8 years ago, after Mt. Gox, no one trusted exchanges to hold their money but wanted better ways to buy bitcoin. They would buy their bitcoin and promptly withdraw it from exchanges as quickly as possible. Now, eight years on, there are dozens of decent exchanges and brokers who make it easy to buy bitcoin, and trust in exchanges is strong. Ironically, as a result, the percentage of bitcoin holders who custody their bitcoin on exchanges is at all-time highs.

You might think that this is not an issue but this is where the world's regulators, through an organization called the Financial Action Task Force (FATF), come in. FATF is an unelected international advisory body that issues guidance designed to prevent whatever the majority of countries deemed to be financial crimes. Although no country is forced to enact one of their recommendations, the potentially devastating effects to international trade of ignoring them mean that their proclamations are consistently implemented by almost every country in the world. So when the FATF “advises” a country to adopt a regulatory stance, you can assume that it will be implemented. In June 2019, they issued guidance for cryptocurrencies that included a controversial provision called the “Travel Rule”. This rule advocates that all cryptocurrency exchanges and bitcoin brokers should only allow cryptocurrency transfers to parties they can correctly identify.

 

With the latest FATF rule, we already see countries such as India, South Korea, and Estonia look to fast-track regulation to this effect and we can expect more to follow. If left unchecked, the end result could be a majority of bitcoin being stored on a handful of centralized exchanges - barring Bitcoiners from self-sovereignty.

 

FediMint is a new way of custody that enables users to form groups where members look out for each other’s bitcoin.
FediMint has three simple, yet powerful elements:

The first is that FediMint is designed to be used by pre-existing groups where members already have high levels of trust in each other. Families, close friends, small villages, community groups, etc., are all examples of groups with strong second-party relationships. This contrasts with the distant third-party relationships offered by exchange or the first-party relationship afforded by self-custody. This setup also has the added advantage of often being exempt from most regulatory considerations. The second-party relationships and lack of profit would mean this is considered a non-commercial activity.

The second part is to break the custody challenge into two. It does this by recognizing within any given group, there will be some more capable of guarding the group’s bitcoin than others.

The final part of FediMint is the use of two powerful technologies, federations and chaumian e-cash mints, to remove any single weak point and to maintain complete privacy for all users, which is the reason behind FediMint’s unusual name. A federation is a mechanism that shares custody of the group’s bitcoin amongst all guardians. This ensures that a majority of guardians need to act to perform a transaction and that a failure of a minority of guardians can be tolerated by the system without affecting its operation. Chaumian e-cash mints are a cryptographic tool to allow the federation guardians to process transactions on behalf of any member of the group without knowing who it is or how much they have. This ensures financial privacy even though group members have delegated the complicated task of managing their bitcoin holdings to the guardians.