How AML and KYC caused BTC and ETH

What if, about 20 years ago, I told you that all the banks and governments of the world were agreeing on regulation that would end money laundering? How quickly would they be able to end money laundering?

Any day now.

The regulation that controls money laundering is one of many sources of cryptocurrency’s rise. Most people launder at least a little money. We pay for babysitters or fixit guys in cash. But the big money launderers — traffickers in humans, drugs and weapons — are the foundation of alternative economies such as cryptocurrency.

It might be an exaggeration to say that anti-money laundering legislation caused cryptocurrency, but it’s not a far from the truth.

I keep hearing people say they need AML and KYC because they want to prevent these horrible unseemly behaviors, but that’s not why we do AML and KYC. We do it because we are afraid of the government. But the government has failed to do away with unseemly behavior through AML and KYC, and instead has spawned cryptocurrency itself. It’s the perfect example of unintended consequences, which is what most government regulation gets.

Fail fail fail

Government regulation has failed to stop money laundering by criminal elements.

Government regulation has failed to stop tax evasion by the rich and the corporations.

Government regulation has failed to stop terrorism and arms trade.

Government regulation has failed to stop drug trafficking.

Government regulation has failed to stop human trafficking.

So tell me now, why do we need KYC and AML? They have failed miserably.

When we force AML and KYC on the cryptocurrency markets, we are enforcing a set of failed government regulations which are even less likely to work in the crypto-world.

So let’s talk about how we eliminate unseemly behavior and enforce taxation in a post-fiat world.

Crime and the death industry

It should be obvious that banking laws won’t prevent arms trafficking. If it isn’t logically obvious, it is empirically obvious. So far, no dice.

The ideas that some arms traffickers, called “governments” should be allowed to trade in arms is a bit odd to me. Why do we allow anyone to produce arms at all? Why do we condone the production of stuff whose sole purpose is for the harm and destruction of other people?

I’ll tell you why. Taxes, that’s why. When we pay taxes, we lose control of what someone does with our money. But let’s let that slide until later, when I talk about taxes. Let’s assume that if someone is elected to government, they become authorized to kill other people (indirectly, of course, not with their own hands).

But since none of us in the crypto industry want to be involved in arms trafficking, I’ll give a few tips on how to reduce it.

1. Limit production of arms. Don’t sell them to anyone who isn’t authorized for law enforcement.
2. Legalize and regulate drugs. If it’s legal, you don’t need to kill people to trade the stuff.
3. Law enforcement against arms trafficking, not law enforcement against money movement. This is so obvious. We are going around calling people criminals just because they are moving money around the world. How about we stop being suspicious of people with money? Let’s stop the behavior we want to stop, not some other behavior.

Drugs

Polygon is one of the ICOs with the least focus I’ve ever seen in a business plan, but they can succeed, because “nobody wants to rent office space to the marijuana industry.” That cracks me up. Nobody ever says the are reluctant to rent office space to Purdue Pharma, Johnson & Johnson, Pfizer, or Novartis, just to name a few of the companies implicated in the opioid crisis. Vodka companies don’t seem to have a problem finding a location for their distilleries.

Whether or not you think that drugs should be legal is beside the point. It doesn’t matter. We have failed, globally, to eliminate this problem through legislation and enforcement. On a practical level, we should be looking at some other solutions.

Legalize drugs. Look at some of the root problems. Fund rehab programs. I don’t know how to stop the problem of recreational drugs, but I do know one thing, and so do you. Throwing people in jail isn’t working.

Legalizing drugs will instantly eliminate 360 billion dollars from the black market (well, not instantly, but pretty rapidly).

Human Trafficking

Human trafficking has a lot more elements to it than the illegal drug or weapons industry. It probably has more users than either of them. I have no glib or easy solutions for this.

However, a quick search of AML laws regarding human trafficking makes it clear that ICO regulation isn’t an appropriate way to address this problem. The signs of human trafficking, as related to money include things like “ongoing ATM/credit card transactions in even amounts between 10 PM and 6 AM”, and “high volume deposits through funnel accounts and immediate withdrawals from border towns.” It also includes some of the standards, like paying bills in cash, but those generally aren’t large enough amounts to be caught with AML anyway.

I could write a blog post about how to reduce human trafficking, but that’s not the gist of this post. The gist is that AML on ICOs simply is not an element of that solution.

It’s also quite possible that better human identification systems enabled through blockchain and biometrics will play a part. Allowing every human to have a self-sovereign identity at birth could go a long way towards identifying situations where an individual is at risk.

Taxes

Despite all of the above, I don’t think taxes are a bad thing. Generally speaking, even the libertarians of the crypto world don’t think taxation is a bad thing. What we tend to think is that the taxes aren’t going to places that really benefit people. In fact, even if you aren’t libertarian, you probably think that.

In the crypto world we have people predicting the demise of government, the crackdown of government, or the submission of the cryptoworld to government. All of this has to do with taxes. Government is powerful. It controls the banks (or is controlled by the banks, same difference). It has lots of weapons. The crypto world should be afraid. Very, very afraid.

Well, maybe at least a little bit.

Let me put it simply: government needs to rethink taxes.

We all want government services. We want protection of our safety, firefighters, roads, protection of our ownership rights, education, health care, identity services, preservation of our environment, and a host of other services. Most of us happily pay for these things.

The problem is that most of us are not happily paying for a host of other things. We are paying for war, often not even in our own country. We are paying for drug regulation. We are paying people with no real security training to pat-down old ladies in wheelchairs at the airport. We are paying for expensive travel, accommodation, and entertainment for politicians. We are paying subsidies to bail out large insurance companies and banks. Most of us do not happily pay for these things.

Governments need to look into new models of how they “tax” for services. Liberland is one of the wackiest experiments on the planet, but also one of the best. They are looking closely at what it means to be a government in the first place, and providing optional taxation, as well as system that uses tokenization to allow direct democracy. In other words, you pay for service (such as getting a passport). When you pay taxes, those tax monies purchase tokens that give you voting power in the government. The country is implementing checks and balances that would allow the population veto power, so that corporate interests don’t get too much power in the system.

In a blockchain world, there’s no reason why I couldn’t pay taxes to one government that provides great education for my children, and pay taxes to a different government that provides my location-based services, such as road and firefighters.

At the end of the day, everyone needs those services. Yes, there will be free riders. There are free riders today. It will take us quite a while to figure out what this new world will look like. But it’s imperative that we do, because government can’t stop people from putting their money into secret accounts. People don’t want the government knowing every time they use money. People don’t want corporations knowing every time they use money. There are legitimate reasons why people want privacy, and once they have it, government won’t be able to control them.

Instead, people will control their governments.

Government will have to look like a service provider, and give services that people happily pay for. There will have to be better accountability for where the money is going. Government, to some degree, will compete with NGOs. If I think an NGO is doing a better job of keeping youth off the streets, I’ll pay the NGO my “taxes”.

You might think this is somewhat utopian, and it is, but it’s hard to argue that what we have now is working. As a community, it is up to us, the blockchain community, to figure out how this future government will work, and to work with the existing governments to make the transition as painless as possible. We won’t succeed in making it painless, but it’s imperative that we try.