As the grasp of regulators tightens on the global cryptocurrency market, exchanges such as KuCoin are being compelled to implement mandatory pre-purchase checks. In tandem, several prominent banks are limiting funds transferred to cryptocurrency exchanges under the guise of protecting customers from fraudulent activities. In the background, the Financial Action Task Force (FATF) is looming over these rapidly evolving regulations.
The FATF underscores the significance of Know Your Customer (KYC), Know Your Business (KYB), Know Your Transaction (KYT), and Anti-Money Laundering (AML) regulations applicable to all financial transactions, cryptocurrencies included. The stated objective of these regulations is to identify, thwart, and prosecute illicit activities, such as money laundering, black market activities, tax evasion, and financing of terrorism.
The FATF’s strategy is shrewd: the general public is universally against money laundering and terrorist financing, making it challenging to oppose their recommendations without appearing to endorse illegal and dangerous activities. However, the true motive behind these guidelines is to maintain a stronghold over the financial system and, primarily, to ensure tax compliance by the public; preventing criminal activity is seemingly a secondary goal.
A string of major banks fined for breaches of AML and KYC regulations despite their dedicated in-house teams monitoring every transaction attests to the inefficiency of these regulations in preventing criminals from exploiting banks. For example, despite all of these measures, Danske Bank pled guilty to fraud in 2022.
According to the U.S. Department of Justice, “Danske Bank defrauded U.S. banks regarding Danske Bank Estonia’s customers and anti-money laundering controls to facilitate access to the U.S. financial system for Danske Bank Estonia’s high-risk customers, who resided outside of Estonia — including in Russia.” They forfeited over $2 billion and agreed to implement and maintain a revamped compliance program and AML controls.
Credit Suisse assisted several of their French customers avoid tax by opening shell companies in different territories. They settled the case with French authorities for $234 million. Previously, in 2014 they paid $2.4 billion to U.S. authorities for tax evasion and continued to conceal $700 million after the settlement.
The list of banks knowingly breaking AML and KYC regulations goes on and includes Santander, JP Morgan Chase, ING, NatWest, and Goldman Sachs. The U.K. Financial Conduct Authority is currently investigating Barclays for possible money laundering.
Pressures on cryptocurrency exchanges to adopt KYC and AML regulations can be understood in light of actions taken by the U.S. Internal Revenue Service (IRS) against Kraken, a popular digital asset exchange. Far from aiming to curb terrorism or black market activities, the IRS seemed intent on casting a broad net across all U.S. crypto clients.
According to Kraken, the IRS “sought intrusive and unnecessary information about U.S. clients, including I.P. addresses, employment information, sources of wealth, net worth, and banking details.” The judge overseeing the case denied several of the IRS’s requests outright, stating that the summons should be “no broader than necessary to achieve its purpose.”
Proponents of widespread KYC claim it’s also about building trust. In a world where financial transactions are increasingly digital and impersonal, KYC offers a way for banks to develop deeper relationships with their customers. By understanding their customers’ financial behaviors, banks can offer more personalized services, detect potential problems before they escalate, and protect customers from fraud.
Fortunately, we live in a world where the development of blockchain technology is starting to offer people a genuine alternative to the overreach of large banks. The degree to which organizations know about each individual’s financial behavior should be a choice for the individual, not the bank.
Balancing transparency, trust, and privacy is crucial, and that’s why developing KYC within self-sovereign identity systems is vital. Without crypto as an alternative, we would have no choice other than to acquiesce to the demands of governments and banks. Indeed, our money would cease to be ours, and eventually, we would need permission to spend it in ways that authorities deem socially acceptable.
While the media portrays crypto as the wild west, it’s battling for the hard-fought freedoms we so easily take for granted. KYC and AML are important in all financial settings, including crypto; however, so are self-sovereignty and personal liberty. There’s no need for these to be mutually exclusive.
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