Prohibition drives Bitcoin into the dark

A Little Bit of Money

Thought Experiments on Cross-Border Payments - Of Couriers, Bankers, and Bitcoiners

Series 6: Prohibition drives Bitcoin into the dark

Truly compliant Bitcoin transactions through banks is a choice

Offering bank accounts supporting Bitcoin or any other form of digital cash is a choice that any bank could make. There are no insurmountable technical obstacles present, only administrative barriers. For a financial institution to permit Bitcoin transactions, a few steps have to be made. Firstly, the bank has to register a Bitcoin Wallet and use standard KYC-tools to verify the identity of the customer. To comply with AML laws and regulations the bank requires a known, established relationship with said customer. Traditional AML/KYC tools are a necessary but not sufficient condition.

Integrating Data Surveillance on the Blockchain will become a piece of cake

Besides, the financial institution has to put technical aids in place ensuring regulatory compliance. Integrating sophisticated data surveillance systems are a prerequisite. These tools are available today and can be built-in fairly easily. It is not maddeningly complicated even though it might look like it is. Some profound research papers predict there may come a time when tracking Bitcoin addresses and monitoring AML thresholds of customer payment activity right on the blockchain becomes a piece of cake. 

Bypassing capital controls with digital cash or paper money is likewise

Circumventing these systems will only be possible if customers withdraw funds to their private computer. Once funds have been approved for withdrawal, the compliance burden is not with the bank anymore. Private funds in a private wallet are not considered as financial intermediation but rather a peer-to-peer transfer. Freedom of trade allows anybody to deal with digital cash freely. Creating one-time Bitcoin addresses to perform single transactions is legal – just like dealings in paper cash regardless if it is used occasionally or regularly. Neither paper money nor digital cash caters towards government capital controls. Again, digital cash begs the question if people are willing to sacrifice freedom for security. 

Bitcoin is unstoppable while banks are adaptable

Because Bitcoin is in existence, anyone can transfer money across borders without the requirement of a bank. This state of affairs is a reality. Comparatively, the status of freedom of expression changed drastically with email when information started to flow freely across the globe. No laws can stop people from using Bitcoin technology to their benefit, just like the rise of emailing was unstoppable. In my view, it is time for banks and regulators to adapt to given facts. Applying rational principles rather than acting abrasively against technological advance is imperative for inventions that can only be regulated to some extent in any scenario. 

Diabolizing crypto currency is like banning alcohol

Prohibition or restrictive regulation will not make Bitcoin go away but only drive crypto currency into the underground. Demonizing crypto currency is like banning alcohol: it makes illicit distillers thrive; consequently, making Bitcoin taboo will rally transactions in the dark web. That is why in my opinion financial authorities should focus on a Bitcoin-friendly regulatory environment. The United Kingdom and Luxembourg are good examples of this approach. In these jurisdictions, regulators have been patiently analyzing the circumstances while encouraging start-ups to work with them. These countries already capitalize on Bitcoin benefits and derive reasonable regulation from there.

To be continued. Further Reading:

  • D. Bryans. “Bitcoin and Money Laundering: Mining for an Effective Solution.” Indiana Law Journal, vo. 89, no. 441-472, 2014. 
  • D. Bayer, S. Haber, and W.S. Stornetta. “Improving the efficiency and reliability of digital time-stamping.” In Sequences II: Methods in Communication, Security and Computer Science, pages 329-334, 1993.
  • E. Greebel, K. Moriarty, C. Callaway, and G. Xethalis. “Recent key Bitcoin and virtual currency regulatory and law enforcement developments.” In Journal of Investment Compliance, vol. 16 issue 1, pages 13 – 18, 2015.

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