Our world is filled with atrocious threats, crimes and violence. Human trafficking, child abuse, state-sponsored violence, terrorism and a laundry list of other heinous acts require tools to fight back and ultimately reduce their frequency to as close to zero as possible. Unfortunately, there are massive disagreements about the types of tools we should use in order to be as successful as possible in this endeavor.
In one camp, we have offensive tactics. These tools attempt to reduce the level of horrific crimes by making the criminal activity more difficult. This could be in the form of cutting off terrorist financing through know-your-customer (KYC) anti-money laundering (AML) regulations or giving corporations the power to scan user photos to catch images of child abuse.
What is KYC?
Know your customer (KYC) regulations are sets of rules implemented by the U.S. Financial Crimes Enforcement Network (FinCEN). These rules apply to actors in the investment and securities industries, including broker-dealers, banks and cryptocurrency exchanges such as Coinbase. The stated purpose of KYC is to prevent money laundering and other criminal activity. In order to comply with KYC, firms must verify the identification of all customers as well as continuously review customer activity for any suspicious activity. While KYC proponents claim that these regulations reduce the amount of illegal activities in the financial sector, the anti-KYC side argues that KYC is a privacy disaster that simply pushes criminals to better hide their activities or use different tools.
NOTE: In this post, I define KYC as the requirement for a person to provide identification and/or private information before they can receive a product or service, regardless of industry.
What is AML? How is it related to KYC, and how is it different?
Anti-money laundering (AML) regulations were created by an unelected global organization called the Financial Action Task Force (FATF). Similar to KYC rules, the stated intention of AML rules is to target criminal activity in the banking and financial sector, specifically to target money laundering and terrorist activities. In short, AML puts the burden on the institution to determine whether or not its customers are participating in illegal activities. These rules require companies to collect private information about their customers and continuously monitor activity for any suspicious transactions.
While KYC and AML are similar in their intentions, KYC is technically a subset of AML. KYC is specifically about verifying the identity of customers, whereas AML is a broader set of requirements. AML requirements include KYC, as well as things like reporting any transactions over $10,000 and verifying the origin of large amounts of money. KYC and AML rules require surveillance and mass collection of customer data. While this data is collected for a stated purpose of reducing criminal activity, it also provides a honeypot of information for potential attackers, a massive regulatory burden for companies and a hurdle for the most vulnerable members of society to access financial services.
While offensive tactics are easy to rally people behind — who doesn’t want to stop human trafficking? — the long-term effectiveness and downstream consequences of these tactics are rarely discussed. Some of the consequences, such as a reduction in business efficiency, are easily laughed off by proponents of offensive tactics. Who cares if a corporation loses some profits if it means we can catch child abusers? However, these tactics come with very real costs to the most vulnerable among us, as well as society at large. Furthermore, the long-term effectiveness of offensive tactics is questionable at best.
The Downsides Of Offensive Regulation Tactics
Let’s talk about the downsides of offensive tactics, using KYC regulations as an example. While the legal definition of KYC is specific to banking and finance, there are similar rules in place across various industries. In this post, I define KYC as the requirement for a person to provide identification and/or private information before they can receive a product or service, regardless of industry. KYC is required for getting bank accounts, healthcare, employment, housing and even phone/internet services. The stated purpose of KYC is essentially to ensure that a terrorist is restricted from using the banking system to finance their activities, or a human trafficker is prevented from using the local internet provider. This sounds noble enough, but is it actually effective?
In the short-term, KYC can be effective at catching the less intelligent and less adaptable criminals. It is certainly possible that banks will help catch some money laundering when an ID verification program is first launched. However, we should expect most criminals to quickly adapt by using forged documents, bribing officials or going outside of the banking sector entirely. The more skilled criminals will find and design tools that allow them to continue their activities in the long run.
While the benefits of KYC are fuzzy, the costs are clear. First, the costs to everyday people are massive. Personally-identifying information such as social security numbers, birthdates and addresses can be used to steal identities, physically attack or financially rob completely innocent individuals and their families. Even if the data is not stolen from the primary source, it can be sold to secondary organizations without the user’s permission. While some people may prefer to opt-in to such a system, the inability to opt-out of personal data collection is an asymmetry that benefits corporations and governments at the expense of everyday people.
Second, KYC presents incalculable potential future costs for society at large. KYC provides a treasure trove of data to government entities. If you trust the current government regime, this may seem fine. However, an increase in power for political leaders that you like today also means an increase in power for political leaders that you may vehemently disagree with tomorrow. If you would be terrified to grant a certain power to an enemy, then that power should simply not exist in the first place.
To sum up the societal costs: In the short-term, KYC requires all users to upload private information, increasing the potential attack surface for every single individual. In the long-term, KYC provides increased surveillance powers to unknown future government leaders who may use this power to harm society.
How does the proposed U.S. infrastructure bill fit in?
KYC and AML regulations are especially relevant right now with the recent battle over the U.S. infrastructure bill. An initially proposed version of the bill included extremely broad definitions of a “broker” which could be interpreted to apply to miners, nodes or developers. If this broad interpretation is to be used in practice, it would potentially require almost all cryptocurrency participants to collect and report information about the transactions they are interacting with.
For example, a Bitcoin miner could be required to report customer information to the IRS related to the transactions included in any block that it mines. While it would be impossible for many participants to comply with such a regulation, the concept has major negative implications for user privacy and security purposes. Someone mining Bitcoin in their garage should not be expected to collect the private information of thousands of users; nor should a user be forced to provide their private information to a random person mining Bitcoin in their garage.
While it wouldn’t fall directly under KYC or AML regulations, this provision could have similar impacts on the Bitcoin ecosystem, if enforced. Users would be harmed by being coerced to give up private information which could be hacked or sold to third parties. Operators would be harmed by needing to comply with stringent regulations — many, if not most, would likely shut down or move to a different jurisdiction. Meanwhile, criminals or tax evaders looking to use cryptocurrencies would simply use the tools to route around these regulations. Similar to KYC and AML regulations, the net effect of this infrastructure bill provision would likely be bad for good actors and neutral for bad actors.
Beyond the societal costs that impact everyone, KYC comes with major costs for the most vulnerable members of society. A natural effect of KYC is that anyone who wants to participate in society needs to have a government-issued ID. This seems harmless, until we consider the types of people who either do not have a government-issued ID, cannot get a government-issued ID or feel unsafe needing to use government-issued ID. The people who have trouble getting government identification typically come from a difficult background. Whether this is someone with deadbeat parents that never registered them with the state or a refugee with no official records on hand, KYC requirements exclude people from society, often based on factors that are completely beyond their control.
Even people who have government-issued IDs may not necessarily feel safe putting their information out there where it can be leaked, hacked or sold to unknown actors. Victims of domestic abuse, those who escape cults and whistleblowers must fear for the safety of themselves (and their family) due to the mass availability of their personal information. If a major goal of KYC is to protect the most vulnerable among us by preventing heinous crimes, then we cannot ignore instances where KYC does the exact opposite by negatively impacting the health and safety of the victims of humanity’s most atrocious acts.
The importance of considering the scope of offensive tactics cannot be understated. While certain types of targeted offensive tactics such as investigative work done by the police are effective tools, many of the offensive tactics employed today (e.g., KYC) are broad brush regulations that impact everyone, regardless of their relation (or lack thereof) to criminal activity. Police work directly affects those who are involved or adjacent to a crime, while KYC directly affects every single person in the entire jurisdiction.
Bitcoin Presents Hope
While broadstroke offensive tactics provide a litany of downsides with questionable upside, there is yet hope. If the goal is to prevent bad actors from winning, defense is more important than offense due to a key asymmetry: if you score, you might win; if your opponent does not score, they cannot win. Thus, providing the tools for individuals to defend themselves and others is paramount.
KYC is a clunky, one-size-fits-all approach. As such, it is destined to be mostly ineffective, as individual criminals can adapt far faster than national or global KYC regulations can. Encryption, however, provides a defensive tool that individuals can harness in different ways, depending on the circumstances. Encryption, when done properly, is unhackable and thus completely private from any and all attackers. It is the ultimate defensive tool for individuals in the digital age. Remember, if attackers cannot score, they cannot win. Whether encrypted messaging (e.g., Signal), encrypted email (e.g., ProtonMail), or encrypted value (e.g., Bitcoin), encryption gives power not only to those who want privacy, but most importantly, to those that truly need privacy. While KYC harms vulnerable people that require privacy, encryption enables these same people to defend against threats.
The current state of the world makes it quite difficult to live in society without consistently giving up private information. However, this is quickly changing. First, the increased amount of data collection and surveillance has woken many people up to the importance of privacy. The common question of “why do you need privacy if you’re not a criminal?” is being challenged more potently with each major data leak and each personalized advertisement based on an item mentioned in a private conversation. While increased surveillance has forced many to start caring more about their personal privacy, perhaps the most important development is the increase in encryption-based tools available to the world.
For many, the introduction to Bitcoin, the world’s premier encrypted money, leads them to discover the world-changing power of encryption. Bitcoin uses encryption to provide the most defensive form of property that has ever existed. It is an unhackable method of value storage which can be effectively teleported anywhere on earth, secured across multiple physical jurisdictions using multisig or carried across borders via memorization. Traditional forms of value storage such as gold, dollars and real estate are limited either by their physical nature, regulations such as KYC or both. Dollars cannot be teleported across an ocean in ten minutes. Gold cannot use multisig to distribute its bearer properties across different physical locations. One cannot memorize words, flee a dangerous situation and use those words to regain access to one’s house once in a safe location.
Many politicians argue that Bitcoin and other encryption-based innovations are a threat because they cannot be regulated like more traditional technologies. Others conclude that encryption-based technologies are primarily for evading taxes or hiding bad deeds. Both completely miss the point by framing the situation through the lens of the existing system. Encryption is a step change in the fabric underpinning our entire society. Never before has there existed a thing that is non-confiscatable, unhackable and undestroyable.
Encryption allows for these things to exist, while Bitcoin provides the financial incentive for people across the globe to learn, use and advocate for encryption. The critics are indeed correct that Bitcoin and other encryption tools cannot be regulated and can be used to evade taxes or hide bad deeds. However, their being correct is as useless as a king from the 1400s realizing that the printing press can be used to print information he does not want to be published. In the long run, they are fighting against an inevitable force that cannot be shut down, hacked or destroyed. When faced with an inevitable technology, it is far better to embrace, build upon, and advocate for its positive qualities than to waste energy trying to stop it. Fortunately, all types of people from across the world are starting to realize this, with Bitcoin leading the way due to its embedded financial incentives.
The power and availability of defensive tactics has never been as strong as it is today. The reality is that criminals can and will use the most powerful tools available to them in order to commit terrible crimes. This has and always will be true. Again, we must remember the importance of defense over offense: an attacker cannot win if they cannot score. Would-be victims and those living in fear can now start to improve their safety by simply reducing their attack surface. If we want to help the most victimized people among us, we must encourage the distribution of defensive tactics to empower everyday people rather than take untargeted offensive actions that harm everyday people.
This is a guest post by Mitch and inspired by @AnarkioC’s Medium post. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Our world is stuffed with atrocious threats, crimes and violence. Human trafficking, youngster abuse, state-sponsored violence, terrorism and a laundry record of different heinous acts require instruments to combat again and finally cut back their frequency to as near zero as doable. Sadly, there are large disagreements concerning the kinds of instruments we must always use to be able to be as profitable as doable on this endeavor.
In a single camp, now we have offensive techniques. These instruments try to scale back the extent of horrific crimes by making the legal exercise harder. This could possibly be within the type of reducing off terrorist financing by means of know-your-customer (KYC) anti-money laundering (AML) laws or giving companies the facility to scan consumer photographs to catch pictures of kid abuse.
What’s KYC?
Know your buyer (KYC) laws are units of guidelines carried out by the U.S. Monetary Crimes Enforcement Community (FinCEN). These guidelines apply to actors within the funding and securities industries, together with broker-dealers, banks and cryptocurrency exchanges equivalent to Coinbase. The acknowledged function of KYC is to stop cash laundering and different legal exercise. With a view to adjust to KYC, companies should confirm the identification of all prospects in addition to repeatedly assessment buyer exercise for any suspicious exercise. Whereas KYC proponents declare that these laws cut back the quantity of unlawful actions within the monetary sector, the anti-KYC facet argues that KYC is a privateness catastrophe that merely pushes criminals to higher cover their actions or use totally different instruments.
NOTE: On this submit, I outline KYC because the requirement for an individual to supply identification and/or personal info earlier than they’ll obtain a services or products, no matter business.
What’s AML? How is it associated to KYC, and the way is it totally different?
Anti-money laundering (AML) laws had been created by an unelected international group known as the Monetary Motion Job Power (FATF). Much like KYC guidelines, the acknowledged intention of AML guidelines is to focus on legal exercise within the banking and monetary sector, particularly to focus on cash laundering and terrorist actions. Briefly, AML places the burden on the establishment to find out whether or not or not its prospects are collaborating in unlawful actions. These guidelines require firms to gather personal details about their prospects and repeatedly monitor exercise for any suspicious transactions.
Whereas KYC and AML are related of their intentions, KYC is technically a subset of AML. KYC is particularly about verifying the id of consumers, whereas AML is a broader set of necessities. AML necessities embody KYC, in addition to issues like reporting any transactions over $10,000 and verifying the origin of huge quantities of cash. KYC and AML guidelines require surveillance and mass assortment of buyer knowledge. Whereas this knowledge is collected for a acknowledged function of lowering legal exercise, it additionally supplies a honeypot of knowledge for potential attackers, an enormous regulatory burden for firms and a hurdle for essentially the most susceptible members of society to entry monetary companies.
Whereas offensive techniques are simple to rally folks behind — who doesn’t wish to cease human trafficking? — the long-term effectiveness and downstream penalties of those techniques are hardly ever mentioned. A few of the penalties, equivalent to a discount in enterprise effectivity, are simply laughed off by proponents of offensive techniques. Who cares if an organization loses some earnings if it means we are able to catch youngster abusers? Nevertheless, these techniques include very actual prices to essentially the most susceptible amongst us, in addition to society at massive. Moreover, the long-term effectiveness of offensive techniques is questionable at greatest.
The Downsides Of Offensive Regulation Ways
Let’s discuss concerning the downsides of offensive techniques, utilizing KYC laws for example. Whereas the authorized definition of KYC is particular to banking and finance, there are related guidelines in place throughout numerous industries. On this submit, I outline KYC because the requirement for an individual to supply identification and/or personal info earlier than they’ll obtain a services or products, no matter business. KYC is required for getting financial institution accounts, healthcare, employment, housing and even cellphone/web companies. The acknowledged function of KYC is basically to make sure that a terrorist is restricted from utilizing the banking system to finance their actions, or a human trafficker is prevented from utilizing the native web supplier. This sounds noble sufficient, however is it truly efficient?
Within the short-term, KYC may be efficient at catching the much less clever and fewer adaptable criminals. It’s actually doable that banks will assist catch some cash laundering when an ID verification program is first launched. Nevertheless, we must always count on most criminals to rapidly adapt by utilizing solid paperwork, bribing officers or going outdoors of the banking sector totally. The extra expert criminals will discover and design instruments that enable them to proceed their actions in the long term.
Whereas the advantages of KYC are fuzzy, the prices are clear. First, the prices to on a regular basis persons are large. Personally-identifying info equivalent to social safety numbers, birthdates and addresses can be utilized to steal identities, bodily assault or financially rob utterly harmless people and their households. Even when the info is just not stolen from the first supply, it may be bought to secondary organizations with out the consumer’s permission. Whereas some folks might desire to opt-in to such a system, the lack to opt-out of non-public knowledge assortment is an asymmetry that advantages companies and governments on the expense of on a regular basis folks.
Second, KYC presents incalculable potential future prices for society at massive. KYC supplies a treasure trove of information to authorities entities. Should you belief the present authorities regime, this may increasingly appear effective. Nevertheless, a rise in energy for political leaders that you simply like immediately additionally means a rise in energy for political leaders that you could be vehemently disagree with tomorrow. Should you could be terrified to grant a sure energy to an enemy, then that energy ought to merely not exist within the first place.
To sum up the societal prices: Within the short-term, KYC requires all customers to add personal info, growing the potential assault floor for each single particular person. Within the long-term, KYC supplies elevated surveillance powers to unknown future authorities leaders who might use this energy to hurt society.
How does the proposed U.S. infrastructure invoice slot in?
KYC and AML laws are particularly related proper now with the current battle over the U.S. infrastructure invoice. An initially proposed model of the invoice included extraordinarily broad definitions of a “dealer” which could possibly be interpreted to use to miners, nodes or builders. If this broad interpretation is for use in follow, it will doubtlessly require nearly all cryptocurrency contributors to gather and report details about the transactions they’re interacting with.
For instance, a Bitcoin miner could possibly be required to report buyer info to the IRS associated to the transactions included in any block that it mines. Whereas it will be not possible for a lot of contributors to adjust to such a regulation, the idea has main damaging implications for consumer privateness and safety functions. Somebody mining Bitcoin of their storage shouldn’t be anticipated to gather the personal info of hundreds of customers; nor ought to a consumer be compelled to supply their personal info to a random individual mining Bitcoin of their storage.
Whereas it wouldn’t fall straight beneath KYC or AML laws, this provision may have related impacts on the Bitcoin ecosystem, if enforced. Customers could be harmed by being coerced to surrender personal info which could possibly be hacked or bought to 3rd events. Operators could be harmed by needing to adjust to stringent laws — many, if not most, would possible shut down or transfer to a special jurisdiction. In the meantime, criminals or tax evaders wanting to make use of cryptocurrencies would merely use the instruments to route round these laws. Much like KYC and AML laws, the web impact of this infrastructure invoice provision would possible be dangerous for good actors and impartial for dangerous actors.
Past the societal prices that influence everybody, KYC comes with main prices for essentially the most susceptible members of society. A pure impact of KYC is that anybody who needs to take part in society must have a government-issued ID. This appears innocent, till we think about the categories of people that both shouldn’t have a government-issued ID, can’t get a government-issued ID or really feel unsafe needing to make use of government-issued ID. The individuals who have hassle getting authorities identification usually come from a tough background. Whether or not that is somebody with deadbeat mother and father that by no means registered them with the state or a refugee with no official information readily available, KYC necessities exclude folks from society, typically primarily based on components which can be utterly past their management.
Even individuals who have government-issued IDs might not essentially really feel protected placing their info on the market the place it may be leaked, hacked or bought to unknown actors. Victims of home abuse, those that escape cults and whistleblowers should worry for the security of themselves (and their household) as a result of mass availability of their private info. If a serious objective of KYC is to guard essentially the most susceptible amongst us by stopping heinous crimes, then we can’t ignore situations the place KYC does the precise reverse by negatively impacting the well being and security of the victims of humanity’s most atrocious acts.
The significance of contemplating the scope of offensive techniques can’t be understated. Whereas sure kinds of focused offensive techniques equivalent to investigative work executed by the police are efficient instruments, most of the offensive techniques employed immediately (e.g., KYC) are broad brush laws that influence everybody, no matter their relation (or lack thereof) to legal exercise. Police work straight impacts those that are concerned or adjoining to against the law, whereas KYC straight impacts each single individual in the complete jurisdiction.
Bitcoin Presents Hope
Whereas broadstroke offensive techniques present a litany of downsides with questionable upside, there may be but hope. If the objective is to stop dangerous actors from successful, protection is extra vital than offense because of a key asymmetry: should you rating, you would possibly win; in case your opponent doesn’t rating, they can’t win. Thus, offering the instruments for people to defend themselves and others is paramount.
KYC is a clunky, one-size-fits-all method. As such, it’s destined to be principally ineffective, as particular person criminals can adapt far quicker than nationwide or international KYC laws can. Encryption, nevertheless, supplies a defensive device that people can harness in numerous methods, relying on the circumstances. Encryption, when executed correctly, is unhackable and thus utterly personal from any and all attackers. It’s the final defensive device for people within the digital age. Keep in mind, if attackers can’t rating, they can not win. Whether or not encrypted messaging (e.g., Sign), encrypted electronic mail (e.g., ProtonMail), or encrypted worth (e.g., Bitcoin), encryption offers energy not solely to those that need privateness, however most significantly, to those who actually want privateness. Whereas KYC harms susceptible people who require privateness, encryption allows these identical folks to defend towards threats.
The present state of the world makes it fairly tough to stay in society with out persistently giving up personal info. Nevertheless, that is rapidly altering. First, the elevated quantity of information assortment and surveillance has woken many individuals as much as the significance of privateness. The widespread query of “why do you want privateness should you’re not a legal?” is being challenged extra potently with every main knowledge leak and every personalised commercial primarily based on an merchandise talked about in a non-public dialog. Whereas elevated surveillance has compelled many to start out caring extra about their private privateness, maybe a very powerful growth is the rise in encryption-based instruments out there to the world.
For a lot of, the introduction to Bitcoin, the world’s premier encrypted cash, leads them to find the world-changing energy of encryption. Bitcoin makes use of encryption to supply essentially the most defensive type of property that has ever existed. It’s an unhackable methodology of worth storage which may be successfully teleported anyplace on earth, secured throughout a number of bodily jurisdictions utilizing multisig or carried throughout borders by way of memorization. Conventional types of worth storage equivalent to gold, {dollars} and actual property are restricted both by their bodily nature, laws equivalent to KYC or each. {Dollars} can’t be teleported throughout an ocean in ten minutes. Gold can’t use multisig to distribute its bearer properties throughout totally different bodily places. One can’t memorize phrases, flee a harmful scenario and use these phrases to regain entry to at least one’s home as soon as in a protected location.
Many politicians argue that Bitcoin and different encryption-based improvements are a menace as a result of they can’t be regulated like extra conventional applied sciences. Others conclude that encryption-based applied sciences are primarily for evading taxes or hiding dangerous deeds. Each utterly miss the purpose by framing the scenario by means of the lens of the prevailing system. Encryption is a step change within the material underpinning our whole society. By no means earlier than has there existed a factor that’s non-confiscatable, unhackable and undestroyable.
Encryption permits for this stuff to exist, whereas Bitcoin supplies the monetary incentive for folks throughout the globe to be taught, use and advocate for encryption. The critics are certainly right that Bitcoin and different encryption instruments can’t be regulated and can be utilized to evade taxes or cover dangerous deeds. Nevertheless, their being right is as ineffective as a king from the 1400s realizing that the printing press can be utilized to print info he doesn’t wish to be revealed. In the long term, they’re preventing towards an inevitable pressure that can not be shut down, hacked or destroyed. When confronted with an inevitable expertise, it is much better to embrace, construct upon, and advocate for its constructive qualities than to waste power making an attempt to cease it. Happily, all kinds of folks from the world over are beginning to understand this, with Bitcoin main the best way because of its embedded monetary incentives.
The facility and availability of defensive techniques has by no means been as robust as it’s immediately. The fact is that criminals can and can use essentially the most highly effective instruments out there to them to be able to commit horrible crimes. This has and at all times will probably be true. Once more, we should bear in mind the significance of protection over offense: an attacker can’t win if they can not rating. Would-be victims and people residing in worry can now begin to enhance their security by merely lowering their assault floor. If we wish to assist essentially the most victimized folks amongst us, we should encourage the distribution of defensive techniques to empower on a regular basis folks relatively than take untargeted offensive actions that hurt on a regular basis folks.
This can be a visitor submit by Mitch and impressed by @AnarkioC’s Medium submit. Opinions expressed are totally their very own and don’t essentially replicate these of BTC Inc or Bitcoin Journal.
