Know Your Customer Meets its Limits with Cryptocurrencies

Know Your Customer Meets its Limits with Cryptocurrencies

Will Governments Realize it in Time?

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Business acronym term KYC - Know your customer

The past few weeks have been a whirlwind of whipsaws in the cryptocurrency markets. Since Bitcoin’s peak in early December it has been one headline after another keeping crypto-investors and traders on edge as governments around the world make statements ranging from the ominous to the obscure.

South Korea’s own government can’t get its story straight. One day Justice Ministry Chief, Park Sang-ki, says that he’s readying a bill to ban trading on exchanges. The next day a Finance Ministry official walks back Park’s statements saying more discussion is needed.

He also said that discussion was under way on how the government could reasonably regulate cryptocurrency trading that’s overheating with irrational and speculative behavior, Yonhap reported. “A balanced perspective is necessary because blockchain technology has high relevance with many industries such as security and logistics“, the Finance Ministry official added to his statement.

Then on Friday U.S. Treasury Secretary Steve Mnuchin addressed the Economic Club of Washington and stuck his foot so far down his throat the crypto-markets came to the realization that regulators have no idea how to combat this growing phenomenon.

Between South Korea walking back its statements and Mnuchin’s admission of ignorance the crypto-markets left FUD behind. But, make no mistake, they are going to try to control things this year and are already working on exactly that by helping to make Bitcoin unusable in any practical sense.

Protection? From Whom?

All of these regulators try to sell the coming crackdowns as consumer protection. Everything is sold that way. But, what it winds up being is protection for the entrenched industry powers. And since cryptocurrencies are a direct threat to the world monetary system, the most powerful people in the world will fight tooth and claw to impede their growth.

But, beyond Mnuchin’s boilerplate paeans to being a man of the people, the thrust of his comments portrayed a stunning lack of understanding about how cryptocurrencies work. And his thinking is that because the U.S. has anti-money-laundering and know-your-customer laws wallet software providers are obliged to observe these laws.

Mnuchin said, “In the United States — and people may not realize this — under our laws, if you have a wallet to own bitcoins, that company has the same obligation as a bank to Know Your Customer. So, in the United States, we have rules for anti-money-laundering, for all different types of entities, we can track those types of [transactions]. The rest of the world doesn’t have that. So one of the things we are working very closely with the G-20 on is making sure that this doesn’t become the Swiss numbered bank account.”

What is stunning here is that firstly, many issuers of cryptocurrencies aren’t, in fact, companies and that further open source software isn’t owned by anyone so how do you apply AML and KYS laws to open source, freeware wallet software?

Mnuchin’s understanding of this market is so limited that he can’t wrap his head around the fact that his Treasury department and the IRS haven’t defined blockchain-based digital assets as currencies, so how do you regulate the issuers of them like banks under US laws? And since they are classified for tax purposes as property, why does a wallet issuer, even if it is a company, have to comply with KYS and AML rules for people storing their property personally?

Who’s supposed to report a suspicious transaction to the Treasury, Steve? Who?

I could go on with the inanity of Mnuchin’s position and I know that, of course, the laws can (and likely will) be amended to cover some of these issues, but the truth is that there is no one to actually hold liable here. There are literally hundreds of applications out there that can house Bitcoin. Those applications are not centralized in any way, the group writing the wallet software doesn’t have your keys. In fact, that’s the whole point of the wallet. Only the person running that instance of the wallet has the keys and the power to authorize transactions, or don’t.

So, is every single holder of cryptocurrencies now considered a bank of their own? If so, then (because Bitcoin is property) all home owners are banks. So is everyone that owns an e-book on their Kindle. Because all of this is completely ridiculous, Mnuchin is admitting that there is no practical way to create the kind of compliance they did with the banks, which the Treasury department directly regulates.

Now, some cryptocurrency projects are going out of their way to promote their KYS and AML compliance, at least in theory.  If the information on the blockchain is transparent and available for audit then that’s it.  There’s the information and if the person decides not to share that information willingly with the IRS then that’s on them.

The Authority Problem

The real problem is that these authorities create uncertainty with their gross mismanagement of assets and real property. Their arbitrary and onerous regulations create literal fiscal “sh**holes” around the world which we have to dig ourselves out of.

Then they get angry when we create solutions to avoid them. Enforcement of rules is always capital destructive. This is the fundamental problem with all forms of central planning. And it is the curse of the authoritarian mindset to believe the rules are more important than their effects on people. KYC laws are a classic example of how one country abuses its dominant position in the world marketplace to force open the books of foreign banks to hunt down tax evaders.

Mnuchin invoking anonymous Swiss bank accounts is telling of his mindset. Swiss banking privacy was blasted open in 2010 with the US’ threat to remove all banks from the SWIFT international electronic communications system. He’s warning everyone they will do that to crypto. The problem is warnings are all he really has. Within two days of the Justice Minster’s comments about banning cryptocurrencies, street-level protests and public outcry forced the government to completely back down.

The war on terror, itself a reaction to ruinous US foreign and monetary policy, was used to justify this. And it’s where cryptocurrencies got their first real burst of interest from. Thanks to US policy over-reach the first bull market in Bitcoin occurred and it jumped from there to China amidst massive capital flight in 2013-15.

Privacy is Not Terrorism

Personal fiscal privacy has been the norm throughout all of human history up until the recent past. And now governments all over the world over believe they have a right to know everything about you and your dealings. There is no longer the presumption of financial innocence until proven guilty. But, the more they attempt to bind down the crypto-markets, the more people will value the anonymity certain currencies offer.

The current political mood is toxic. People are willing to suffer inept bureaucracies and regulations as long as they feel they get something in return for it or avoid the worst of it.

The entrenched powers are fighting real reform through electoral result in the US and Europe, watering down Brexit, fighting Trump everywhere, sanctioning Poland for changing its laws. Now their eyes are on cryptocurrencies. This is, in my opinion, leading to a real “Let them eat cake,” moment where anymore subversion of what the people want will be met with violent opposition.

Just ask South Korea. What happened this week is only the start.

If Mnuchin was smart, he would be going after the privacy coins now, before they have real pull within the industry. But he’s not smart. His Wall St. buddies are far more interested in controlling Bitcoin to make money off of it via futures, leveraged ETFs and erecting barriers to commerce. And then use it to retard the growth of the industry.

And that greed and need for control is their Achilles’ heel, because all it will do is ensure that whatever they did to Bitcoin will not happen to the others. They will slow down the move into cryptos, but they won’t kill it. The perversion of the capital markets is too great.

That’s what 2017’s explosion was all about — pent up demand for something different, something capable of throwing off real yield and the promise of real wealth generation. Will 2018 be the year we storm the Bastille or roll back over and go to sleep?

 

Featured Image via BigStock.

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