The worst policy ever—KYC holds a lack of accountability, allowing money laundering and financial crime use to continue rising.

Real-life numbers tell a different story. Several independent studies have found that AML and KYC policies enable the authorities to recover less than 0.1% of criminal funds. AML efforts cost a hundred times these amounts, but more importantly, they start to threaten our basic right to privacy.

The instances of absurd demands, like the of a French man asked to justify the origin of €0.66 he wanted to deposit, are hardly raising any eyebrows anymore. Regulators face this ridicule without blinking, all while journalists and whistleblowers continue to expose billions of dollars laundered at the highest levels of the same institutions that put their regular clients through a bureaucratic nightmare.

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

The  emerging as a free value-transferring system, as opposed to the KYC-gated fiat, has given hope to many personal freedom advocates. However, the regulators’ response was to try and integrate both the acts of buying and transferring crypto into the current AML processes.

Does it mean that the blockchain has been tamed, with both the entrance and the exit sealed by the AML regulation?

Luckily, not yet. Or at least, not in every jurisdiction. 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 crypto without KYC.

The Swiss example could prove valuable in stopping global AML practices from spiralling out of control and bringing a surveillance state upon the world that used to be known as “free”. It is worth taking a closer look at, but first, let’s see why the traditional AML approach is failing.

KYC: THE WORST POLICY EVER

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

As  by the director of Europol Rob Wainwright in 2018: "The banks are spending $20 billion a year to run 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 comprehensive on the effectiveness of AML, published in 2020 by Ronald Pol from La Trobe University of Melbourne. It found that “the anti-money laundering policy intervention has less than 0.1 percent impact on criminal finances, compliance costs exceed recovered criminal funds more than a hundred times over, and banks, taxpayers and ordinary citizens are penalized more than criminal enterprises.” Furthermore, “blaming banks for not “properly” implementing anti-money laundering laws is a convenient fiction. Fundamental problems may lie instead with the design of the core policy prescription itself.”

The study uses numerous sources from major countries and agencies, but its author admits it is nearly impossible to reconcile it all. Indeed, as strange as it may seem, despite billions of dollars and euros spent on AML, there is no generalized practice that could allow us to measure its effectiveness.

The reality, however, is difficult to ignore. Despite the 20 years of modern KYC practices, and continue to rise. What’s more, a number of high-profile investigations have shown massive money laundering schemes happening at the very top of respected financial institutions. Crédit Suisse helping Bulgarian drug dealers, Wells Fargo (Wachovia) laundering money for the Mexican cartels, BNP Paribas facilitating operations of a Gabonese dictator… This is not to mention tax frauds initiated by the banks themselves: Danske Bank, Deutsche Bank, HSBC, and so many others have been proven guilty of scamming their countries. Yet, the regulators’ response was to tighten the rules surrounding small retail-sized transfers and create extensive red tape 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 for the end result. This lack of accountability could explain the increasingly absurd rules forcing financial institutions to maintain armies of compliance specialists, and regular 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 worrisome trends. The increasingly intrusive regulations have set up a framework allowing to efficiently filter 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, non-conformists… or those involved in the crypto space.

CRYPTO AML

The blockchain represents a major challenge for the fiat system because of its decentralized nature. Unlike centralized banks burdened with countless AML-related verifications, blockchain nodes simply run user-agnostic code.

There’s no way a blockchain like Bitcoin could be shaped into the AML mold, however, the intermediaries, also known as VASP (virtual asset service providers), can be. Their AML duties now include two major categories: buying crypto and transferring crypto.

Transferring crypto falls under the prerogative of FATF, and most countries tend to implement this organization’s recommendations sooner or later. These recommendations include the “travel rule”, which implies that the data about the funds must “travel” together with them. Currently, FATF recommends that any fiat transfer over $1000 must be accompanied by the information on the sender and the beneficiary.

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

The good thing about blockchain, though, is that it does not need intermediaries for transferring value. However, it needs them for buying crypto with fiat.

The framework for buying crypto is determined by financial regulators and central banks, and this is where the countries’ traditions play an important role. In France, a highly centralized country, an array of minute regulations, on-site inspections, and conferences define market practices in great detail. Switzerland, a decentralized country famous for its direct democracy based on consensus, typically grants financial intermediaries a certain autonomy in managing their own risk appetite.