About the author: Michael J. Casey is chairman of the CoinDesk Advisory Board and a senior consultant for the blockchain research at the Massachusetts Institute of Technology (MIT) Digital Currency Initiative.
In last week's column , I mentioned a core issue facing the financial inclusion goal of cryptocurrency projects: the possibility of both “private understanding and understanding” (KYC) is non-existent. of.
- Viewing the privacy of the cryptocurrency era from the "room N incident": most cryptocurrencies in the market are not truly anonymous
- Technology is getting less and less, supervision is getting more and more, and the currency circle has really changed.
- Multiple Youtube encrypted bloggers deleted a large number of videos without any notice
- ING Bank: Bullish cryptocurrency has a negative impact on the US dollar
- How do we tell the truth about the currency in the currency circle?
- Who controls the power of the encryption market? Retail investors or institutional investors?
Image source: visualhunt
This week, I will not discuss Libra and its controversial founding company Facebook for the time being, but I would like to discuss this dilemma in more depth, because this issue is not unique to the project. As KYC rules gradually penetrate into the field, all cryptocurrency start-ups that seek to expand financial access for the poor are subject to varying degrees of restraint, that is, they must require the client to provide identity information and track them.
This contradiction stems from the tough policies under the AML-CFT, which were tightened globally after the September 11, 2001 terrorist attacks and financial crisis. Since almost every bank needs to deal with the US dollar, local KYC rules tend to follow the US Bank Secrecy Act and the US Financial Crimes Enforcement Network (FinCEN) guidelines. . In addition, further international pressure comes from the Intergovernmental Financial Action Task Force (FATF), which sets the regulatory standards that countries pressure each other to comply with.
This series of rules gives law enforcement agencies the power to impose high fines, like a sword of the Sword of Damocles hanging over the bankers, pushing them to risk-averse situations. The Bank Compliance Officer can simply convince his superiors to adopt stricter by referring to HSBC (a fine of $1.9 billion for assisting Mexican money laundering) or Standard Chartered (a fine of $1.1 billion for similar faults with Iran). The method of identifying and analyzing customers.
However, it is still unclear whether these measures are effective. The United Nations Office on Drugs and Crime (UNODC) estimates that annual money-laundering funds still account for 2-5% of global GDP (ie between $800 billion and $2 trillion). If there are no such strict rules, will this number be higher? Maybe. But we have no counterfactuals to measure this.
Criminals still have many mechanisms to transfer funds and avoid sanctions. Yes, some people use bitcoin – this is why FATF introduced more stringent rules for its so-called "virtual asset service provider" this year – but the role of cryptocurrency is far less than fiat money. As revealed in the 2015 Panama Papers, a variety of suspicious entities continue to help deceitful politicians and their financiers conceal their identity and conceal capital flows.
What we know is that these rules hinder financial inclusion.
For example, Caribbean governments complain that their economies are increasingly being “de-risked” as more stringent compliance measures curb investment flows to these islands.
For poorer countries, the consequences are even more serious, because in these countries, nationally issued identity cards either do not exist or are easily forged. The rigorous review by foreign banks of counterparties to the FATF's “high-risk jurisdictions” means that the thresholds for companies and individuals in these countries to obtain local banking services are very high. That's one of the key reasons why the world's “no bank account” population is 2 billion.
Of course, this has had a negative impact on poverty, which in turn fuels crime and terrorism – these are the problems that AML-CFT intends to address.
In Somalia, the institutions of this failed country are often blacklisted by the world’s largest banks. For Somali nationals, it is very difficult and costly to send money home to families who rely on remittances. This will allow poverty to continue, forcing people into informal payment systems and fueling the economic environment that deprives citizens of their rights, allowing terrorist organizations such as the Al-Shabaab to flourish.
This is an abnormal effect.
Is cryptocurrency the solution?
The answer to password punk is to circumvent the government. People should use bitcoin because it can implement peer-to-peer digital payments without the need for a regulated entity to act as an intermediary.
The problem lies in the payment channel of cryptocurrencies, where government monitoring becomes more and more strict. The FATF's new "travel rule" stipulates that cryptocurrency exchanges should not only obtain information about customers, but also obtain information about "customer's customers", thereby forcing exchanges to share information. This shows that only the transfer between the self-hosted wallet of the cryptocurrency exchange is not subject to KYC. Once the transaction involves the most basic hosting structure of most exchanges today, a KYC report will be conducted.
Decentralized exchanges (DEX) may solve this problem. Such exchanges only offer price and matching services, but do not host the customer's cryptocurrency. The recent FinCEN guidelines exclude them from the definition of regulated money service companies in the United States.
However, Coin Center, a cryptocurrency advocacy organization, is concerned that the FATF's definition of a regulated “virtual asset service provider” vaguely refers to the entity that “transfers” funds. Ambiguity can create uncertainty, as we have seen in bank compliance officers, and this uncertainty is detrimental to risk appetite. To be on the safe side, many lawyers advise their DEX customers to enforce KYC.
In addition, Helsinki-based LocalBitcoins announced new KYC rules this year due to the new anti-money laundering law in Finland. Without official monitoring, it is more difficult for people to find the counterparty and agree on the transaction price of the cryptocurrency and the legal currency.
In any case, it is unrealistic for people in developing countries to use bitcoin as their primary account and transaction medium. Libra's stability mechanism, backed by a basket of legal coins, may turn it into a daily payment tool, but as we saw from David Marcus's testimony to Congress, the business-backed project will Need to implement KYC.
The key is that the poor need a low barrier to accessing the legal currency.
Monitoring technology has intensified
We are back to where we first started: the goal of financial inclusion is at the expense of the government’s goal of fighting crime.
Some may say that the government should decriminalize the currency – combating actual crimes such as drug trafficking and arms trading, but regard the right to exchange value as a human right. However, we are still realistic: this is impossible.
So how do you get rid of this vicious circle? The answer may lie in the ability of blockchain technology to track the transfer between pseudonym accounts themselves—although not yet applied.
For some time, transaction tracking tools such as Elliptic and Chainanalysis have helped law enforcement agencies track cryptocurrency payments between bad guys and provide companies with strict “anti-money laundering” monitoring and auditing services.
New companies such as Coral Protocol and CipherTrace are now using high-tech network analysis and encryption protection technologies to help companies share cryptocurrency metadata and flag suspicious behavior without revealing customer personally identifiable information (PII). This will make it easier for companies to comply with FATF's travel rules and conduct more complex and systematic analysis of risks.
In addition to the KYC rules, there is real value here for a cryptocurrency economy that is increasingly dominated by "robots."
Still, there is no way to get around the law. On the payment channel, the customer must be identified. Moreover, according to the requirements of law enforcement agencies with these complex tracking tools, companies must open black boxes and hand over personally identifiable information to the authorities.
New way of thinking
However, what if the government admits that there is no need for formal identification of the poor on the payment channel? If they accept an AML model, the model treats the endpoint as an unidentified node and uses these New analysis tools that proactively manage access to the network based on behavior rather than identity. What happens?
In this regard, MIT-IBM Watson AI Lab and Elliptic's collaborative research in machine learning and high-performance computing may be a catalyst. As described by laboratory researcher Mark Weber, the team used a method called graph convolutional networks to create enhanced financial flow forensics to address "advanced criminal networks." The challenges of using complex tiered and confusing trading schemes.
Researchers have drawn a large number of bitcoin transaction maps, separating the patterns that distinguish between illegal and legal behavior. In a forthcoming paper, they believe that their work is a contribution to financial inclusion goals.
One day, companies may use such tools to control the entry point of the cryptocurrency network without using traditional KYC, ensuring that good people can get financial services without providing official IDs, and the bad guys are not Go to the corresponding service.
Will the regulators agree? Under the current mode of thinking, it does not seem to. Compliance is used to identify and capture criminals, not as a way to control financial access itself. If there is any difference, it is that the regulatory trend will become: financial institutions are increasingly dependent on national identity cards, and attitudes toward “high-risk” poor people are becoming more conservative.
Juan Llanos, a cryptocurrency compliance expert, complains that regulators are “unwilling to accept innovation”. He added,
"As long as the government ID card is the standard, we will encounter this problem. Any anonymous thing is controversial and is not allowed. It is very unfortunate."
Nonetheless, the FATF's recent round of deliberations has indeed extended an olive branch to innovators: the willingness to explore the potential of “digital identity provided by the government or the private sector”.
Combining the “private sector” with the Libra white paper's short description of “portable digital identity” as a financially inclusive solution, it is at least imaginable that financial and technology companies like members of the Libra Association are presenting for the poor A new solution that allows them to no longer rely on the outdated concept of national identity to enjoy the financial services they deserve.
For hard-line privacy advocates who see exchange as a fundamental human right, this approach will not satisfy them.
But as a pragmatic solution, this may be the biggest hope for the world's 2 billion non-bank account population.