Oct. 30, 2023
Der SEC-Team. I refer to the Safeguarding Advisory Client Assets. Decentralized Finance (DeFi): DeFi is a rapidly growing sector within the cryptocurrency industry, which uses blockchain technology to provide financial services without the need for traditional intermediaries such as banks or brokerages. Many DeFi applications operate through decentralized autonomous organizations (DAOs), where users can participate in decision making and governance by holding tokens. These DAOs often raise funds through initial coin offerings (ICOs) and use them to develop their protocols and build out their ecosystems. Requiring KYC/AML compliance for each transaction made using these protocols would severely restrict the flow of capital into these nascent projects, potentially stifling innovation and preventing smaller players from gaining traction in this space. Privacy Coins: Privacy coins are a type of cryptocurrency designed specifically to enable private and confidential transactions. They do not reveal the sender's or recipient's identities, allowing users to maintain anonymity while transacting digitally. However, because they are outside of the regulatory framework established by governments around the world, privacy coins have been subjected to intense scrutiny regarding potential misuse for illicit activities like money laundering. While there may be legitimate concerns about the role of privacy coins in facilitating criminal activity, requiring KYC/AML verification for every transfer could compromise the very essence of what makes these currencies appealing to users seeking enhanced privacy protections. Peer-to-Peer Marketplaces: There has been significant growth in P2P marketplaces over recent years, particularly in developing countries where access to credit and traditional finance options remains limited. Platforms like BitPesa allow people to send and receive payments across Africa via mobile wallets, providing a critical service to those who lack bank accounts or formal financial infrastructure. By enabling individuals to transact directly with one another rather than relying on third parties like banks, these marketplaces significantly reduce costs and improve efficiency. Forcing users to undergo KYC/AML checks for every transaction could increase friction, drive up fees, and ultimately render some of these services less affordable or accessible, hindering efforts to promote economic development and financial inclusion in vulnerable communities. Reduced User Adoption: Many users value anonymity when participating in digital asset platforms. Implementing KYC requirements could deter these users from engaging in transactions, leading to reduced user adoption and overall usage of these platforms. In turn, this could negatively affect the liquidity and utility of certain digital assets. Increased Costs & Complexity: Requiring KYC for all transactions would likely involve additional administrative burdens and expenses for businesses operating these platforms. This could translate into higher fees for users, reducing the overall attractiveness of these services relative to alternative solutions that don't impose similar restrictions. Moreover, implementing KYC procedures involves complex processes involving identity verification, fraud detection, and ongoing monitoring, which adds complexity and expense to already intricate operations. Negative Impact on Small-Scale Entrepreneurship & Investment Opportunities: Smaller companies and early-stage ventures may find it difficult to meet KYC/AML requirements due to resource constraints or the nature of their business models. Consequently, imposing these obligations broadly could limit the ability of these entities to secure funding and grow their ideas, thereby hampering innovation and entrepreneurial activity in the digital asset ecosystem. Additionally, it could disproportionately impact retail traders and small investors who seek to diversify their portfolios with relatively low investments, further perpetuating wealth disparities between different segments of society. Unintended Consequences: Finally, enforcing KYC/AML measures universally could lead to unanticipated consequences that undermine public trust and confidence in the integrity of the broader crypto ecosystem. Mandatory KYC might paradoxically facilitate greater levels of criminal activity since bad actors could conceivably circumvent these controls more easily than legitimate users, further exacerbating existing issues related to security and regulation. Similarly, strict KYC rules could create arbitrage opportunities between jurisdictions that adopt varying degrees of regulation, resulting in fragmentation of the global marketplace and increased volatility. Ultimately, these factors could discourage investment and dampen enthusiasm for digital assets among institutional investors and policymakers alike. Privacy and anonymity can play crucial roles in promoting several aspects of the modern economy: Protection against Cybercrime & Fraud: Identity theft, data breaches, and other forms of cybercrime pose serious risks to consumers and businesses alike. By preserving anonymity in certain circumstances, individuals and organizations can better protect themselves against such threats, mitigating losses and minimizing reputational harm. Promoting Financial Accessibility & Inclusion: Many individuals worldwide still lack basic banking infrastructure or face high barriers to entry into mainstream financial systems. Anonymous or pseudonymous payment methods can help bridge gaps in financial accessibility, making it easier for underserved populations to manage their finances and engage in commerce. Supporting Data Privacy Rights: Personal data has become increasingly valuable as technology advances, but also raises questions regarding individual rights to control how their data is collected, shared, and used. Enhancing data privacy laws alongside anonymity technologies enables greater protection of consumer preferences and autonomy. Facilitating Innovation & Competition: New entrants, innovative startups, and emerging industries frequently rely on anonymity and secrecy to gain competitive advantages and pursue disruptive strategies. Without adequate safeguards protecting privacy rights, incumbent firms could unfairly exploit newcomers, limiting opportunities for competition and innovation. Preserving Civil Liberties & Human Rights: In times of political instability or conflict, freedom of expression and association may come at risk. Maintaining anonymity allows people to speak out without fear of retaliation, helping preserve fundamental civil liberties and human rights essential for democracy and social cohesion. Overall, privacy and anonymity support key tenets of the modern economy, including economic opportunity, fair competition, and individual rights, and should be considered integral components of any thoughtful approach towards regulating digital assets. Privacy and anonymity hold particular importance in cryptocurrencies because they offer unique features that traditional currencies do not have. Here's why: Decentralized Nature: Cryptocurrencies operate on decentralized networks that are not controlled by a single entity, unlike central banks managing fiat currency. Therefore, transacting parties can avoid the need for intermediaries like banks, clearinghouses, or payment processors, allowing faster, cheaper, and more private settlements. Pseudo-Anonymous Transactions: Most cryptocurrency protocols employ cryptography techniques, enabling participants to remain anonymous while conducting transactions through pseudo-anonymous addresses generated based on each user's private keys. Unlike conventional bank accounts where names and account numbers are visible, blockchain ledgers only display transaction amounts and timestamps, increasing privacy and confidentiality. Diversification Benefits: Digital assets often provide users with a diverse range of options beyond standard currencies. Individuals and institutions can use cryptocurrencies to hedge against inflationary pressures, capitalize on market fluctuations, invest in cutting-edge innovations, or simply protect their savings during periods of economic uncertainty. The ability to maintain privacy and anonymity helps foster a more robust and flexible portfolio for these purposes. I perceive blanket identification practices as invasive because they believe that requiring all users to disclose their identities goes beyond what is necessary for combatting criminal activity. Mandated KYC and AML procedures can lead to overcollection and misuse of personal information, which can violate users’ privacy rights and create new avenues for identity theft, fraud, and surveillance abuse. I advocate for the idea that the state should prioritize proportionality when enforcing regulation; meaning that measures taken must be commensurate with the severity of the issue being addressed, rather than imposing unnecessarily intrusive or burdensome obligations. Ultimately, this reflects my views about economic development, and individual rights within society. Here are some additional points that explain further why privacy advocates might find blanket identification practices invasive: Collection and Storage of Sensitive Information - When individuals provide identifying details such as name, address, date of birth, etc., they expose sensitive information that could potentially fall into the wrong hands via data breaches or cyber attacks. This vulnerability poses serious risks for financial loss, identity theft, and other forms of harm. Furthermore, keeping large volumes of sensitive information exposes individuals to unwarranted government snooping, leading to suspicions that they will be subjected to arbitrary scrutiny. Overreach and Misuse of Power – Requiring broad identification procedures invites bureaucratic discretion, raising questions about the potential for abuses of power. For instance, if regulators insist that all persons involved in crypto transactions must reveal their true identities, then third-party service providers acting as middlemen could easily access, retain, share, or sell customers' sensitive information to interested parties, thereby causing significant reputational damage to both the consumers and businesses concerned. Moreover, given that most jurisdictions lack clear legal boundaries defining the limits of their authorities, there exists a realistic possibility that governments may misapply or extend powers intended primarily for specific uses, thus infringing upon constitutionally protected freedoms. Disproportionate Burden on Users - Blanket identification requirements impose heavy administrative costs on ordinary citizens, especially small business owners, independent entrepreneurs, freelancers, and others whose livelihoods depend on using cryptocurrencies. These users often prefer pseudonymous transactions due to factors such as geopolitical instability, high taxes, oppressive censorship, or restricted banking services, making them reliant on digital assets as a means of survival. Thus, forcing these same individuals to submit detailed documentation would introduce undue barriers to entry, negatively impacting their competitiveness, profitability, and overall wellbeing. Ultimately, while strong anti-money laundering legislation is vital in fighting financial crimes and preserving national security, it is equally crucial to ensure that proposed policies conform to principles of proportionality, necessity, and subsidiarity. Striking this delicate balance involves a complex web of technical, legal, and societal considerations, calling for nuanced policymaking informed by multi-disciplinary expertise. The argument against blanket identification requirements stems from several related ideas: Firstly, not every person engaging in cryptocurrency transactions is necessarily involved in money laundering, terrorist financing, or other illicit activities. In fact, many people use cryptocurrencies for legitimate purposes, including online shopping, cross-border remittances, peer-to-peer lending, trading commodities, and investing in initial coin offerings (ICOs). Therefore, demanding that everyone undergo stringent identification procedures creates a disproportionately harsh response relative to the problem at hand. It is similar to treating every traveler passing through airport security like a suspected terrorist instead of conducting targeted screening based on behavior patterns, threat intelligence, or risk assessments. Secondly, the effectiveness of mandatory ID checks in preventing criminal activity remains uncertain. Although KYC/AML procedures have been instrumental in detecting and deterring certain types of offenses, such as organized drug trafficking syndicates or financial scams perpetrated by known entities, they have very limited utility when dealing with sophisticated cybercriminals operating covertly via anonymous networks, VPN servers, etc. Since cryptocurrencies employ advanced encryption algorithms, it becomes challenging to trace funds back to their original source without solid evidence linking those funds directly to an identified account holder. Hence, relying solely on KYC/AML protocols for catching bad actors represents a shortsighted approach that fails to appreciate the dynamic nature of evolving technologies and emerging threats. Thirdly, I suggest that KYC/AML guidelines, when applied indiscriminately, pose severe ramifications for human rights, particularly regarding freedom of expression and association. Because cryptocurrencies facilitate privacy and anonymity, they enable dissidents, whistleblowers, journalists, activists, and political refugees to conduct their affairs discreetly without fear of retaliation or interference. By compelling all users to divulge their names and addresses, authorities jeopardize fundamental liberties that safeguard free speech, peaceful assembly, and democratic governance. Such draconian measures might also deter innovation, entrepreneurship, and experimentation, stifling technological progress and limiting opportunities for social mobility. Freedom of Expression - Cryptocurrencies are increasingly being used to support alternative media outlets, crowdfunding campaigns, satirical meme pages, and other forms of content creation that challenge conventional narratives. Many such initiatives rely heavily on donations from supporters worldwide who value anonymity and confidentiality for reasons ranging from personal preference to practical constraints such as government surveillance, internet filters, or harassment by interest groups. If forced to provide real-world identity information during fundraising drives, authors and publishers might be subjected to intimidation, blackmail, or censorship attempts, which could stifle creative output, compromise artistic integrity, and restrict access to diverse viewpoints. Moreover, since many online platforms utilize third-party payment processors integrated with popular crypto wallets, any unfavorable changes in compliance standards could result in arbitrary deplatforming, sudden account closures, or excessive transaction fees, thereby impeding the free flow of information and hindering freedom of expression. Freedom of Association - Cryptocurrencies allow individuals to join decentralized communities, clubs, collectives, cooperatives, foundations, NGOs, and other nonprofit organizations irrespective of physical location, cultural background, religious affiliation, ethnic origin, sexual orientation, health status, or disability level. Members can pool resources, share knowledge, and exchange goods and services using blockchain-based tools devoid of intermediaries, middlemen, gatekeepers, or regulatory bodies. However, if mandated to present personally identifying documents before participating in such associations, participants could experience obstacles relating to data protection, privacy breaches, reputation damage, identity theft, fraudulent solicitations, bullying, mobbing, exclusion, harassment, or stalking. Furthermore, since many virtual communities transcend traditional borders and embrace multilingualism, multiculturalism, and multi-stakeholderism, overzealous enforcement of AML rules could lead to unintended consequences, such as language barriers, cultural misunderstandings, ideological conflicts, or reputational harm resulting from erroneous flagging, false positives, mistaken identities, or wrongful accusations. In summary, the effects of KYC/AML policies on human rights are far-reaching and multilayered, encompassing domains such as freedom of expression, freedom of association, freedom of movement, freedom of religion, freedom of conscience, and freedom of choice. While acknowledging the critical role played by regulatory frameworks in mitigating risks associated with illicit finance, we should remain cognizant of the potential collateral damages caused by hasty decisions that fail to prioritize our essential values and principles. Instead, we ought to develop strategies that strike a sensible balance between lawfulness, orderliness, fairness, justice, efficiency, and compassion, bearing in mind the unique circumstances of each context. Ultimately, our goal should be to promote inclusive growth, shared prosperity, social harmony, and democratic resilience rather than focusing narrowly on short-term gains or long-term losses. Self-censorship: To avoid running afoul of stringent identification requirements, creators and publishers may self-censor themselves or shy away from covering certain topics altogether. They might refrain from discussing politically sensitive issues, criticizing powerful entities, or exposing corrupt practices due to fears of legal reprisals, financial penalties, or reputational damage. This would ultimately limit the range of ideas expressed in society, leading to intellectual impoverishment and reduced pluralism. Chilling Effect: Strict KYC/AML policies may create a chilling effect where people hesitate to engage in activities related to cryptocurrencies due to concerns about disclosing sensitive data. For example, someone who wishes to contribute to an anonymous blogger's Patreon page but does not want to reveal their true identity may choose not to do so instead. This would translate into fewer contributions, less funding, and lower revenue streams for independent writers, artists, musicians, and others who depend significantly on digital tipping or patronage systems. Surveillance: The requirement to submit detailed documentation often involves sharing sensitive personal information with third parties involved in processing payments through cryptocurrency exchanges or merchant services providers. This creates new avenues for surveillance and tracking, allowing governments or private companies to monitor citizens' communications, transactions, and movements, possibly infringing upon their right to privacy. Disproportionate Impact: In many cases, low-income earners, marginalized communities, and developing countries bear a disproportionate burden under these policies because they lack the necessary resources or infrastructure to meet the demands placed upon them. They may face higher costs or greater administrative hurdles compared to wealthier counterparts with better access to legal counsel, banking facilities, or alternative means of communication. Unintended Consequences: In practice, overly prescriptive KYC/AML rules sometimes yield unexpected results. Some examples include: a. Reputational Harm: Individuals whose identities become publicly linked to specific accounts or projects could suffer from unwarranted suspicion, defamation, or cyberbullying based solely on circumstantial evidence or hearsay. Banks and other institutions may deny loans, credit cards, mortgages, insurance policies, scholarships, grants, contracts, or partnership offers simply because of misplaced assumptions or prejudice. b. False Positives: Due to limitations in algorithmic detection capabilities, legitimate users may be falsely accused of suspicious behavior despite acting within the bounds of acceptable norms. They may encounter undue scrutiny, delays, or roadblocks throughout the verification process, causing frustration, inconvenience, or financial loss. c. Wrongful Accusations: Sometimes, well-meaning efforts to combat money laundering or terrorist financing result in incorrect allegations against innocent persons. These incidents generate headlines, trigger investigations, and provoke intense backlashes, forcing victims to expend significant time and energy defending themselves against groundless charges. Overall, while KYC/AML policies aim to prevent criminal activity, policymakers must ensure that they do not inadvertently trample upon basic human rights, including freedom of expression, lest they engender resentment, mistrust, and resistance among affected populations. It is crucial to find ways to reconcile competing priorities, balancing security concerns with privacy preservation, economic development with social equity, and innovation with regulation. Striking a responsible equilibrium requires careful consideration, nuanced analysis, and ongoing dialogues across different sectors of society. Freedom of Expression is an essential component of any healthy democracy and society because it allows people to communicate their ideas, opinions, and beliefs without fear of retaliation or censorship from the government or other powerful institutions. Here's why Freedom of Expression is so critical: Promotes Accountability & Transparency: When citizens have the right to express their thoughts openly and honestly, it makes public officials and authorities more accountable for their actions. This helps to promote transparency and reduce corruption since those in power will think twice before engaging in nefarious activities if they know that there are people watching them. Encourages Critical Thinking: By fostering open debate, discussion, and dialogue about various issues, Freedom of Expression promotes critical thinking skills. Citizens learn how to evaluate evidence and arguments, weigh the pros and cons of various viewpoints, and form informed opinions based on facts rather than emotion or prejudice. Protects Human Rights: The exercise of free speech often serves as a watchdog function, helping to expose abuses of human rights and wrongdoings by governments and other organizations. Without the ability to speak out freely, victims of oppression may remain silent due to fear of reprisals, further perpetuating human rights violations. Fosters Cultural Diversity: Free Speech promotes cultural diversity since people can share their unique experiences, traditions, and values with each other. This leads to mutual respect, understanding, and tolerance between different ethnic, religious, linguistic, and ideological communities, contributing to social harmony and cohesion. Facilitates Innovation & Progress: Freely expressed ideas can drive progress and innovation by allowing people to challenge conventional wisdom, question established practices, and explore new possibilities. Thus, Freedom of Expression plays a vital role in promoting scientific discovery, technological advancements, artistic creativity, and intellectual growth. Empowers Marginalized Communities: People who belong to minority groups or face systemic disadvantage benefit significantly from Freedom of Expression as it provides them with opportunities to raise awareness about their plights, advocate for policy changes, and push for greater equality and justice. This, in turn, contributes to broader social and economic transformation by challenging structural inequities and empowering previously underrepresented voices. Strengthens Democracy: Ultimately, Freedom of Expression is fundamental to the functioning of democratic societies because it enables citizens to hold their leaders accountable, participate actively in decision-making processes, and contribute meaningfully to shaping the future of their communities. Therefore, protecting Freedom of Expression should be a top priority for any democratically elected government committed to safeguarding the rights and freedoms of its citizens. These reasons illustrate why Freedom of Expression matters deeply to society and underscore its importance in supporting healthy democratic systems. Lack of Accountability: Powerful individuals thrive on the perception that they are above the law or immune from scrutiny. However, when common people cannot criticize their decisions or question their motives, these influential figures become less accountable for their actions. This can result in abuse of power, corruption, and misuse of resources. Loss of Trust: When the masses cannot voice their concerns or air their grievances against prominent figures, the latter lose the trust of ordinary people. Over time, this erodes the legitimacy of authority, leading to disillusionment, cynicism, and apathy towards governance and leadership. Stifling of Innovation: Wealthy individuals rely heavily on fresh ideas, creative solutions, and innovative approaches to maintain their positions of privilege. Yet, if people don't feel comfortable sharing their thoughts and suggestions, the flow of groundbreaking concepts dries up, making it difficult for prosperous persons to stay ahead of the curve. Increased Risk of Unrest: In some cases, people may perceive restrictions on freedom of expression as oppressive and unfair, resulting in civil unrest or protests. Such instances could escalate into violent clashes between protesters and law enforcement agencies or security forces, potentially causing injuries, deaths, or destruction of property. Overall, limiting Freedom of Expression isn't beneficial for wealthy individuals either because it can negatively affect their standing in society, weakening their credibility, eroding their support base, and putting their wealth and status at risk in the long run. Hence, preserving Freedom of Expression is crucial for everyone irrespective of their social, economic, or political position. I urge you to consider all the aspects above. Kind regards, Angel Maria