Money laundering and regulatory scrutiny

The more we hear stories about hackers laundering money through cryptocurrency (like what happened with NEM), the harder it will be to access legitimate money into crypto. In addition, the harder it will be to get legitimate money out of crypto. By legitimate money, I mean the money which most governments will allow us to keep without confiscating it using "civil asset forfeiture" or excruciatingly draconian tax policies.

Currently the mood from the IRS appears to be anti-cryptocurrency. This is based on actions not on words, due to the fact that the tax policies are as confusing as possible yet being enforced as strongly as possible. In other words, the IRS is taking full advantage of the ambiguity for enforcement purposes.

Currently the mood in other agencies appears to also be trending toward skeptical. In my opinion the Venezuela's Petro confirms the worst fears of the intelligence establishment. Donald Trump in my opinion rightly banned American citizens from interacting with that state backed scam digital currency but this doesn't mean this state backed scam currency is without purpose. Hackers will likely want to interact with something like Venezuela's Petro in order to launder their billions of dollars in illicit gains.

There will be whitelisting and blacklisting

This is in my opinion unavoidable. I do not necessarily support this approach but based on the available evidence this is the likely approach law enforcement and tax officials will take. Money laundering is viewed by some as a sort of existential threat to the government and to national security. For this reason, there will be no stopping certain agencies around the world from joining forces to flag certain digital trails (on the blockchain via chain analysis), certain digital currencies (like we see with the Petro ban), certain individuals (people who associate with or who are connected to hackers). These lists will likely be kept in secret and we will have no idea whether or not we are on them or if any of our associates are on them, nor will we know whether or not certain crypto projects are on the list, or certain tokens.

In my opinion this is relevant to all projects including Steem. Steem will want to maintain it's legitimacy and this is critical if the price of Steem is to remain high. In my opinion Steem actually goes too far in the extreme with transparency under the excuse of "privacy creates information asymmetry" between entities. At the same time this excessive transparency makes it very hard for Steem to be put on any sort of blacklist by any government because Steem just is the worst or one of the worst cryptocurrencies for illicit activities.

State backed tokens justify Twitter and Facebook bans

When we look and see Twitter, Facebook, Google, all banning crypto, and when we see Bill Gates speak out saying crypto is costing lives, we have to in my opinion analyze this public sentiment. Public sentiment is what controls the price of crypto and if the richest and most powerful view crypto as "costing lives" even if this is not a direct causation, or if they view crypto as nothing more than a money laundering tool for Venezuela and Russia, then this is going to be problematic.

How to restore legitimacy to crypto

• Reveal the ways in which crypto saves lives. Bill Gates made a point in his response to say that cryptocurrency costs lives and no one actually revealed anything good crypto does in response. I do not personally believe cryptocurrency is killing people, nor do I believe that guns kill people, but any technology (including the personal computer) can be used in a way which is harmful, and there are many irresponsible users of cryptocurrency. It's important in this instance to promote the responsible uses, and to denounce the irresponsible uses, while also discussing how cryptocurrency has saved lives as well. For example there were stories about how cryptocurrency was helping homeless people to earn enough money online "click working" so that they can pay rent. There are probably thousands of stories like that which Steem can highlight, and many examples can even show how privacy can be valuable to help people who are very poor avoid persecution, but these are not being talked about in favor of "Silk Road" and drug culture.
• Crypto technology like Ethereum smart contracts have to become practically useful. Right now the only thing Ethereum smart contracts do well is ICOs and perhaps crypto gaming. So these are two new industries which did not previously exist until Ethereum smart contracts made things accessible and decentralized enough so that widespread adoption can take place. This is good but it's not enough of an impact to maintain a potential 1-2 trillion dollar market cap for the crypto space. In order to maintain that, crypto has to be helping to cure diseases, solve big problems, advance science, etc. ICOs only solve the funding problem and even then it is not done in the most intelligent way, and gaming (serious games) could be used to solve problems someday but cryptokitties isn't doing that.

Summary

• Crypto tech is more than just cryptocurrency (much more).
• Crypto tech has to belong to the world, not just be a toy for crypto anarchists/hackers.
• Crypto tech can be harmful and helpful at the same time like with any tool but it will depend on what use cases we choose to highlight.
• Crypto tech can be extremely transparent or privacy oriented, in my opinion there is a spectrum and both extreme transparency and excessive privacy can be abused (by different bad guys) so it's important not to frame the debate so that transparency = safety and privacy = unsafe.

In reality transparency and privacy are equally unsafe depending on what people do with it, as you can hurt people with transparency if you abuse it just like you can with privacy if you abuse it. It's a matter of balancing things so that the transparency offered is hard to abuse, but just enough to keep people safe, while the privacy offered is also hard to abuse, but enough to keep people safe. Ideally people have to be kept safe both from hackers and from persecution (whether from the top down or the crowd).

Designers of crypto tech have to assume that governments around the world have both public and classified lists. China for example has social credit and we know already that people with bad social credit in China cannot travel. We also know in the US there is a "no fly list" and various watch lists. There may also be classified lists of crypto projects which the governments around the world share and which maintain files of all the top developers, thought leaders, etc. In designing crypto tech with this in mind, then in my opinion the designs can become more resilient, as the crypto tech has to be designed with the potential government responses in mind (either a negative response from the top down or a negative response from the bottom up).

A negative response from the top down would be an outright ban. An outright ban is what we see with Trump and the Petro. A negative response from the top down is also what we see from the IRS and other agencies which want to maintain a very high compliance burden on users to possibly discourage usage by law abiding participants.

This negative response comes from people at the top who have a certain sentiment toward crypto, and this sentiment has to be addresses so that the people at the top have a better understanding of the long term benefits for society (and their interests as regulators).

The negative response from the bottom comes from people who also have a certain sentiment, perhaps they believe crypto is evil because it's costing lives, or maybe because they have inexperience with the technology in general. This sentiment has to be addressed. The bottom or crowd, is basically the every man. The idea of promoting transparency to empower the crowd is noble, but the crowd is even more ignorant in terms of knowledge than those at the top, and so more access to information without the tools to understand and make good use of it could lead to persecution from the bottom up.

So the crowd requires more wisdom so that it can responsibly self govern. The top requires more knowledge and a deeper understanding of what the tech can do for them. All sides can benefit from crypto tech depending on values, interests, etc. In general, a lot of the interests that we see regulators expressing from the top actually are shared by the people who voted from the bottom. So we cannot dismiss for example the interest by regulators to protect investors if investors elect politicians to put regulators in place to protect them in this way. Instead we have to apply data analytics to figure out which demographic prefers the top down approach to protecting investors and educate that specific demographic as to the benefits of the bottom up crypto tech approach to achieving these same protections.

The same applies to money laundering. Those who are terrified of money laundering have to be made away of statistics showing real world risks. In addition, money laundering in the effort to evade sanctions or fund terrorism, should receive condemnation from the crypto community in general. So the Petro really is much worse than a regular scam because this kind of scam is deliberately set up to help a particular nation state gain an advantage against other nation states by exploiting the crypto community. To a certain extent money laundering is impossible to stop, but it's easily condemned.

If you enjoyed this post, feel free to check out some of my other related posts

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• Why I agree with Donald Trump on the ban of the fake "cryptocurrency" backed by Venezuela
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