Over the past decade, the abbreviations AML and KYC have become an integral part of our lives. To help law enforcement trace illicit 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 KYC obligations for financial institutions, which have had to verify the identities, backgrounds and nature of their customers. This system, based on surveillance and the assumption of guilt, has helped the global financial system fight criminals efficiently 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 enable authorities to recover less than 0.1% of crime funds. Anti-money laundering efforts are costing hundreds of times these amounts, but more importantly, they are beginning to threaten our basic right to privacy.
Cases of ridiculous demands, such as that of a Frenchman who was asked to justify the source of the €0.66 he wanted to deposit, no longer raise any eyebrows. Regulators face this ridicule without batting an eye, while journalists and whistleblowers continue to expose billions of dollars laundered at the highest levels in the same institutions that put their ordinary clients through a bureaucratic nightmare.
This suggests that sacrificing our right to privacy may not be justified by the results.
The emergence of blockchain technology as a free value transfer system, rather than a “know your customer” (KYC) system, has given hope to many advocates of personal freedom. However, the regulators' response has been to try to integrate both the business of purchasing and transferring cryptocurrencies into existing anti-money laundering processes.
Does this mean that the blockchain has been tamed, with the entrance and exit closed by anti-money laundering regulation?
Fortunately, not yet. Or at least not in every jurisdiction. For example, Switzerland, famous for its common sense, often allows companies to limit their risk exposure. This means that people can purchase reasonable amounts of cryptocurrencies without KYC.
The Swiss example may be valuable in preventing global AML practices from spiraling out of control and imposing a surveillance state on the once “free” world. It's worth taking a closer look at it, but first, let's see why the traditional approach to AML fails.
KYC: Worst policy ever
Few people dare to question the effectiveness of current AML and KYC policies: no one wants to appear on the “criminal” side of the discussion. However, this is a discussion worth having, as our societies seem to spend an disproportionate amount of money and effort on something that is not working as intended.
As Europol director Rob Wainwright noted in 2018: “Banks spend $20 billion a year managing compliance… and we confiscate 1% of criminal assets every year in Europe.”
This thinking was developed in one of the most comprehensive studies on anti-money laundering effectiveness, published in 2020 by Ronald Ball of La Trobe University in Melbourne. It found that “anti-money laundering policy intervention has less than 0.1% impact on criminal financing, compliance costs exceed criminal funds recovered more than a hundred times, and banks, taxpayers and private citizens are more likely to be penalized than criminal enterprises.” Moreover, blaming banks for not “correctly” implementing anti-money laundering laws is a convenient fiction. Instead, the underlying problems may lie in the design of the underlying policy recipe itself.
The study uses numerous sources from major countries and agencies, but its author admits that it is almost impossible to reconcile it all. In fact, as strange as it may seem, despite the billions of dollars and euros spent on combating money laundering, there is no general practice that can allow us to measure its effectiveness.
But the reality is difficult to ignore. Despite 20 years of modern KYC practices, organized crime and drug use are still on the rise. Furthermore, a number of high-profile investigations have shown massive money laundering schemes occurring at the top of respected financial institutions. Credit Suisse helping Bulgarian drug traffickers, Wells Fargo (Wachovia) laundering money for Mexican cartels, and BNP Paribas facilitating the operations of a Gabonese dictator… not to mention tax frauds initiated by the banks themselves: Danske Bank, Deutsche Bank, and HSB. C, Bank of England. Many others have been found guilty of defrauding their countries. However, regulators' response has been to tighten rules surrounding small-scale retail transfers and create extensive red tape for ordinary, law-abiding citizens.
Why do they choose such burdensome and ineffective measures? Perhaps the main reason here is that the organizations that set the rules are not responsible for their implementation or the final result. This lack of accountability may explain the increasingly ridiculous rules that force financial institutions to maintain armies of compliance professionals and ordinary people to jump through hoops to perform basic financial operations.
This reality is not only 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, various groups can be isolated from the financial system. This includes politically exposed people, dissenting voices, the homeless, non-committals… or those involved in the cryptocurrency space.
Cryptocurrency anti-money laundering
Blockchain represents a major challenge to the legal system due to its decentralized nature. Unlike central banks, which are burdened with a myriad of anti-money laundering checks, blockchain nodes simply run user-neutral code.
There is no way that a blockchain like Bitcoin can be shaped into an AML template, however, intermediaries, also known as VASPs (Virtual Asset Service Providers), can be. Their AML duties now include two main categories: purchasing cryptocurrencies and transferring cryptocurrencies.
The transfer of cryptocurrencies falls within the remit of the Financial Action Task Force (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 money should “travel” with it. Currently, the FATF recommends that any cash transfer over $1,000 must be accompanied by information about the sender and beneficiary.
Different countries impose different thresholds for the travel rule, which are $3,000 in the United States, €1,000 in Germany, and €0 in France and Switzerland. The upcoming update to the TFR regulation will impose a mandatory KYC for every cryptocurrency transfer starting from 0 EUR in all EU countries.
But the good thing about blockchain technology is that it does not need intermediaries to transfer value. However, it needs them to buy cryptocurrencies with fiat currencies.
The framework for purchasing cryptocurrencies is determined by financial regulatory bodies and central banks, and here the traditions of countries play an important role. In France, a highly centralized country, a combination of careful regulations, on-site inspections and conferences define market practices in great detail. Switzerland, a decentralized country known for its direct, consensus-based democracy, typically grants financial intermediaries a degree of autonomy in managing their risk appetite.
Switzerland is also the country where one of the most prominent liberal economists Friedrich Hayek founded the famous Mont Pelerin Society. Even in 1947, its members were concerned about dangers to individual freedom, noting that “even the most precious possession of Western man, freedom of thought and expression, is threatened by the spread of beliefs that claim the privilege of tolerance when in the West.” A minority position, they seek only to create a position of power from which they can suppress and suppress all viewpoints except their own.”
Interestingly, a company called Mt Pelerin operates today on the banks of Lake Geneva, and this company is a cryptocurrency broker.
Buy crypto in Switzerland
Switzerland is far from the liberal tax haven many believe. It has yielded to international pressure by abolishing centuries-old traditions of banking secrecy for foreign residents. It is now a member of the OECD Treaty on the Automatic Exchange of Information, and the zeal with which it is implementing FATF recommendations shows its willingness to shed its former inflammatory image. In fact, FINMA has decided to implement a travel rule for cryptocurrencies starting from 0 EUR, including non-hosted wallets, as early as 2017. In contrast, the “conservative” European Union will only implement this commitment in 2024.
However, when the money does not leave the country outright, Switzerland still prefers not to micromanage its financial institutions and does not impose a lot of paperwork for routine operations. It now stands as one of the rare countries on the ancient continent where people can buy cryptocurrencies without being identified. This means that companies like Mt Pelerin can process retail-sized cryptocurrency transactions of CHF 1,000 per day without requiring the customer to verify their identity.
This does not mean an open bar, but rather a higher degree of independence. For example, Mt Pelerin applies its own fraud detection methods and reserves the right to reject transactions that raise suspicions. In contrast to the heavy bureaucracy imposed by other countries, this approach actually boasts a high success rate in filtering out attempted fraudulent transactions. After all, companies on the front lines often have a better understanding of ever-evolving fraud tactics than government officials.
For the sake of our societies, the Swiss approach to combating money laundering must be maintained and replicated. At a time when mass surveillance has become routine, and the development of central bank digital currencies 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 most well-intentioned, can manipulate our lives and “erase any views other than their own.” That's why we buy Bitcoin, and that's why we want to do it without KYC.
You may ask what about criminals? Shouldn't we deny them access to funds to limit their interest in underground entrepreneurship?
There is no doubt that after twenty years of modern anti-money laundering, this thesis has been proven wrong. So why don't we accept the fact that criminals enter our money flows and follow that money just to expose their operations? Continue reading Part Two to learn more.
Special thanks to Biba Homsy, Regulatory and Cryptocurrency Lawyer at Homsy Legal, and the Mt Pelerin team for sharing their insights.
This is a guest post by Marie Potreva. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
