Edan Yago has spent the last seven years engaged in payments using cryptocurrencies, first at Zynga, then as CEO of Epiphyte and now as the founder of a stealth startup developing a meta-stablecoin platform.
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The worst-kept secret in cryptocurrency is that many projects are little better than scams: they’ve digested billions of dollars and what’s come out of the other side has been, well… use your imagination.
But what about the ever-increasing, ever-complex, ever-demanding know-your-customer (KYC) and anti-money-laundering (AML) practices required of young fintech and crypto startups when onboarding customers?
These practices have cost us many more billions than all initial coin offering (ICO) scams put together – and what they have produced, in my estimation, is worse than nothing.
They have created an all-pervasive, global surveillance apparatus. A system that keeps billions in poverty, kills innovation and provides an excuse for the banking system to lock out the competition.
Financial exclusion
Stepping back, in 1970, the U.S. passed the Bank Secrecy Act, which weaponized banking and financial institutions, turning them into an unofficial secret police. From then on, anyone dealing in finance was under ever-stricter orders to monitor the activity of their customers, pass details of “suspicious activity” to the authorities and block financial access to undesirables.
The direct cost of this compliance to the financial companies is now in the billions every year. But that is only the smallest part of its social cost.
Similarly to the war on drugs, the U.S. has encouraged KYC/AML regulations to spread around the world. Most countries have enthusiastically adopted them, and those that tried to resist, like Switzerland, eventually bowed to intense pressure. Today most of the countries of the world are joined together – administering the least publicized, most global form of Big Brother surveillance in existence.
Privacy issues aside, these requirements have ended up excluding an ever-increasing number of groups from the financial system. Immigrants, poor people and anyone without “appropriate” government-issued ID is left out of the formal financial sector.
In the U.S., over 10 million people are unbanked, and millions more in the U.K. But it is the developing world that suffers most.
Entire countries have fallen victim to prejudice and a lazy risk aversion on the part of the banks. Many small countries in the Caribbean, the Pacific and Africa are almost entirely locked out of the global payments system.
An entire country, Somalia, began to starve because U.K. banks decided it was not worth the bother to bank remittance services. Forty percent of the country’s population relied on these remittances – people sending their hard-earned savings home to feed their families. The U.K. banks’ excuse: payments to Somalia were “high-risk,” a euphemism for not worth the compliance cost of dealing with people with poor documentation. Invariably, those who pay the highest cost are society’s weakest.
Perhaps the greatest cost of KYC/AML is impossible to measure because it’s the things that never happened. We will never know how many innovative products and solutions never came to be because they did not fit, or could not afford, the current compliance regime.
In the crypto space, we see it every day. How many services died because they could not get banking? How many startups withered because they were forced to spend precious capital on lawyers, lawyers and more lawyers?
How many fintech alternatives could not begin to operate because they could not get licensing? How many alternatives to banking would the poor, the young, all of us, have if financial companies were not forced to be an unofficial arm of law enforcement?
We will never know.
Costs vs. benefits
To justify financial Big Brother, governments do what they always do in defense of intrusive measures. They trot out an ever-growing list of Very Scary Things™.
These include drug barons, terrorists, dictators, Iranians, and, worst of all, tax dodgers. Governments have sponsored any number of studies that show that KYC/AML helps frustrate the efforts of these Money Launderers™.
And perhaps they do frustrate the odd terrorist or oligarch (though apparently not very much). However, the question that is never asked is, at what cost?
Is it worth the more inconvenient, more expensive service we are all subjected to? Is it worth the exclusion of poor or marginalized people? Is it worth the entrenchment of the banking system?
Is it worth the massive troves of private information collected by every financial company and frequently stolen by hackers? Is it worth the creation of a massive, semi-privatized, global surveillance system?
It had better be. Otherwise, what a tragic, heart-breaking waste.
Inaccessible piggy bank image via Shutterstock
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