Sacrificing privacy doesn’t make us safer

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Last month we saw the US Federal Reserve come to BitMEX for failing to identify customers. Crypto intelligence company CipherTrace reports that most crypto exchanges are not collecting enough user information, and so-called “FinCEN files” show this. Even large banks that collect and report huge amounts of suspicious transactions are not doing enough to target the bad guys relieve. Suffice it to say, it’s a great time to be alive for compliance hardliners and a tough spot for privacy advocates, aside from a healthy recent price hike for Monero (XMR).

Many members of the crypto community now imagine a world with two “Bitcoin blockchains” – or perhaps two different networks of different blockchains. The first is a blessed white blockchain, or “chain of lights,” similar to a friendly neighborhood where everyone knows each other’s names. The other is a sinister “dark chain” full of drug dealers, pimps and terrorists (as far as we know).

Advocates of data protection fear that only those who keep crypto with such institutions will be allowed to see the beautiful light chains, since the rules for Know Your Customer apply to exchanges where crypto is kept and banks and institutional assets crypto via similar custody solutions to mainstream do. These chains will lie in the tall 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 in the dark chain .

Compliance with anti-money laundering regulations

While the basis of these fears is well founded, it is important to recall the original purpose of money laundering compliance, which dates back to the 1970s in America and was to aid law enforcement in their investigation. Maintaining a comprehensive reporting system for monitoring user activity and reporting to the government, like the modern airport panopticon for traffic safety administration, is an invention of Bush-era America after September 11th of the 21st century and hardly a requirement for a global one Financial network.

In fact, this recently imposed norm was a major impetus for many privacy-friendly innovations in cryptography, including arguably Bitcoin (BTC) itself. In other words, the “lightchainers” justify the potential removal of privacy from blockchains under the same “war on terror” – Justification of the Patriot Act, only with the option of permanently airing your dirty laundry in a public ledger rather than leaving it between the two banks and government (and occasionally leaked to Buzzfeed).

More importantly, it has long been evident that even in the crypto space, the introduction of global mandatory identification and traceability of wallets has tarnished that original law enforcement rationale for AML rules. In the past, the world’s Elliptics, CypherTraces, and Chainalysises have spent most of their energy working with law enforcement to identify actual criminals and their transactions resulting from actual criminal activity, rather than setting up huge dragnets of all wallet addresses.

Whether it was the mountain. Gox or other exchange hackers, BitLocker scammers or international criminals of all kinds. Bitcoin has a feature that allows blockchain exploration compliance companies to delineate known bad guys and create an actual “darkchain” that is not in polite society remaining blockchain is mixed in (s).

This system 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 their investigations. These efforts have made it much more difficult for actual criminals to launder their crypto on compliant exchanges as well.

Light chain against dark chain

So let’s reject the thesis that we are approaching a dichotomy between “chain of light and chain of darkness”. Rather, let us realize that we already have a small chain of proven money launderers that VASPs should not work with and that they should freeze and that law enforcement should work with. We then have the patches of chains of light that exist within VASPs (i.e. exchanges) for which they are and should be legally required to remain private and only share to the extent that they discover darkchain or demonstrable criminal activity instead to share private user information from non-criminals. This leaves us with a third chain, the huge, beautiful, wonderfully opaque “Graychain” block chains that have served us so well over the years.

To keep the blockchain gray, we must oppose the lightchain’s efforts to break into the gray by punishing VASPs and blockchain exploration and compliance tools that cause an unjustified pollution of the gray with the white. In other words, the publication of identifying information from exchange customers should lead to legal disputes and, in Europe, to data protection enforcement measures. We also have to oppose the blackout of our beloved gray chain by political decision-makers, experts and so-called crypto lawyers who advocate penalties for operating in the gray area.

There is nothing wrong with keeping your crypto in a hardware wallet, arguing that those who practice healthy cybersecurity this way have “something to hide” that is detrimental to credibility. We must oppose this by advocating the graychains, which are in no way 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 at all. Even if the Lightchainers are successful, they will end up sowing the seeds of even more private forms of money that are beyond their reach.

The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Zachary Kelman is the managing partner of Kelman PLLC, a New York-based law firm specializing in cryptocurrency and blockchain technology. The firm handles both litigation and corporate matters, including advice on compliance with international standards for data and financial services. Zachary has advised government agencies and central banks around the world on the application of local and international laws to digital assets and their multiple uses.