Bleeding Edge

Money laundering 101

If you were a criminal, how would you go about laundering your money?

All great debaters try to force their opponents into black and white terms, and Warren is no different.

The false equivalency that Warren is trying to force here is, “If you support crypto, you support Russian oligarchs.”

There are factual problems with the argument. Crypto is not, and has never been, a good system for laundering money.

The fact of the matter is, on both a relative and absolute basis, far more money laundering happens in the traditional finance system than in crypto.

Let’s get more specific and use the popular exchange from this week‘s testimony of Senator Warren and her interactions from the bench of the House of Senate with the the CEO of Chainanalysis. 

“If you were a Russian oligarch that needed to launder $1 billion, how would you do it?”

Now, if you are a Russian oligarch, chances are you have been one for a long time. There aren’t a lot of new, self-made oligarchs after all. Most of them earned their wealth during the perestroika.

Yet, because you have been a Russian oligarch for the past 30-odd years, and presumably you didn’t get that way by being incompetent — you have several well-oiled and well-established traditional FIAT money systems and banking processes for laundering the money.

You have shell companies in the Channel islands, and from Cyprus all the way to Panama and the BVIs, and from Antigua to Caymans and from the Turks & Caicos, to Jamaica and Columbia.

You have various corporate structures and (perfectly legal) tax schemes in place in London, in Wall Street, and in Singapore. 

You have relationships with prominent banking and wealth management institutions.

You are very likely to have a web of estate relations, employees, fellow oligarchs, business accomplices and valued personal relationships, that help obscure the true ownership of your diverse assets.

My point is, that you have already a pretty good functional system that is tried, tested and already operating at scale.

Thus my question is: “If you already have a system that works, why change it by trying to fix that which is not broken?”

After all — criminal enterprises are just like any other enterprise: “Risk Averse.”

Therefore the “criminals use bitcoin to launder money” argument has always been a “red-herring” for me, because this argument assumes, (for some erroneous reason) that criminals will abandon their current functional systems for money laundering in favor of a risky, new technology such as the blockchain and the Crypto money radical innovation.

Of course the necessary disclaimer is that personally I have no experience operating a criminal organization, and therefore my assumptions might be off-base, but methinks, it is safe to assume that the Crime Family Bosses, the shady Banksters and their Oligarch friends, are not wildly dissimilar to their legal counterparts.

Moral judgements aside, successful criminals don’t get that way by accident. 

Presumably they have people, processes and technology in place that allow them to achieve their goals.

Organizations are naturally averse to adopting new forms of technology because people don’t like learning new systems and nobody wants to take on the risk of the technology failing.

Here’s a real example from my own life…

I have known for years that using traditional banks for FX is the stupidest thing to do. Yet, the thing is … that the pain of replacing this method of exchange of one monetary FIAT currency to another FIAT currency that might be useful for me in a different country is simple enough when done via the SWIFT code — so if I were to change it to another new FX trading system — the cost of doing business (laborious time management) is simply too high for me to seriously contemplate and actually institute.

Also we must consider that of course my team has been trained on the existing method of FX trading of FIAT money and that all our FX currency swap profits get generated from this tested, tried & true system that has been in place for far too long for me and it has worked well enough so far — that it would be an anomaly to seriously contemplate changing it. 

It’s just too sticky…

So we stick with it — and even though we could save money and process FX related trades, in an easier way by changing systems from FIAT money to crypto money — I am probably not going to be doing so anytime soon, firstly because I don’t want the headache, but also because my inner “boomer” loves all new technology but doesn’t necessarily use it until it enters the first phase of the early adoption of the Innovation Bell curve, and besides, this “next Crypto money solution” will probably be a pain for the short term and it will also eventually be replaced with another wave of innovation to come up from the FinTech innovation horizon of progress…

So, now, let us imagine this following scenario as if you are an employee of a criminal organization. 

What sane person would advocate for a new, relatively untested technology to manage and perhaps lose personal wealth of an Oligarch or of a Criminal overlord you work for?

Tough call. 

Because you are talking about a high stakes game of innovation VS personal health and well being…

So, I’m going to propose a new rule.

Anyone that says crypto is a tool for money laundering, must first imagine what a junior employee at a criminal enterprise proposing that to their boss would look like…

I’m sort of joking here, but not really.

Two or three years ago, I spoke to many “crypto teams” at big financial institutions

It didn’t take me long to find out that the “crypto team” meant one, extremely enthusiastic late teens to twenty something year old hacker, who is obsessing about innovative technology, overly enthusiastic and eager for change — yet still trying and failing to advocate for the adoption of crypto-money within any established and entrenched enterprise…

So this is my mental model for how criminal organizations would react to crypto money as well. 

After all, they are also most likely run by “old guys” who hate technology.

Imagine the pitch:

Employee: I have a new way for us to launder money: crypto.

Boss: Bitcoin? Isn’t that a Ponzi scheme?

Employee: No, it’s a decentralized digital bearer asset. But that’s beside the point. We can use it to launder.

Boss: But I already use my bank to launder money. Why do I need something new?

Employee: Yes, but this is…it’s decentralized, you see. There are no intermediaries, so no one could seize your wealth.

Boss: I like my intermediaries. I trust them. I go golfing with my Swiss banker Jan Van Valburg every Wednesday.

Employee: Yes, you like these intermediaries, but maybe you won’t like the next ones. What if Jan gets fired?

Boss: Ok, I will try this with 5% of our funds. But keep in mind, this is my personal money. If I lose it, I will probably kill you.

Employee: On second thought — I agree — bitcoin is a Ponzi scheme…

And to all my young employees out there who have had to teach their boss how to PDF a Word document, can you imagine getting them set up with multiple wallets, moving funds cross-chain and washing them through mixing services?

No thank you.

The truth is, crypto has a host of issues that make it deeply unappealing for oligarchs and criminals to use because blockchain and crypto money is always at the forefront of innovation whereas “crime” is the oldest profession in the world..

Besides that, in today’s reality of blockchain and crypto money — liquidity on “Crypto-money mixing services” is extremely low and around only $30 mm daily on a global scale. On the upside is that all the blockchain companies like “Chainalysis” can trace fall their “mixing” funds any where and in any way that the crypto-coins are mixed up. Also, in the event that you want to “exit” to FIAT money, you have to go through a KYC’d exchange. That is the path — mostly — and this way because the whole system is based on a public, verifiable ledger

Indeed, Crypto money is a bad solution for criminal institutions for the same reasons crypto money and the blockchain is still un-investable for banks as well as for most all investing institutions and large scale enterprises — mainly because it’s still too new, too small and perhaps too risky to make any sense for the C-level suite and the Board of Directors to learn, to accept and ultimately to digest.

Yours,

Dr Churchill

PS: 

“It’s bad form to mention money laundering. Instead, you talk about asset management structures and tax-beneficial schemes.” —John Sweeney

Methinks, that my default position on the Macro Economic scale of things is that it is always important to detach ourselves from the current Circus of ringmasters who are managing public opinion like any self-respecting animal trainer manages his beasts. 

Lion tamers aside — we should just make a diligent effort to look at the big picture here.

So, zooming out and thereby seeing the whole forest and the trees — we can all see what I think that Senator Warren’s testimony does. 

And that is simply an effort to raise awareness about crypto-money, about the new FinTech technology and also about raising some interesting questions we need to answer collectively as a Society and a people– not as fractions divided by wealth and power.

Specifically, there is a growing divide between political factions that see financial exclusion as a one size fits all policy tool, and those who view an open financial system as a basic tenet of a free society.

The right to trade and transact with financial inclusion for all — is the same as all other “Rights” we enjoy as a liberal democracy and a Free society, such as access to any religion, access to free speech, rights of assembly, and all other rights that make us reliant on the ability to transact freely, openly and transparently.

Seen in this light, sanctions and other forms of financial exclusion start to seem less like a clever policy tool and more like a violation of basic human rights.

The fact remains that today, crypto-money, is a poor system for money laundering. 

And the question our industry needs to ask is this: 

“What values do we want in a new financial system?”

A financial system that is 100% permissionless opens it up to criminal activity. 

A system that is subject to far too many rules, regulations and interventions — creates the heavy risks of endemic corruption, bureaucratic freeze, systemic illiquidity, rigid authoritarianism and governmental cronyism.

And because there are no easy answers to these questions — I think this is the implicit trade-off our technologically advanced society is beginning to digest.