Over the past decade, the abbreviations AML and KYC have become an inextricable part of our lives. To help authorities track illegal funds, an increasingly restrictive set of anti-money laundering measures is being implemented around the world. Over the past two decades, it has involved extensive know-your-customer obligations for financial institutions, required to verify their customers' identities, backgrounds and the nature of their activities. This system, based on surveillance and presumption of guilt, has helped the global financial system effectively fight criminals by cutting off their money flows.
Or is it really?
Real life numbers tell a different story. Several independent studies have found that AML and KYC policies allow authorities to recover less than 0.1% of criminal funds. Anti-money laundering efforts cost a hundred times more than those amounts, but more importantly, they are beginning to threaten our basic right to privacy.
Cases of absurd demands, such as one from a Frenchman who was asked to justify the origin of the 0.66 euros he wanted to deposit, hardly cause any surprise anymore. Regulators face this ridicule without blinking, as journalists and whistleblowers continue to expose billions of dollars laundered at the highest levels of the same institutions that subject their regular customers to 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, unlike KYC-controlled fiat, has given hope to many advocates of personal freedom. However, the response from regulators was to try to integrate both the acts of purchasing and transferring cryptocurrencies into current AML processes.
Does this mean that the blockchain has been tamed, with entry and exit sealed by AML regulation?
Luckily, not yet. Or at least not in all jurisdictions. For example, Switzerland, famous for its practical common sense, often allows companies to define their own risk exposure. This means that people can buy reasonable amounts of cryptocurrency without KYC.
The Swiss example could prove valuable in preventing global anti-money laundering practices from spiraling out of control and bringing to the world a surveillance state that used to be known as “free.” It's worth taking a closer look, but first let's look at why the traditional AML approach is failing.
KYC: the worst policy in history
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 an indecent amount of money and effort on something that simply does not work as expected.
As noted by Europol director Rob Wainwright in 2018: “Banks spend $20 billion a year running the compliance regime… and we are seizing 1 percent of criminal assets every year in Europe.”
This thought was developed in one of the most complete studies on the effectiveness of AML, 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 percent impact on criminal finances, compliance costs exceed criminal funds recovered more than a hundred times, and banks, taxpayers and ordinary citizens “They are penalized more than criminal enterprises.” Furthermore, “blaming banks for not “properly” implementing anti-money laundering laws is a convenient fiction. The fundamental problems may rather lie in the design of the central policy prescription itself.”
The study uses numerous sources from major countries and agencies, but its author admits that it is almost impossible to reconcile everything. In fact, strange as it may seem, despite the billions of dollars and euros spent in the fight against money laundering, there is no widespread practice that allows us to measure its effectiveness.
The reality, however, is difficult to ignore. Despite 20 years of modern KYC practices, organized crime and drug use keep climbing. What's more, a series of high-profile investigations have shown that massive money laundering schemes are occurring at the highest levels of respected financial institutions. Crédit 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 defrauding their countries. However, regulators' response was to tighten the rules surrounding small retail transfers and create a huge bureaucracy for average law-abiding citizens.
Why would they choose such cumbersome and inefficient measures? Perhaps the main reason here is that the organizations that define the rules are not responsible for either implementing them or the final result. This lack of accountability could explain the increasingly absurd rules that force financial institutions to maintain armies of compliance specialists and ordinary people to jump through hoops to perform basic financial operations.
This reality is not simply frustrating; In a broader historical and political context, it reveals worrying trends. Increasingly intrusive regulations have created a framework that allows people to be filtered efficiently. This means that, under the pretext of fighting terrorism, different groups can be isolated from the financial system. This includes politically exposed people, dissident voices, homeless people, nonconformists… or those involved in the crypto space.
crypto AML
Blockchain represents a major challenge to the fiat system due to its decentralized nature. Unlike centralized banks burdened with countless AML-related checks, blockchain nodes simply execute code independent of the user.
There is no way a blockchain like bitcoin can fit the AML mold; however, intermediaries, also known as VASPs (virtual asset service providers), can do so. Your AML duties now include two main categories: buying cryptocurrencies and transferring cryptocurrencies.
The transfer of cryptocurrencies is the prerogative of the FATF, and most countries tend to implement the recommendations of this organization sooner or later. These recommendations include the “travel rule,” which implies that data about funds must “travel” with them. Currently, the FATF recommends that any trust transfer over $1,000 must be accompanied by sender and beneficiary information.
Different countries impose different thresholds for the travel rule, with 3,000 dollars in the United States, 1,000 euros in Germany and 0 euros in France and Switzerland. The upcoming update to the TFR regulation will impose mandatory KYC for every crypto transfer starting from €0 in all EU countries.
However, the good thing about blockchain is that it does not need intermediaries to transfer value. However, you need them to buy cryptocurrencies with fiat money.
The framework for purchasing cryptocurrencies is determined by financial regulators and central banks, and this is where countries' traditions play an important role. In France, a highly centralized country, a series of meticulous regulations, on-site inspections and conferences define market practices in great detail. Switzerland, a decentralized country famous for its consensus-based direct democracy, typically grants financial intermediaries some autonomy to manage their own risk appetite.
Switzerland is also the country where one of the most prominent liberal economists, Friedrich Hayek, founded the famous Mont Pelerin Society. As early as 1947, its members were concerned about the dangers to individual freedom, noting that “Even the most precious asset of Western man, freedom of thought and expression, is threatened by the spread of creeds that, claiming the privilege of tolerance in the minority position, they only seek to establish a position of power in which they can suppress and erase all opinions except their own.
Interestingly, a company called Mt Pelerin operates today on the shores of Lake Geneva, and this company is a cryptocurrency broker.
Buy cryptocurrencies in Switzerland
Switzerland is far from the libertarian tax haven that many believe it to be. It has succumbed to international pressure by de facto canceling its centuries-old tradition of banking secrecy for foreign residents. It is now a member of the OECD treaty on automatic exchange of information, and the zeal with which it implements FATF recommendations shows a willingness to shed its previously sulphurous image. In fact, FINMA decided to implement the travel rule for cryptocurrencies starting from €0, even for non-hosted wallets, already in 2017. In contrast, the “conservative” European Union will not enforce this obligation until 2024.
However, when funds do not explicitly leave the country, Switzerland still prefers not to micromanage its financial institutions and not impose tons of paperwork for routine operations. It is now one of the few countries on the old continent where people can buy cryptocurrencies without being profiled. This means that companies like Mt Pelerin can process retail crypto transactions of CHF 1,000 per day without the need for 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 reject suspicious transactions. In contrast to the heavily bureaucratic procedures imposed by other countries, this approach actually has a high success rate in filtering out attempted fraudulent transactions. After all, companies operating on the front lines often have a better understanding of evolving fraud tactics than government officials.
For the good of our societies, the Swiss approach to anti-money laundering must be preserved and replicated. At a time when mass surveillance has become routine and the development of the CBDC 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 everyday transactions, any government, even the best-intentioned, could manipulate our lives and effectively “erase any point of view other than its own.” That's why we buy bitcoin and why we want to do it without KYC.
What about criminals, you might ask? Shouldn't we cut off their access to money to curb their interest in clandestine entrepreneurship?
It is true that after 20 years of modern anti-money laundering, this thesis has been proven wrong. So why not accept the fact that criminals enter our money flows and simply follow that money to expose their operations? Continue reading Part 2 to learn 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 by Marie Potterieva. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
