypto transaction is private or not. For practical purposes it won't be private. If you don't report your crypto transactions to the government then the other partie(s) will do that and the government will punish you for not reporting them.

As Philip Zimmermann said “If privacy is outlawed, only outlaws will have privacy.”

If Bitcoin had the privacy features of Monero from the start, it wouldn't be useless, just like Monero isn't useless. The users of the the "proper" Bitcoin would be fewer than the users of the current one, but their number would probably be greater than the number of the Monero users, because some of the current Bitcoin users would use the "proper" Bitcoin despite it being outlawed. And I am not really sure that the "proper" Bitcoin would be outlawed, maybe it would be in Monero's position, frowned upon, but not outlawed. After all torrents are not outlawed, even though most of the content distributed there is not licensed by its respective owners.

My impression is that most of the Bitcoin users in USA don't really use it as a currency, but as an investment. And this is probably true for Bitcoin users worldwide, not just in USA. So these people would be happy with any financial instrument that is unregulated or weakly regulated, liquid and highly volatile. My guess is that if there were a "proper" Bitcoin, they could use some financial instrument derived from the "proper" Bitcoin, ETF or just move to some other completely unrelated financial instrument.

I can think of the following reasons why users prefer centralized services

• Arguably centralized services are easier to use.
• In some cases centralized services have lower fees when transferring crypto between user accounts in the same platform.
• Almost always centralized services have lower latency when transferring crypto betwen user accounts in the same platform.

For new users the first point (easier to use) is what attracts them to centralized services.
For some experienced users (e.g. daytraders) the second and third points (low fees, low latency) is crucial.

Monero is not dead exactly because it provides something that Bitcoin does not, private transactions. Essentially Monero is Bitcoin done right.

Indeed, it seems that the originally BTC was invented as yet another type of cash. It has many of the properties of physical cash. Its transactions are irreversible, wallets don't have owner's identity attached to them, you cannot lock the wallets, or invalidate coins, etc. It does not replicate all the properties of physical cash, but it is close enough.

However governments attempt to treat crypto wallets as yet another type of bank accounts and the crypto itself and electronic bank money. They will not stop until they regulate it to the point where it is no different from ordinary bank money.

Regarding the ability to transact bitcoin off-chain, I think that the closest thing to off-chain transactions that we have now for BTC is the Lightning Network which only stores aggregated transaction data in the blockchain. However this doesn't really solve the problem where you have to report all of your transactions to the government.

So this is yet another proof that governments treat crypto as yet another kind of bank money. There is one difference, though. With banks they can get a full list of your transactions to/from your account and with crypto this is not possible because they don't know taxpayers' wallets, so they shift the reporting burden onto the taxpayers.

For practical purposes there are two kinds of trades that governments cannot trace easily. The first kind are some of the online crypto<->crypto trades (DEXes, wallets that provide atomic swaps, non-KYC CEXes, etc.). And the other kind are P2P trades where the traders meet in person and exchange crypto for physical cash.

Mandatory reporting of crypto/crypto trades is bad because the amount of paperwork will make crypto unusable for everyday use. Also this means once the government knows that you own crypto, it is very difficult, next to impossible to hide that crypto from the government again. One option is to sell the crypto for fiat, pay the taxes, then buy crypto again, without reporting it. Which is fine, except that, if I understand you correctly, it is illegal to buy crypto without reporting that.

In EU individuals don't have to report purchases of crypto, at least I am not aware of a global EU law that applies to all EU members. Also for the time being there are no reporting requirements for crypto/crypto trades between individuals, I guess because they are unable to track them. On the other hand when you pay the taxes for the sold crypto, you may need to provide at least some of the trading history to explain how you got the crypto that you are selling for fiat.

Things are changing and they are gradually enforcing KYC on all companies that work with crypto. Given the direction we are headed, I expect that they will introduce stricter reporting requirements in EU too, but in a few years. I hope that we have 4-5 years, maybe more, until that happens. So one can use that time to hide his wallets from the prying eyes of the governments.

Just google for buy european did number with crypto and you will find a bunch of companies providing phone numbers. You also probably want to get a number with SMS, because not all companies provide authentication codes via voice calls, some insist on sending you an SMS.

I cannot recommend a specific company, because I don't use a European VOIP number, but you can probably try a few until you find a suitable one. Also keep in mind that some websites recognize VOIP numbers and refuse to create accounts with such numbers.

As far as I know in most EU countries crypto is treated as an asset and the owner is required to pay tax only when converting it to fiat, the difference between the buy and sell price is paid. I think France is an exception and there is a yearly tax that is paid on the crypto that you own (it is still treated as an asset, though). There might be a few other exceptions but in most cases only selling of crypto for cash is taxed. However things are changing quickly and the new laws might be more restrictive.

As for the USA and Canada, I am not sure about the taxation there, I think it is done in a similar way, crypto is an asset and you pay taxes on the difference between the buy and sell price of the crypto. But if you live in the USA, you are more knowledgeable about it than I am.

Regarding the other countries, again my impression is that their tax laws might be different, but very few people there actually pay taxes on the crypto anyway.  One exception is India where, I think, you pay 1% of the amount each time you make a trade. And there are still some countries where crypto is not regulated, so you can do anything you want with it as long as you don't break other laws.

There are still a few decent non-KYC CEXes. Sooner or later the governments will ruin those decent exchanges by forcing them require KYC, but until then it probably makes sense to use them at least in some cases.

I agree that it is a problem. It probably makes sense to go through the transaction history of the wallets that one owns and see which wallets are "tainted" by communication with KYCed CEXes, then move the crypto from the tainted wallets to new ones. If the move is done through an intermediary privacy coin on some DEX, then it should be rather difficult if not impossible to connect the "tainted" wallets to the new ones. In most countries taxation is done only when selling crypto for fiat, so exchanging crypto for crypto should not involve additional government taxes/fees, although it will cost some network fees.

Replacing just one seed word is really easy to break and is probably the first thing the bad guys will try if they find something resembling a seed phrase. And it still requires memory. I would suggest taking one's favorite irrational number (pi, e, sqrt(2), etc.), choosing an arbitrary offset in the number's digits, then remembering that offset.
After that using the sequence of digits at that offset to encrypt the seed phrase, writing down the encrypted seed phrase and storing it in multiple places.

The obvious lessons that I took from laws like this one are

• Don't keep large amounts on CEXes or other centralized sites.
• Use privacy coins.
• Keep the crypto wallet on an encrypted disk partition.
• Write down the passwords/seeds, but not in cleartext. Encrypt them using some simple rule, reordering or substituting the words with other words. Don't write down the simple encryption rule, but remember it.

I think this applies worldwide, not just to those living in the UK.

Thanks for the article, I read it with interest, even though it is mostly about Samourai. I am not sure whether the profit that the respective software authors make is what makes or breaks the legality of the service in the eyes of the government.

I found the press release of the US government regarding Tornado Cash

They say

The profit of their business is responsible for the last charge, "conspiracy to operate an unlicensed money transmitting business". However the first two charges, "conspiracy to commit money laundering, conspiracy to commit sanctions violations" are not directly related to any profit, so even a non-commercial software or service can be prosecuted for the first two "conspiracies".

I am pretty sure that their profit made them more important in the eyes of the US government, thus making them a priority target. But the question is what are they going to do after they kill all for-profit privacy tools? I think that they will go after the tools which don't provide any visible profit for their authors. At least that is what the wording of the press release suggests.

So essentially the developer of Tornado Cash is prosecuted for writing and making public the source code of a program. I knew that we are moving towards an Orwellian society, just did not expect things in EU to go downhill so fast.

The developers of Monero should be extremely careful not to reveal their identity. They are doing pretty much the same thing as the developer of Tornado Cash, the only difference is that Monero works on a larger scale and more efficiently than Tornado Cash.

It is not a question of being paranoid., unless we consider governments' paranoia being the reason why they want full control over crypto, to the level where crypto is not much different from electronic fiat money. In fact it is a matter of the level of government control that people are prepared to tolerate. Should the government be allowed to control every aspect of my life, including the crypto wallet addresses? I think that the government can function perfectly well without them knowing my wallet addresses. I don't undergo a KYC procedure when I pay with cash for something at the corner store. However the governments gradually tighten the regulations and sooner or later I will have to use KYCed wallet when I buy the same things using crypto. Do the governments want all the wallets to be KYCed? I am pretty sure that they do. Am I going to help them with that? No I am not going to help them. Of course "your mileage may vary".

People's opposition to the governments plans are irrelevant to the level of control that the EU government tries to acquire. They are determined to get full control of the crypto up to the point where all wallets are KYCed and they are able to see the full list of transactions for any person, pretty much like they do with the banks elecronic money provided by credit/debit cards.

If crypto is treated like any other government-controlled finances then the government will have the right to

• Confiscate any crypto whenever the government decides so
• Freeze the crypto account thus preventing the owner from using the funds
• Anything else they currently can do with fiat and cannot do yet with crypto

I have no reason to grant the government this kind of power over my crypto funds.

The reason for hiding this kind of information is that this information allows the government to do anything they want with my crypto. The golden UNIX security principle is also called the "principle of least privilege", everyone gets the minimal privileges/information that they need to carry out their tasks. I think that this principle can and should be applied to the governments as well.

Regarding the financial records that governments have, they don't really know how much cash one has in his pockets. And they don't know your real estate and/or stocks which are in jurisdictions that don't cooperate with your government. Same goes for crypto, if you work correctly with it, the governments do not know how much crypto you own and they will not know your wallet(s).

Why give the governments additional information about yourself? Information is power and the fact that they already have some leverage against you does not mean that you have to provide them even more leverage against yourself.

In the case of a decentralized service based on opensource code, the location of the developer(s) does not affect the security of the users' data in any way, because source code is freely available and anyone can inspect it and make sure that there are no backdoors.