The Problem is Centralized.

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Money Laundering
The goal of many criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin.

Terrorist Financing
Terrorist financing involves the solicitation, collection or provision of funds with the aim of using them to support terrorist acts or organisations. Funds may stem from both legal and illicit sources.

The two most essential tools for any government or centralised entity are gathering information about you as a person and accessing this information when necessary. Passports, ID cards, proof of address and residency papers are among the documents you will need to provide in order to open a traditional bank account, Electronic Money Transmitter accounts, NeoBanks (Revolut, N26 etc) or regular business entity.

These procedures sound reasonable and necessary to most people because they’re for the greater good, to counter the big, bad criminals behind all those narcotics; who torture people and even murder them.

They can also help prevent the financing of another 9/11, or similar devastating attacks on our western society. And, in some cases, they might be right, as this system could help prevent money laundering and terrorism financing.

However, it’s probably much more effective as another tool, i.e. taking a cut from your hard-earned (digital) money via taxes, and/or applying pressure on those not in line with the current administration’s narrative, through the freezing of assets.

Blockchain and Permission less Technology

The blockchain is transparent and public by its very nature. Anyone can check transactions on blockchains like Bitcoin and Ethereum. If you want, you can track a particular token's complete history and movements.

Yet, at the same time, the users are (pseudo) anonymous. Everyone with a PC and internet access can create a wallet and interact with their peers on this public ledger.

Blockchain technology is all about borderless, permissionless, P2P transactions on a public ledger, to give people back their right to financial sovereignty and self-custody. No more middle man that can dictate how much, when, or even if you can make financial transactions. This is the blockchain, and the middle man, a.k.a. centralised entity, hates this.

Regulation: The Foot in the Door.

To avoid losing their control and tight grip over their users (you and me ), governments and financial institutions want to regulate their way into this ‘’permissionless system of P2P transactions.’’ They do this by using the same arguments they have always used to scare the general public and legislators within the traditional and established financial system. AML/CFT. Because who could be against fighting criminals and terrorists? Right?!

Regulation: a Tool for the Middle men

In the first steps of trying to regulate the industry, they have started with their traditional tool and framework: AML/CTF. By enforcing this existing framework upon the crypto space, they are trying to identify all users and their wallets in this ‘’unregulated’’ blockchain/cryptocurrency space.

This is, of course, practically impossible because of the properties of blockchain technology we discussed earlier: it is permissionless and (pseudo) anonymous.

So they have deemed that the fastest way to ‘’regulate’’ this industry is to implement the traditional framework where this new industry meets the traditional one: the fiat on and offramps, i.e. Centralized Exchanges.

These centralized entities can be regulated, fined, and/or even dismantled if they don’t comply with the traditional system and its policies of Know Your Customer, Anti Money Laundering and Counter-Terrorism Financing.

This way, all crypto users wishing to swap their crypto to fiat will need to be verified, making them vulnerable to the ever-increasing power of governments, financial institutions and NGOs, when they deem it necessary.

Regulation: The next steps

However, only regulating the fiat on and offramps, thus NOT regulating the market and industry itself, would be a nightmare! We need sophisticated bankers and regulators to help ‘’solve’’ the current ‘’problems’’ in the DeFi /crypto and blockchain markets.

The regulators are coming up with more and more technology-crippling proposals and bills. This was seen in Europe a couple weeks ago, when they proposed implementing the traditional framework differently. This involves KYC for self-custodial wallets, reporting requirements for payments of more than 1,000 euros, and even adding labels and descriptions to every transaction (how?).

The UK and USA are more thoughtful about how they want to go about regulating this new industry, with President Biden recently signing an executive order to ensure responsible innovation in digital assets and cryptocurrencies. According to the White House, this involves,

“The first-ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.”

The UK is looking to regulate “Stablecoins”, which are coins pegged to the price of a “stable” external currency or commodity (the US dollar, Gold etc).
A few weeks ago, a statement was released on the UK Government’s website, which read:

“The Government has today announced moves that will see stablecoins recognized as a valid form of payment, as part of wider plans to make Britain a global hub for crypto-asset technology and investment.”

I believe that these proposals show two things: a centralized entity that is becoming scared of losing control, and a lack of the appropriate knowledge to make such radical and impractical decisions.

44 world leaders deciding on the future of the financial system. 1944, Bretton Woods in New Hampshire, USA.

Stopping Criminals vs Increasing Economic Burden

In my opinion, AML/KYC/CTF policies and regulations in the traditional system are an excellent way of mapping the user of the financial system. They are also very effective in adding enormous costs to running a “compliant” company. Just look at all the KYC experts and Compliance Officers needed to process all this information; or the technology required to develop, gather and store all of this data.

Criminals and terrorists wishing to bypass this “tedious” system of identity verification simply have to increase their spending on constructions that allow them to continue their criminal activities. Alternatively, they can get help from the same bankers that have installed these procedures for you and me, but who will allow them to bypass the identity verification procedure.

In Conclusion: Smoke and Mirrors

I believe that AML/KYC policies are much more effective for mapping ordinary users of our traditional financial system that can be used for purposes well beyond their stated sole objective: stopping money laundering and terrorist financing.

In my view, the current system of “combatting terrorism and anti-money laundering” is all smoke and mirrors. Cause sophisticated criminals can easily get around these regulations or are even helped bypassing the policy altogether. Instead, we should go back to the drawing board and rethink our collective stance on our personal /financial privacy in the traditional system, and what we are willing to give up, before we can start thinking about regulating a whole new industry to the same inefficient standards we have today.

We should, instead, think about how we could effectively combat criminals and terrorism in the future without completely exposing ourselves to all sorts of “middle men” (financial institutions, Governments, NGOs etc) that are okay with us today, but could prove to be much less friendly in the near future....