Larry Cermak: Selling government analysis software Coinbase Analytics/Neutrino is not to recoup costs, but to save face for Coinbase!

The U.S. exchange Coinbase faced privacy concerns last month after being exposed for selling government blockchain tracking software, sparking community backlash. With recent rumors of preparing for a U.S. stock market listing, some in the community believe its centralized actions contradict the ethos of cryptocurrency. Is Coinbase catering to the traditional and regulatory world? CEO Brian Armstrong addressed the sale of the blockchain tracking software, Coinbase Analytics, yesterday.

Of course, there are also individuals questioning his stance, with media outlet The Block's Larry Cermak weighing in.

Brian Armstrong Explains Government Collaboration Case

Below is the translation of Brian Armstrong's original tweet: (please refer to the original text for actual context)

I've seen some articles about Coinbase Analytics and thought I should share some thoughts. Initially I didn't think it was news, but there have been a lot of speculations. Blockchain analytics software is not new, it's been around for a while and it uses publicly available data to track crypto transactions - usually to catch bad actors.

Exchanges that have stable access to traditional financial systems (e.g. can connect your bank account, can do fiat to crypto conversions) need to comply with Anti-Money Laundering (AML) regulations, hence the use of blockchain analytics software for transaction monitoring. There are many ways the existing AML regulations can be improved, and those are not ones we created, but those are the norms under which fiat exchanges can operate compliantly.

Early on, Coinbase used some existing blockchain analytics services. They worked out ok, but the issue was we didn't want to share data with third parties when we didn't have to, and they didn't support all the features and blockchains we needed. So we realized we needed to build this capability in-house.

We did this through an acquisition (to be honest, it didn't go well, and we had to part ways with some team members). But we were able to rebuild the team and have a department in the company. (Note: Coinbase acquired Neutrino company)

Building this capability was expensive, and we wanted to recoup that investment. There is a market for blockchain analytics software now, so we also sell it to others. It also helps us build relationships with law enforcement, which is critical for the growth of crypto. Especially if you want more fiat money to flow into crypto over time (like I do).

Blockchain analytics software essentially just organizes the publicly available data already on the blockchain to make it more useful. If people want true privacy, that's what privacy coins are for. I'm a fan of privacy coins because I think everyone should have more financial privacy. Over time, this will be similar to the internet moving from HTTP to HTTPS.

Regardless of whether Coinbase sells blockchain analytics software, transactions on public blockchains can still be traced by anyone. We (Coinbase) see ourselves as an intermediary - we bridge the traditional financial world and the crypto world, and it's important that we provide that bridge to keep fiat and crypto operating smoothly.

Real-world adoption can bring a lot of progress (including better financial privacy), and that's the only way forward.

https://twitter.com/brian_armstrong/status/1282106176000233472

The Block Director's Comment: Out of Touch with Common Perception

The Block's research director Larry Cermak, who always speaks boldly, stated that Brian Armstrong's comments are completely out of touch with common perception.

He then went on to explain:

Brian Armstrong stated that Coinbase sells blockchain analytics software to the government to recoup costs (acquiring Neutrino cost $13.5 million) and build relationships with law enforcement.

He pointed out that Neutrino was acquired in the first half of 2019, originally a spyware company selling products to countries and known for human rights violations. Brian Armstrong did not provide a clear explanation for why Coinbase needs to provide those address clusters to government agencies.

Larry mentioned that Coinbase has always been known for the difficulty in constructing address clusters, meaning that unless you are on the inside, that data is only probabilistic. The issue is that law enforcement has a harder time using data from other blockchain analytics companies to prosecute someone as their sole evidence because the data is probabilistic.

Remember back in 2018 when Coinbase provided customer data of 13,000 users to the IRS. When you combine client data exports with the complete knowledge of constructing clusters, it creates a new (dangerous) capability.

Coinbase is Not Short of Money, It Should Be Lobbying Costs

Regarding recouping costs, Larry mentioned that government agencies themselves have said this is the cheapest tool on the market and has the most functionality. This indicates that Coinbase is cutting prices, with a contract for four years costing only $184,000.

Larry believes that Coinbase exchanges can earn this money in transaction fees in just a few hours. He thinks the more likely reason is lobbying costs, as Coinbase is preparing for an IPO, and this kind of government tender cost is a basic lobbying budget.

Focus on What Data Coinbase Provides

Larry suggests focusing on how Coinbase provides this data. They can use these tools internally only. Or at least distinguish between the "compliance version" and the "investigation version." People should pay attention to whether Coinbase will provide address clusters in full.

Nevertheless, Larry believes it's good to see Coinbase comment on these issues, but these explanations are too scarce.