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KYC, Bitcoin and the disappointed hopes of AML policies: preserving individual freedom


Over the past decade, the abbreviations AML and KYC have become an inextricable part of our lives. To help law enforcement track down illegal funds, a set of increasingly restrictive anti-money laundering measures are being implemented around the world. Over the past two decades, this has led to numerous KYC requirements for financial institutions to verify the identity, background and nature of their activities of their customers. This system, based on surveillance and the presumption of guilt, has helped the global financial system to effectively fight against criminals by cutting off their financial flows.

Or is this really the case?

The actual numbers tell a different story. Several independent studies have shown that AML and KYC policies allow authorities to recover less than 0.1% of criminal funds. Anti-money laundering efforts cost a hundred times that amount, but more importantly, they are beginning to threaten our fundamental right to privacy.

Examples of absurd requests, such as that of a Frenchman asked to justify the origin of the €0.66 he wanted to deposit, hardly raise eyebrows anymore. Regulators face this ridicule without batting an eyelid, while journalists and whistleblowers continue to expose billions of dollars laundered at the highest levels of the same institutions that are putting their regular customers through a bureaucratic nightmare.

This suggests that sacrificing our right to privacy may not be justified by the results.

Blockchain emerging as a free value transfer system, as opposed to KYC-controlled fiat, has given hope to many advocates of personal freedom. However, the response from regulators has been to try to integrate both the acts of purchasing and transferring crypto into current AML processes.

Does this mean that blockchain has been tamed, with entry and exit sealed by AML regulations?

Fortunately, not yet. Or at least, not in all jurisdictions. For example, Switzerland, known for its practical common sense, often allows companies to define their own risk exposure. This means people can buy reasonable amounts of crypto without KYC.

The Swiss example could prove useful in preventing global anti-money laundering practices from spiraling out of control and establishing a surveillance state over the world once known as “free.” It’s worth taking a closer look, but first let’s look at why the traditional AML approach fails.

KYC: the worst policy ever

Few people dare to question the effectiveness of current AML-KYC policies: no one wants to appear on the “criminal” side of the debate. However, this debate is worth having, because our societies seem to be spending indecent amounts of money and effort on something that simply does not work as intended.

As Europol director Rob Wainwright pointed out in 2018: “Banks spend $20 billion a year managing the compliance regime…and we seize 1% of criminal assets each year in Europe. »

This thinking was developed in one of the most comprehensive studies on the effectiveness of LMA, published in 2020 by Ronald Pol of La Trobe University in Melbourne. It found that “anti-money laundering policy intervention has less than 0.1% impact on criminal finances, compliance costs exceed more than a hundred times the criminal funds recovered, and banks, Taxpayers and ordinary citizens are penalized more than criminal enterprises.” Furthermore, “blaming banks for not applying anti-money laundering laws “properly” is a convenient fiction. Rather, the fundamental problems may lie in the very design of the fundamental policy prescription.”

The study uses numerous sources from major countries and agencies, but its author admits that it is almost impossible to reconcile everything. Indeed, as strange as it may seem, despite the billions of dollars and euros spent on AML, there is no generalized practice that would make it possible to measure its effectiveness.

The reality, however, is difficult to ignore. Despite 20 years of modern KYC practices, organized crime and drug use continue to rise. Additionally, a number of high-profile investigations have revealed that massive money laundering schemes were taking place at the highest levels of respected financial institutions. Credit Suisse helps Bulgarian drug traffickers, Wells Fargo (Wachovia) launders money for Mexican cartels, BNP Paribas facilitates the operations of a Gabonese dictator… Not to mention the tax frauds initiated by the banks themselves: Danske Bank, Deutsche Bank, HSBC and many others have been found guilty of fraud in their countries. Yet the response from regulators has been to tighten the rules surrounding small retail transfers and create lots of red tape for average law-abiding citizens.

Why would they choose such heavy-handed and ineffective measures? Perhaps the biggest reason is that the organizations that set the rules are not responsible for their implementation or the end result. This lack of accountability could explain the increasingly absurd rules forcing financial institutions to maintain armies of compliance specialists and ordinary people to jump through hoops to conduct basic financial transactions.

This reality is not just frustrating; in a broader historical and political context, it reveals worrying trends. Increasingly intrusive regulations have created a framework to effectively screen people. This means that under the pretext of fighting terrorism, different groups can be cut off from the financial system. This includes politically exposed people, dissenting voices, homeless people, non-conformists… or people involved in the crypto space.

Crypto AML

Blockchain represents a major challenge for the fiat system due to its decentralized nature. Unlike centralized banks tasked with countless checks related to anti-money laundering, blockchain nodes simply run code independent of the user.

It is not possible that a blockchain like Bitcoin can be shaped in the AML mold, but intermediaries, also known as VASPs (virtual Asset Service Providers), can be. Their AML tasks now include two main categories: purchasing crypto and transferring crypto.

Crypto transfer falls under the prerogative of the FATF, and most countries tend to implement this organization’s recommendations sooner or later. These recommendations include the “travel rule,” which implies that fund data must “travel” with them. Currently, the FATF recommends that any fiduciary transfer over $1,000 be accompanied by sender and beneficiary information.

Different countries impose different thresholds for the travel rule, with $3,000 in the United States, €1,000 in Germany, and €0 in France and Switzerland. The next update of the TFR regulations will impose mandatory KYC for every crypto transfer starting from €0 in all EU countries.

The advantage of blockchain, however, is that it does not need intermediaries to transfer value. However, it needs it to buy cryptocurrencies with fiat.

The framework for purchasing crypto is determined by financial regulators and central banks, and this is where country traditions play an important role. In France, a very centralized country, a multitude of careful regulations, on-site inspections and conferences define market practices in great detail. Switzerland, a decentralized country famous for its consensus-based direct democracy, generally grants financial intermediaries some autonomy in managing their own risk appetite.

Switzerland is also the country where one of the most prominent liberal economists, Friedrich Hayek, founded the famous Mont Pélerin Society. As early as 1947, its members were concerned about the dangers weighing on individual freedom, noting that “even this most precious asset of Western man, freedom of thought and expression, is threatened by the propagation of beliefs which, claiming the privilege of tolerance when they are in the world.” minority position, seek only to establish a position of power in which they can suppress and annihilate all opinions except their own.

Interestingly, a company called Mt Pelerin operates on the shores of Lake Geneva today, and this company is a crypto broker.

Buy crypto in Switzerland

Switzerland is far from the libertarian tax haven that many believe. It succumbed to international pressure by de facto canceling its centuries-old tradition of banking secrecy for foreign residents. Today, it is a member of the OECD treaty on the automatic exchange of information and the zeal with which it applies the FATF recommendations shows its desire to shed its once sulphurous image. Indeed, FINMA has decided to implement the travel rule for cryptos from 0€ in 2017, including for unhosted wallets. On the other hand, the “conservative” European Union will only apply this obligation in 2024.

However, even though funds do not explicitly leave the country, Switzerland prefers not to micromanage its financial institutions and does not impose tons of paperwork for routine operations. It is now one of the few countries on the old continent where people can buy crypto without being profiled. This means that companies like Mt Pelerin can process retail crypto transactions worth CHF 1,000 per day without requiring the customer to verify their identity.

This does not mean an open bar, but rather a greater degree of autonomy. For example, Mt Pelerin implements its own fraud detection methods and reserves the right to refuse transactions that raise suspicion. Unlike the heavily bureaucratic procedures imposed by other countries, this approach actually has a high success rate in filtering out fraudulent transaction attempts. After all, businesses operating on the front lines often understand the ever-changing fraud tactics better than government officials.

For the good of our societies, the Swiss approach to AML must be preserved and reproduced. In an age where mass surveillance has become routine and the development of CBDCs threatens to impose total control over our personal finances, we are closer than ever to the dystopia that Friedrich Hayek so feared.

By controlling our daily transactions, any government, even the best-intentioned, could manipulate our lives and effectively “erase all opinions except their own.” This is why we buy Bitcoin, and this is why we want to do it without KYC.

What about criminals, you ask? Shouldn’t we cut off their access to money to curb their interest in clandestine entrepreneurship?

Certainly, after 20 years of fighting modern money laundering, this thesis has been proven false. So why not accept the fact that criminals penetrate our financial flows and simply follow this money to reveal their operations? Continue reading part 2 to find out more.

Special thanks to Biba Homsy, regulatory and crypto lawyer at Homsy Legal, and the Mt Pelerin team for sharing their insights.

This is a guest post from Marie Poterieieva. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.


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