The crypto compliance lie: Sacrificing privacy does not make us safer

[Cordillerabit]

In the last month, we’ve seen the United States Federal Reserve come after BitMEX for failing to identify customers, crypto intelligence firm CipherTrace report that most crypto exchanges are not collecting enough user info, and the so-called “FinCEN Files” demonstrate that even large banks that collect and report vast troves of suspicious transactions are not doing enough to unbank the bad guys. Suffice to say, it’s a great time to be alive for compliance hardliners and a rough patch for privacy advocates, aside from a healthy recent boost in the price of Monero (XMR).

Stepping back and looking at the larger trend, many in the crypto community are now imagining a world with two “Bitcoin blockchains” — or perhaps, two distinct networks of various blockchains. The first is a blessed white blockchain, or “lightchain,” akin to a friendly neighborhood where everybody knows each other’s name; the other is a sinister “darkchain” full of drug traffickers, pimps and terrorists (as far as we know).

Privacy advocates fear that because Know Your Customer rules are being placed on exchanges that custody crypto and that banks and institutional wealth will make crypto mainstream via similar custodial solutions, only those who custody crypto with such institutions will be allowed onto the lovely lightchains. These chains will lie within the lofty ivory pillars of Wall Street and beneath the halls of wealth and power, while the vast unwashed masses who prefer to hold and control their own crypto will be forced into a crypto ghetto on the darkchain.

Anti-Money Laundering compliance
While the basis of these fears is well founded, it is important to remember the original purpose of AML compliance, originating in 1970s America, was to assist law enforcement in its investigations. Maintaining a vast reporting system for monitoring user activity and feeding it to the government, like the modern Transportation Security Administration airport panopticon, is a 21st century, post-9/11 invention of Bush-era America and hardly a prerequisite for a global financial network.

In fact, this recently imposed norm was a major impetus for many privacy-friendly innovations in crypto, including, arguably, Bitcoin (BTC) itself. In other words, the “lightchainers” are justifying potentially removing the privacy from blockchains under the same “War on Terror” rationale for the Patriot Act, only with the possibility of permanently airing your dirty laundry on a public ledger rather than keeping it between the banks and government (and occasionally leaked to Buzzfeed).

More importantly, it has long been obvious that even in the crypto space, the imposition of global mandatory wallet identification and traceability has strained this original “assisting law enforcement” rationale for AML rules. Historically, the Elliptics, CypherTraces and Chainalysises of the world have spent most of their energy working with law enforcement to map out actual criminals and their transactions resulting from actual criminal activity, rather than setting up vast dragnets of everybody’s wallet addresses.

Whether it was Mt. Gox or other exchange hackers, BitLocker scammers or international criminals of many stripes, Bitcoin has a feature that allows blockchain exploration compliance firms to demarcate known bad guys and create an actual “darkchain” not to be mixed into the polite company of the remaining blockchain(s).

This system has worked. Most virtual asset service providers, or VASPs, (i.e., exchanges) use blockchain explorer compliance tools to block and track transactions on the darkchain and assist law enforcement with its investigations. These efforts have also made it much, much harder for actual criminals to launder their crypto on compliant exchanges.

Source: https://cointelegraph.com/news/the-crypto-compliance-lie-sacrificing-privacy-does-not-make-us-safer