Sacrificing privacy doesn’t make us safer

In the past month, we have seen the US Federal Reserve chasing BitMEX for failing to identify customers, crypto intelligence firm CipherTrace reported that most crypto exchanges are not collecting enough information about users and so-called “FinCEN files. “The big banks that collect and report huge amounts of suspicious transactions are also not doing enough to unblock the bad guys. Suffice it to say, this is a great time to be alive for compliance hardliners and a tough time for privacy advocates, aside from a healthy recent Monero (XMR) price hike.

Taking a step back and looking at the broader 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”, similar to a friendly neighborhood where everyone knows each other’s name; the other is a “darkchain” left full of drug traffickers, pimps and terrorists (as far as we know).

Privacy advocates fear that as Know Your Customer rules are put into exchanges that hold cryptocurrencies and that banks and institutional wealth will make crypto mainstream through similar custodianship solutions, only those who hold cryptocurrencies with such institutions will be able to access. to adorable light chains. These chains will be found within the lofty ivory pillars of Wall Street and under the halls of wealth and power, while the vast unwashed masses who prefer to keep and control their cryptocurrency will be forced into a crypto ghetto on the darkchain. .

Anti-Money Laundering Compliance

While the basis for these fears is well founded, it is important to remember that the original purpose of AML compliance, which originated in the 1970s in America, was to assist law enforcement in its investigation. Maintaining an extensive reporting system to monitor user activity and deliver it to the government, such as the Transportation Security Administration’s modern airport panopticon, is a 21st-century, post-9/11 invention of America’s Bush era and hardly a prerequisite for a global financial network.

Indeed, this recently enforced rule has been a major impetus for many privacy-friendly innovations in cryptocurrencies, including, arguably, Bitcoin (BTC) itself. In other words, the “light bearers” are justifying the potential removal of privacy from blockchains according to the same logic as the “War on Terror” for the Patriot Act, only with the ability to permanently air your dirty laundry on a ledger. public rather than keeping them between banks and government (and occasionally leaked to Buzzfeed).

More importantly, it has long been obvious that even in the crypto space, the imposition of mandatory global wallet identification and traceability has strained this original “law enforcement assistance” 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 real criminals and their transactions resulting from real criminal activity, rather than creating vast trawl networks of addresses of everyone’s wallet.

Whether it was Mt. Gox or other exchange hackers, BitLocker scammers or international criminals of many strips, Bitcoin has a feature that allows blockchain exploration compliance companies to delimit known bad guys and create a true “darkchain” not to be confused with the polite society of the remaining blockchain (S).

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

Lightchain vs darkchain

Thus, we reject the thesis that we are heading towards a “lightchain-vs-darkchain” dichotomy. Rather, we recognize that we already have a small darkchain of proven money launderers that VASPs don’t work with and shouldn’t work with and should freeze and partner with law enforcement to deal with. We then have the spots of lightchain that exist within VASPs (i.e. exchanges) for which they are, and should be, legally obligated to keep private and only share to the extent that they detect darkchains or demonstrable criminal activity, rather than sharing the user’s private information of non-criminals. This leaves us with a third chain, the vast, lovely, delightfully opaque “graychain” blockchains that have served us so well all these years.

To “keep the blockchain gray,” we must resist lightchain efforts to penetrate gray by penalizing VASPs and blockchain exploration and compliance tools that engage in unjustified contamination of gray with white. In other words, advertising the identifying information of the exchange’s customers should lead to lawsuits and, in Europe, actions against privacy. Likewise, we must resist the darkening of our beloved gray chain by politicians, pundits and so-called crypto lawyers who advocate sanctions for those operating in the gray zone.

There is nothing wrong with keeping your encryption in a hardware wallet and claiming that those who exercise sound cybersecurity this way have “something to hide” undermines credibility. We must resist this by advocating gray chains, which are by no means true vectors for money laundering, and by pointing out the irrationality of believing that pseudonymous blockchains are more valuable when they are no longer anonymous. Eventually, even if lightchainers are successful, they will sow the seeds of even more private forms of money that lie beyond their reach.

The views, thoughts and opinions expressed herein are solely the author’s and do not necessarily reflect or represent the views and opinions of Cointelegraph.