Yaya Fanusie: Bitcoin and Terrorism – How Compliance Will Shape Cryptocurrencies (#324)

Transcript

this is epicenter episode 324 with guest Yahya fanucci hi welcome to epicenter my name is sebastian Cuchillo today our guest is Yahya fanucci yeah as a research fellow at the Center for a New American Security which is a think tank in Washington DC previously though he was a counterterrorism expert in economics analyst at the CIA he served seven years with the agency and was deployed for three months in Afghanistan to advise military personnel law enforcement and policy makers so

this idea that crypto is used for terrorist financing is one that gets thrown around a lot and many times to discredit crypto well in this area yeah I knows what he's talking about he is an expert in counterterrorism and terrorist financing and when he became interested in Bitcoin in 2015 he started researching how terrorist organizations were using crypto to fund their activities Brian and I hosted this conversation and we talked with the AI about the history of AML kyc policies and specifically their accelerations since 9/11 we debated on the ethics of enforcing compliance on the financial industry this is something I generally take issue with especially when it comes to crypto startups because they usually don't have

the resources or experience to do so we talked about the eff ATF or the Financial Action Task Force which is the organization that defines global policy guidelines for the financial sector we talked about the travel rule which puts compliance requirements on the financial industry to send over any identifying information with all money transfers and this travel rule is slowly being rolled out and applied to crypto in many jurisdictions and we discussed privacy and censorship and the risk of too much regulation and oversight I really love this conversation firstly because AI is extremely knowledgeable and articulate when it comes to this stuff and we were

able to have a thoughtful philosophical debate on these issues and secondly because we got see a counter perspective on AML kyc and compliance policies from someone who's an actual fan of crypto CIA takes the position that compliance can actually help the industry which is an unpopular opinion amongst people in the space but as you'll hear in our conversation the answer isn't so black and white and maybe lie somewhere in the middle before I go to the interview I'd like to tell you about our sponsor for today's episode Peppa Peppa is where the crypto community comes together which short video updates and tokens of appreciation so whether you're a crypto developer a podcaster and analyst a blogger or just an enthusiast there's never been an

easier way to showcase your work earn appreciation and connect with the community so a few people know this but about a year ago I really got into electronic instruments and app badhak drum machine a couple of synthesizers and a sequencer and I started playing electronic music analog electronic music and I moved last year and I hadn't set up my gear yet and I finally set up last weekend and I've been posting little video updates and little clips of the things that I'm playing I mean it's mostly not very good but you know I'm learning and I'm getting back into the groove of things and stuff so it's really fun so I've been posting it on Peppa so if you're interested in seeing that and the other things that I'm posting you can go to Peppo calm slash epicenter that lesson though we sent you and there you can download the app for

iOS or Android and you can find me at sub 2.0 that's SCB to pomt zero so we'd like to thank Peppa for the support of the podcast and with that here's her interview with Yaya fanucci we're here with Yaya finucci Yaya is an adjunct senior fellow at the Center for a New American Security which is a think-tank in in DC and previously was a counterterrorism analyst at the CIA for seven years and actually did a tour in Afghanistan advising personnel on the ground on issues regarding counterterrorism and economics yeah yeah thanks for joining us today thank you glad to be here tell us a bit about your

background and specifically I'm interested in learning a little bit more about what you were doing at the CIA and your area of expertise there well I had a bit of a transition in my career I was actually hired by the CIA by the agency as we call it in 2005 or I started there in 2005 I was hired as an economic analyst and as an analyst right it meant I was someone mostly behind a desk doing analysis on all types of intelligence and information that came in and providing my analysis of providing that analysis to policymakers or you know and you're talking the highest levels of the US government mid level personnel and my my initial job was to look at economic

threats economic risks to look at issues like corruption happening around the world and energy energy issues energy security but sort of my first year year and a half I made a change I decided to become a counterterrorism analyst that was really interested I mean this was you know a few years after 9/11 after the London bombing in 2005 I decided that you know I wanted to use my skills to combat terrorism and terrorist attacks so I became a what we called a CT analyst the counterterrorism analyst worked for a few years countering and following plots mostly by Al Qaeda this was before the days of

Isis looking at al Qaeda plotting against the United States following issues like radicalization and and so that's that's what I did but I left the government I left the CIA in 2012 and I started working on another sort of investigative in another investigative realm financial investigations I worked with a consulting firm that was doing an investigation on a recovering illicit assets basically looking at kleptocracy x' and trying to locate funds that were squirreled away behind by dictatorships and this involve and this was all out out open sort using open sources using contacts this was not a government

operation but that's actually what got me into this whole realm of finding when people are trying to hide illicit proceeds what do they use how do they use the banking system how do they use front companies how can you try to investigate in and cover their trailer not cover their sure how can you uncover their trail from there I eventually started working in the think-tank community you know here in in Washington DC you've got these think tanks a lot of times are staffed by former government people so I sort of fit fit in I had my government experience and I joined an organization called the foundation for defense of democracies that had a center dealing with sanctions and illicit finance and I was a part of that Center and it was

while working at a think-tank and thinking about national security issues engaging policymakers writing articles and briefs that the question came to me in I guess we're about 2015 the question arose what is Bitcoin and how does this deal with national security or how does it impact national security and I was someone who knew little about Bitcoin I think my introduction to Bitcoin was probably more the movie dope which I think came out in 2015 is a sort of an indie film and so someone recommended that movie and I mean I had heard a Bitcoin before that but that was the first time I saw you know an in-depth portrayal as cinematic as it was about

what bitcoin is or what it could be used for but I didn't really know you know I wanted to understand the context right there there were a lot of policymakers that were saying things like this Bitcoin thing is gonna be used by terrorists and you know bitcoin is all bad it's all for illicit stuff and as someone who worked for the CIA right you're supposed to you're supposed to get to the heart of the matter you're supposed to look at things objectively you're supposed to understand all the reporting all the the context that's out there about a particular subject or a particular threat and that started me down this voyage of trying to understand this technology trying to understand how it was used and trying in a very in a

very like I say more objective way to understand it in a security context without being alarmist and in that manner that's how I started looking at this for my own research as part of a think-tank that's actually really interesting that you bring this up and definitely triggers my curiosity so you mentioned Bitcoin in national security in looking at Bitcoin kind of through that lens what were your big impression two takeaways when you did this early you know look at they come from that perspective and maybe how what does that look like today how do you think what's the impact of Bitcoin and cryptocurrency on national security from a u.s.

perspective well good question it definitely was a journey so in 2015 not knowing much about Bitcoin I just asked the question right what is this how does this relate to national security and the first thing I noticed was that in the press there were a lot of assertions about things like Isis using Bitcoin but as an investigator I could never I couldn't really confirm this I never could could verify how much this was true or if it was true now there were attempts 2014-2015 there were attempts of people that supported Isis to teach or instruct others to try to use Bitcoin but this was just like you know people posting on social media I could never

confirm you know if there was an effect and if terrorists were actually using it 26 so is something I sort of left aside but at the same time this was also when you had people talking more about Bitcoin and talking more about blockchain so I just sort of naturally became more interested in this technology that I was hearing about I started started to research it on my own but in 2016 something came up in 2016 there was a media report coming out of Middle East that there was a designated terrorist group that was fundraising through Bitcoin and what I did was I actually remember it to this day because I saw the report it was just sort of a passing report from some obscure media outlet

and I said to my interns I said you know what this is probably just so another one of these reports you know they just we probably can't verify it so why don't you just take a look at it I'm gonna go to lunch and then you know let me know what you find so I came back and one of my interns again my interns were much younger and more adapted and aware of technology they showed me the social media points basically they were able to find the social media post post that this organization had put up on the post it was saying hey you know send us money for for guns and for weapons etc and there was a QR code and that QR code went directly to you scanned it went directly to blockchain dot info and you could see the address you can see the

wallet you can see what they had raised and right then it sort of hit me I said oh wait a second this is interesting we can verify that this social media account is run by this organization because it has a history and they've posted this address and now we can actually see something here and a light bulb went off in my mind I said this is from a security perspective this is great you know we can actually look and track what's going on here let's learn about this and that that was the beginning of me looking at these types of campaigns and in the subsequent couple of years there were a few others like that that came up I mean especially when the price of bitcoins skyrocketed in 2017 you started to see you know like

like anything you start to see more people engage with crypto and you started to see some jihadist websites propaganda sites all not all but many of them soliciting Bitcoin payments but let's I guess jump ahead to you where that is now and what I think about it now you know a lot of people ask well ok you know will terrorists use Bitcoin or terrorists using crypto and my response is the adoption of Bitcoin or crypto by terrorist organizations it's gonna mirror the adoption that you see in the regular world what I would say is that we've noticed in recent years different groups experimenting with crypto particularly as fund raising we've seen

different campaigns we've seen people organizations try to get money for their computer service servers we've seen a few examples of these these are sort of you know sporadic examples so but what it's clear to me is that they're experimenting they're learning I've noticed an increase in sophistication with some of these campaigns but also it what I've noticed is that this is this is sort of just one tool in the toolkit right for any of these types of organizations for many reasons crypto currency is not good for terrorist crowdfunding because it's it is so transparent so I think that keeps a lot of these fundraising campaigns from from really earning a lot of funds but they're probably other uses other money

laundering uses other use cases that that it is good for quote-unquote and is being used for now you spend some time in Afghanistan when you were at the CIA he tell us a bit about what you were doing there and how that prepared you for you know what you're doing now and so your transition into the world of crypto well my time in Afghanistan was you know I would say that it connects to my current experience more in sort of the mindset that you have particularly in dealing with issues like war issues like security you know my role was as an analyst I was providing analytic support

an understanding of what was happening on the ground and and not even just you know militarily not just necessarily the tout what the Taliban was doing but of course just even what was going on in the country you know the US presence there obviously was a military one but what a lot of people don't realize is also there was a reconstruct reconstruction one right I mean not just the US but but coalition so the military needed to understand what was going on and I helped to provide senior military personnel that sort of analytic support but in terms of what does it do or what did it do for me today goes to this question this I think might be relevant

for your your listeners it's one thing to look at foreign policy and national security sort of you know from a sort of individual perspective like this is what I think should happen in the world this is how I think foreign policy should run it's different when you are in an environment where you actually see you know what you see you see that the risks when you see the threats we see the political developments happening when you see if you sort of see the repercussions of corruption you see policy going well and policy going wrong and so I think it gave me a sense that foreign policy is not a one-way street it's not always simple president you know what the president's or military political leaders they make

they make they have successes and mistakes that's the way of the world and so my you know the way I see the world is that you know often we're given a world we have to figure out how we're gonna best manage what we're dealing with and also that there's a sense of responsibility right so when you think about foreign policy from the mindset of okay if I was responsible right for people's lives how would I act right when you're not responsible for people's safety security or well-being you you have a different mindset you just sort of think well I wish the world would work this way but if you if you're to actually test and as an analyst as a CIA analyst you're really tasked you're not tasked with making policy like that's actually what you're not supposed to do

is when you're in the CIA as an analyst you you're supposed to check the surveillance situations see what's going on and provide the best insights and when you do that you really think not so much about what do I want but what is the people who are gonna have to make the decisions what do they need to understand and that's how I approach this this the issue of crypto and illicit finance anti-money laundering risks I mean that's my mindset I see the world that way and I try to not get you know even though I I'm intrigued by blockchain technology right I don't I don't think that technology should be over people I'm concerned about people so I have a mindset of one who's focused on supporting those who have

responsibility to keep people secure you know what one of the main things that we really want to dive in here is am L&K by sea and you know everyone in the crypto space of course is familiar with AML hey Rossi and you know you sign up for any change you have to go through that and you know we kind of understand on some high level why it's there but I think what's really interesting to dive into here is your try to understand this topic a bit more deeply try to understand you know where does it come from what are some of the thinking behind it you know what it ejects where's it going on the on a high level what's the impact this is gonna have you know all the cryptocurrency space you

know the short into long term you know I I fought one way we could like start off this question is he's for asking a little bit about you know the history of AMA on kyc so Sabathia pointed out people have been exchanging things right for forever right like you would have somebody a gold and you know buy something else and you'd have this kind of monetary change you had of course cash for a very long time so there was kind of maybe little of this so what's the history of AML and kyc and how have what's the sort of the evolution it has taken great question I think the the one thought to think about all of this is

all this AML stuff is when it relates to crypto all this tension is because there have been rules that have evolved like you said for how financial institutions should run and how you deal with financial transfers that's that's evolved and now we have the situation where there's this new technology and people want it to be a new way sort of a new way of transacting and there's this tension because there's an established order for how you deal with it and I'll go into I'll go into that evolution so let's start by thinking of a fictional situation from the 1980s right this is how these rules evolved so it let's say

it's 1985 and and you're in Miami picture Miami Vice the old TV show and a guy named Tony Montana I've also known as Scarface he walks into a bank and he has a briefcase now this guy's name is Tony Montana he walks to the teller he you know or sits down at the desk with this person and he says you know what I'd like to open up an account and the teller says oh what's your name my name is John Smith and he opens up the briefcase you know he says uh say hello to my little briefcase and he opens up his briefcase filled with you know dollars you know a bunch of dollars you know maybe I don't know five hundred thousand dollars worth of dollars and he turns it over and he says yes I'd like

to deposit this and the teller says okay mr. Smith I'll sign you right up here's your account nice doing business with you and he walks out a fictional fictional portrayal but in essence you could maybe do that or something close to that in the 1980s in Miami that obviously had led to some issues it led to banks being used for money laundering cartels using them people washing their money right through financial institutions and then also when they wanted to send money to and fro they could do it to unknown people so it became a big problem right so by the end of that decade by the end of the 80s there was a sense amongst a lot of countries and the g7 the group of seven

countries in particular we're looking at this and they said you know what we have to sort of codify some rules around how banks deal with their customers and how we deal with financial transactions so that we minimize these things so we make it difficult for a Tony Montana Scarface who who says he's a different name for him to use the banks or the banking system so out of that came really this coordinated effort by different governments to to raise anti-money laundering standards and that came in the 90s the early 90s and through this one organization they formed this organization called the Financial Action Task Force and ffedith you know it really didn't have much

power except the power of each government to say okay fat if you guys get together all the financial people in the countries the heads of the ministries and central bankers you get together and you come up with the rules for how the banks should manage that how they should manage them manage themselves to prevent the use by criminals in those institutions so they came up with a group of standards and that sort of evolved again the idea was to have standards so that each jurisdiction would then have standards and then that jurisdiction or that country right would then go to its financial industry and it would make sure that all of its banks follow these rules what are some of these rules right I mean you talk about AML kyc you know

know your customer banks have to make sure that they know they are dealing with so you say your name is John Smith okay let me see your ID let me get two forms of ID and over time this actually evolved after 9/11 with more completeness after 9/11 you know there was another effort a ramped up effort to make fat of standards not only just be about anti money laundering but also make combating the financing of terrorism and you hear people say AML CTF or CF T so the early 2000s you had basically clear standards that all governments that belong to this or that should belong to this organization

a fad of all standards for them to regulate and manage their financial sector and I'll give one quick anecdote so you understand why these standards are relevant particularly on the terrace financing so the 9/11 attack I forget the numbers but he owes it was funded with less than you know you know less than a million dollars I forget if it's five hundred thousand four hundred thousand something like that now when that attack happened investigators went back to try to figure out well how did these 19 hijackers how are they supported because they didn't have jobs right they were going to a flight training school they were in the US for however long but they didn't they they had money that came from the outside

after the attack investigators were able to go back and identify how the funding happened where funding came from because really of some of these rules that were in place and I'll give just one example now 9/11 attack came through the banking system came through the conventional banking system right more than anything not necessarily even like koalas but mostly you know the banking system and investigators were able to see that there were payments from like a money exchange and I forget the exact one whether we're talking like a MoneyGram type or Western Union right but the finance seers that were in the Middle East mostly transmitted money to the u.s. to the

hijackers and there were lots of payments that went back and forth the investigators were able to pull up those records and see that a lot of times they were trying the financier was trying to hide who they were but guess what even when someone is trying to even when a terraced financier is trying to send money he may put a fake name but if you go through the AML procedures you through those exchanges you have to put either an address you got to put a phone number and even some of these guys they would put a fake name but they're gonna put a real phone number why because they want to make sure that transmission goes through and if it doesn't they want to be reached so these are little you could say slip-ups so they were able to use that identifying information to then build a

network figure out who would sent the money and that actually helped the investigation of those attacks so again that's after the effect but it's those rules that are in place that law enforcement is gonna want to use to go and you know to investigate when illicit activity is happening so would you say that there was like a clear trend towards more ml and kyc rules after 9/11 is that when really things accelerated yes absolutely I mean I remember I mean I'm older than I look you know I'm in my mid-40s and I actually remember in the 2000s you know when I when I got a bank account cuz I graduated from grad school and I

remember moving to a new seat in this city moving in in DC and I remember that getting a bank account seemed to be much more much more not more difficult but they would require more IDs like passport and you know your birth certificate or whatever you didn't have that in the 90s I mean I can see that you didn't have that at all but the rules were much more strict so the financial sector not only that be also the issue of sanctions you had North Korea sanctions that were implemented you started to see more of an effort to clamp down on a lot of the loopholes that allowed whether it was terrorist financing drug cartels you know nuclear proliferators who also would try to use the banking system or

the shipping shipping system yes a greater effort to ensure that financial institutions follow certain rules to make it difficult for people to use this system illicitly do we have a sense today of the costs the sort of global cost to business of MLK yce are there any figures on that as I exist I don't know offhand but I do know that I may have seen them because I do know that people have complain about that right the cost of what we call compliance right the term that gets thrown out you compliance from a banking perspective or financial institution perspective compliance is is simply you make you your institution making sure

that the bank is following all these rules it's not onboarding customers anonymously it's looking at use of funds that you're doing due diligence on your customers that is a he and also that you're not sanctions compliance which relates to a the AML compliance right you're making sure fact sanctions exception yeah oh fak saying she's right Treasury to the Treasury Department that puts out these sanctions you have to make sure it's a bank hey hey your customer comes up that says his name is John Smith that his real name is not kim jeong-hoon you know or that he's not Kim Jong Un's you know uncle using the bank on behalf of that you have to make sure that you're not violating sanctions or that through your through your institution so there's a huge cost

there's the financial cost there's also the cost of fighting you know someone say the issue of financial inclusion right if you have all these standards you raise the bar for who can use the bank you make it difficult you make it more difficult right if you don't have an ID these are some of the other costs that might not be financial but could could even counteract some of what you're trying to do with terrorist financing these are all issues and the thing is I think a lot of times folks in crypto are engaging these issues particularly this issue of de-risking and then the promise of compliance some people will say well anti money laundering you know all these standards aren't good because so much money laundering occurs I mean Treasury US Treasury acknowledges there's money laundering that goes on in the system it's not like this is a zero

you know know a hundred percent successful thing and many people criticize to say it's very unsuccessful but again this is what you have to think of okay how do we in how do we deal with this is the issue that because of the cost that we turn off these standards we turn down these standards that we turn off these restrictions trolls or do we still just have to address them through policies through you know whatever whatever ways society has to has to figure out yeah I mean the way that I tend to look at this and my thinking about this has changed and I think it has mostly since I've been in the crypto space and I mean working for and alongside companies that are having to do compliance is that the systems

that have been put in place are meant to of course prevent money laundering which may be used to fund terrorism to fund crime you know all these bad things that society doesn't want and like I think we can all agree that like these things are not undesirable in society but in in a sense States and the police and sort of like authorities have failed to control these these things and have failed to properly police these things and so what what's been done is they've essentially deputized and give no past this responsibility on this cost onto industry where they've failed to you know properly prevent terrorist attacks and things like this they say okay well you know what here

banks now you're under the authority you're authorized and obligated to do all these compliance and do all these things where we have failed and all that cost is now on to you and by the way we're not going to you know pay you for this work which is meant to be you know it should be our work right we'll just find you if you don't do it if you do it right we'll just find you if you don't do it like if you were to you know just change the names of the actors in this sort of in this scenario it sort of looks like a mafia organization right that is itself trying to get others to do their bidding if from from that perspective I think I don't know if it's unethical but it's highly questionable right that states would impose this on companies and when you're looking at the

crypto space specifically and we'll get into into fat of and and and the the travel rule in this sort of thing you're talking about small companies many of whom don't have the resources Tristram you know the resources that know how to implement these sorts of this compliance and that might end up causing tremendous harm to to the crypto industry I mean as we're recording this in France there's a new lobbying Association that is being launched it's being announced actually tomorrow as a recording this and one of our goals is to lobby the French government say hey like French companies can't comply with the travel rule it's it's too much like we need to really like take this take our foot off the gas here and really

assess the situation before we start imposing all of this compliance on French companies which won't be able to you know who won't be able to implement them and we'll end up closing up shop and well who's gonna come in well the coin basis the you know the companies that have money will end up monopolizing the market so that's just really bit of a rant on that but no rant heard rant acknowledged and maybe I would pose the me I don't know if you want me to respond with the please okay so I think my my thought on that is then well there are two thoughts one is does the dose I know we haven't just been talking about crypto but you know does the

crypto space one it's cake and eat it and wants to eat it too meaning okay so we're gonna say I'm gonna say we was the crypto space cuz it in a sense I feel like I'm part of the crypto space even though some people would probably you know revoke my crypto pass in your ledger in the sense that okay we want to say we have a new way of transforming the way we deal with money the way we deal with that new transfer value we've solved the double spending problem and now we can you know you you know make a new way for the financial system to work so okay we alright we acknowledge that but the other side of that is okay so

how do you then take that idea of how transacting financially could be cross-border peer-to-peer decentralize then how do you then take that and really make it scale without dealing with some of these things I mean so in the midterm maybe you in the short term midterm maybe you can create something right maybe you can do all these great things and you see the benefit but there are these other external forces that you have to address that you're anyone's gonna have to address when you get into the issue of scaling I don't have a solution for for de-risking for the impact on business I acknowledge it I think the way the question that I posed back to those that make that us that have that complaint is

well then what is the technical solution for this is there not a technical solution you know if people are so creative to come up with these you know totally creative you know protocols and platforms well are they putting time into maybe a kyc platform and that does preserve our privacy in some sense but then also allows you to authenticate someone and okay now that you've created it and how are you going to scale that and what is the work maybe there's policy work maybe there's you know there's lobbying word and then there's a whole bunch of work to make that be you can't just create the software and then think that's going to reshape society which I think a lot of people think it's a lot of other social political work that has to go on so I'm not saying I have a prescription for how you know how

to make the changes you anyone wants to make but I'm just saying that okay yeah these are these are issues these are policy issues there and there are some people that are dealing with it some people are thinking about Financial Inclusion maybe they need to and how the technology could help that maybe they need more of a platform or but these issues don't just go away because we we see them I mean I guess there's also sort of a you know a fundamental maybe a clash right the values in a vision that's that's at hand here and I think in if you look at the cryptocurrency space you know many people have this view that you know financial privacy is like very important right and that's something that you know needs to be

protected and you know that's in a way that is very important and of course that means you know some terrorists will use it right of course that means you know like some people will end up you know doing bad things but which is sort of you know the consequence of freedom in a way and and then I think you have on the other side the you know let's say somebody in counterterrorism you know who's like I'm gonna you know I don't care about that or I don't wanna prevent terrorism right and I will whatever to take prevent terrorism and like financial privacy you know that's not my problem but like it's about preventing terrorism so how do you see that playing out you think that there is

just a sort of a friend fundamental incompatibility and you know they're sort of gonna be like this kind of clash of forces and then you know we'll see which side ends up prevailing or you think there is some that could happen here well I think that there's a different way to look or there's a way to look at it which i think is different which is that this clash does not have to result in a zero-sum game or it isn't a zero-sum game and so here's a perfect case and this is particularly true I think with the way US regulators have dealt with it so I'm gonna talk really from the perspective of what I see how

the US has been because really I'd say the US has been more forward-leaning and ahead of other jurisdictions especially Europe I mean I must say I think with guidance which is clear so the privacy aspects of cryptocurrency whether it's privacy coins or what whatnot the u.s. approach has not been to ban privacy or to ban privacy coins or to make it illegal to work on these things the u.s. approach of a fencin right the US financial regulator on these matters the u.s. approach is really focused on the business of money transmission how to

regulate the business of money transmission so the u.s. is not the US isn't even out line mining or anything right that's not saying that you can't you know you have to register if you're if you're mining that you're a money transmitter the US has a pretty clear-cut definition of who is regulated and what activity is regulated so what what I think this is gonna evolve into I think because you can't ban open source software I mean you can try to ban it but it doesn't you know it's not gonna do much right these tools are going to be here they here the genie is out of the bottle you know blockchain software is not going in going away can't be banned out of existence so just like you have software like tor

like you have other types of software that helps with privacy it is going to be there it is going to be in existence so if if Sebastian has Manero and Brian wants to send some monaro to or I shouldn't pick on one you know but send a privacy coin to someone that and he's and and if you know Brian's in the u.s. you know that's not illegal and I don't think it's gonna be illegal in the US right what the u.s. is going to address is okay well Sebastian are you now starting a business where you're you're pretty much the guy that has Manero and people come to you and they get their monaro from you well if you're gonna do

that Brian you need to register with Vincent you need to file you know suspicious activity report like you are a money transmitter you need to be regulated so if someone wants to transact you know it's gonna be available just like it's available for people to use tor or to use but you know VPNs or whatever now it may be difficult it may be harder but that's just the nature of that's what we have today so I think for those who value privacy so much they're going to be able to to move around anonymously or soon anonymously on you know using crypto it's not gonna necessarily go away and the government is not trying to ban privacy but in put them in let me add if you're say so you have to think

about the other alternatives so if someone is saying well you know these rules they you know they're gonna there's someone's perspective or they're one government's perspective and I don't think that we should have these restrictions okay well so here's the the thing about having your cake and eating it too so so crypto space you've created this great new way of transferring value cross borders peer-to-peer in a decentralized way okay so let's take things to their logical conclusion so now when Tony you know back in the 80s when Tony Montana wanted to ship millions of dollars across borders Tony Montana I had to he had to bribe the border guards he had to have a middleman he had to get pallets of cash he had to use a plane it took him a lot to move millions and millions or billions of dollars in the old days

and in today if he was using that's right if we cuz a lot of times we say well hey it's the same as cash okay but today now let's say crypto scales in the way we're now Tony Montana 2.0 he can move billions of dollars with no friction anonymously from an anonymous point to an anonymous point and we've evolved in that way where now that is possible through a decentralized manner now that may be a technological achievement but you also have to realize that there are gonna be some externalities that not only will it just be a case of maybe a couple of terrorists using it or a couple of bad people you are now enabling the total potentially total anonymity of illicit

proceeds across the world in seconds that situation has never existed before so you would just have to think about okay well if that happens how would you deal with that if anonymous transactions totally private transactions scaled in that way what would you do I mean that's not gonna be just a case of a few people bad people using it it's gonna you probably have to create some other infrastructure to deal with that someone's gonna have to so I just closed that out there that you if we take things to the logical conclusions these issues don't go away and privacy now maybe other jurisdictions are gonna ban privacy coins maybe they are gonna say you can't download such-and-such protocol and that's that's a matter where then that that you have to do that

society and that government has to deal with it but I actually think the way the US has addressed this is more balanced than people are giving it credit for that's interesting point I tend to see the evolution of money going in similar ways as sort of the evolution of communication so you know Bitcoin and is is simply the transmission of information and you made a statement somewhere in one of the articles you wrote stating that your position on on privacy with regards to sort of written communication was that you thought that it was reasonable to a lot of people to have privacy but that payments you were

less less favorable to sort of full privacy in payments can you explain you know why you think this is the case and don't you see the I mean III see sort of a take issue with this because to me you know the transmission of money going forward is simply just another form of communication you know much like we send you know messages or have api's or whatever it's just a continuation of the evolution of money yeah glad you pointed that out and the reason why I I take my perspective is I just make a greater distinction because of the role of money in the world compared to communication

now you know I guess you could make a case I'm if I want to you know answer my own argument right I could say that well hey right communication is probably more powerful than money in many ways right I mean you had the right communication has led to revolution I mean hey the Declaration of Independence is like one of the best communication documents out there that has changed society and changed you know civilization you could say I mean there's more than more like that so it's not to say that human communication does not have relevance I'd make a distinction with money because think even more about how critical money is to motivating people and MO and incentivizing behavior I mean communication is you transmit something

and you need a little bit more than just information like you need a lot of support and you need a lot of social stuff that goes with communication people can be bought and people will do things for money that they wouldn't do for without money even with if they had an ideological commitment and so I think I'm just concerned that if money became as frictionless at scale as as communication is that I guess I'm what I'm saying is that the repercussions would be greater than we are we are thinking about and so I'm gonna stand I'm gonna sort of stand in that that I would not make that connection I would not say I wouldn't that wouldn't make that parallel in that comparison and say

that well it's just the same as speech because speech doesn't pay people so that's just a distinction I mean and I totally I totally get it I I totally get I understand it I don't feel that makes a lot of sense to be honest I mean if you if you take your example before of al Qaeda on 9/11 right like I mean if you look at imagine all that communication that went on to facilitate that and okay they also send some money right but like you know in a way if you think of like the amount of information the amount of work the amount of thing like the people being able to communicate you know certainly much greater part than sending some money to pay for flight school or

something well I mean the you know think about it all has to do with resources time energy attention I mean if you think that so let's just say this like that's a good that's an interesting point right because we actually do see that a lot of the plotting that Isis has done in more in the recent years right have not have involved money what Isis has done is it's done these virtual planners which people kind of do what you're saying which is they've used communication secure communication propaganda to try to inspire people to do plotting in Europe in the US right this is actually what we've seen and so here's the thing though that has happened because we have encrypted

communication because we have free communication because we had the Internet much of that plotting particularly you know towards the US has been very unsuccessful because there was not a transmission of resources along with that because it's so hard to do that because it's so hard to use the banking system now to fund some some sleeper cells some cell that you're trying to work with so if you had more money for it was easier to transmit money to those guys value and and for that value to be used for services honestly you would have a lot more havoc so I actually think that makes my point I don't think you can discount money and

say you know you know if they had you know that money wasn't a factor money is a huge factor in providing for the resources for people to do bad things and without the money it's gonna be a lot harder so I live in France where we've had her share of terrorist attacks in the last couple years and most for the US there's a number of things that have protected I think that are not the case say in Europe for instance like the proximity isn't an ocean between like immigration laws all of these things contribute to making the u.s. a much safer place in terms of counterterrorism then say France or the UK or Germany or places like that and I don't know but I don't

think that the like koishi brothers and you know Kuti buddy and all these guys that perpetrated the paris attacks in recent years had received any direct funding from any of like the - organizations so what you have had is and you know again tangential topic right because we're talking about terrorist plotting which I even said with 9/11 right does not take much money 9/11 didn't cost a whole lot of money relatively speaking and the plotting happening more recently in Europe again not a lot of money right to do these types of attacks to get the even the weapons and in fact what you've mostly have had is you've had a lot of people using you know legitimate systems or illegitimate systems but right but not

stuff that's crypto right they found ways to support themselves or to pay for what they need so correct but what I think I'm trying to do is you're arguing here in the same way that when people talk about the banking sector they'll say well wait we have all these laws and don't you see there criminals are able to circumvent and criminals are doing X Y Z if you take those laws away you have to admit that just logically as much money laundering is already occurring you're going to see an increase for someone to say to go to the conclusion of well so they're not really working so let's get rid of these laws then

everything will it's not gonna be a change when actually it's gonna be no there isn't gonna be a change that particular problem may be worse probably is gonna be worse and I would say for a lot of these issues also it depends on your perspective right I mean I encourage people what I gained from working on financial investor and as a counterterrorism analyst is i honest and try to think like an illicit actor so I can stop them and so when you think like an illicit actor I mean it's funny when we have these conversations often I think the my issue with the crypto space is because the space is reacting to what they feel is maybe over handedness or just constraints and or unethical constraints as they'll accuse they will dismiss the risks and or

minimize them I think you have to you can't minimize or dismiss them right you have to accept and if you're gonna say that there exist you have to say how are you gonna deal with them that's absolutely fair point and it may be the kind of brings us into another topic that you know we really wanted to discuss with you so I think it was last year that there's this organization that you just mentioned before called the fat F some people say F ATF F ATF so that they put out this recommendation around a travel rule and I think the travel is something like okay some banks and some fun to another bank they have to kind of send along like you know information about the origin of the fund or like who the fund owns they made this

recommendation I think that this should also apply to cryptocurrency transaction and this has cost quite a bit of you know I would say confusion maybe here maybe disturbance maybe a response is like this is totally with these people have no but I would love to kind of get your point about what does this guidance say and what do you think the impact is going to be on the cryptocurrency space of this travel rule that's now supposed to apply to crypto well on this as you might guess right I have a contrarian opinion compared to most in in crypto

and I have a different way of looking at it most people will say they'll echo your sentiments which is hey this is this doesn't make sense because one crypto doesn't work this way how could you order people to share information right the travel rule I mean you somewhat summed it up but just to be specific the travel rule is is specific to if your financial institution you know or money service business and you're sending a transfer you have to make sure that the user that you know who they're sending it to on both sides you have to retain that information you have to make sure you share that information so it's this communication of really the ID of the people the customers that are transacting through your institution and so that's what the travel rule is in a nutshell and so fat

if came out with the fat of rules or the guidance we're basically to set the standard almost to include cryptocurrency businesses they call them virtual assets service providers but to include them in the standards the mo standards that we have to the state my contrarian opinion is that this is not bad for crypto but this is good for crypto in the sense that okay if you want this stuff to scale if you really want it to be used internationally globally you want it to go from just being a fringe thing that just a few people do it's not really you know widely adopted really the only pathway to do that is to reconcile these laws rules and standards for how we deal with

international transfers and the reason why is because of all the stuff that we've been talking about before at this point right in terms of the history the evolution of money laundering like these standards for transacting financially don't go away just because now you have a new way of transferring I would say that this is more of an opportunity because unless you reconcile these constraints I just don't practically see how you're going to build platforms that are going to be used in the way that folks in the crypto space say they want them to be used unless they just want to be the niche group that they are now which is just a few people that can do you know one-to-one a few transactions here and there but you're not gonna get global adoption so I think this is

actually an opportunity there's going to be pain and there's probably going to be consolidation I'm not a heartless person but I'm just looking thinking practically yeah I mean if people built a business model that totally neglected this stuff probably because they felt well hey there's no real rules or guidance and now they're reaching the wall that was always there in terms of scaling and now they're gonna have to figure out how to address that or maybe they need to figure things out and reconfigure their vision so you said okay there's gonna be pain and of course there are questions right like let's say somebody develops a wallet right that's like a a noncustodial wallet you know maybe it's an iphone wallet and people can just receive funds and saying fund

and you know you don't have to make an account you not to give you another example would be you know there are things like you know Bitcoin wallets like electrum right like you download a new computer running on your computer yeah the people building a lecture I have no idea like how many uses are there and so how do you think that the tribe of rule will play with those kind of non-custodial wallets and what are the other you know these points of pain that you think are gonna come because of the travel rule so in the sort of shortens to medium term those examples that you brought out aren't going to be touched too much by the travel rule or impacted in the sense that let's say from the US perspective right the travel

rule deals with financial institutions or these organizations that are now money transmitters if a coin basis actually customer transmits with a noncustodial wallet based on the travel rule that's not a travel rule transaction maybe a lot of people don't know this because it's not institution to institution it is financial institution to just a noncustodial wallet so the coin base may be saying okay well that's I don't have to worry about that but coinbase does have to is gonna have to worry about if it's going from coinbase to bit Rick's right cuz those are two money transmitters that now have to sort of take account and follow the travel rule and that's why I was saying a lot of the software that's being created that people have access to

and they could use if it's their choice they want to use that clunkier they don't want to use the cryptocurrency exchange they want to use some sort of other their own noncustodial wallet they can do that so all this is doing is it's setting the standard for those institutions that are acting as money transmitters so in the short term is not going to do much in the long term I do think there will be an impact indirectly because honestly I think what a coin base what a rigs your name your favorite exchange I do think that there is gonna be more scrutiny on non-custodial wallets that have no kyc I just don't see how you can get around it because yes the privacy enthusiasts that

want to keep their money away from the banks that don't want to be part of it to have a third party they want to use it on custodial wallets but you have to admit that illicit actors what's gonna be their preference do they want to use a coin based wallet are they do they want to use a noncustodial wallet that keeps everything private that has mixing software built into it maybe want to use the latter too so a coin based compliance team whether they say it or not I mean they're gonna have to assign greater risk I think to non-custodial wallets even if it's not a travel rule issue and I do think that is going to impact years ahead in the next you know several years that may make noncustodial wallets the thing of privacy enthusiasts but in the u.s. I don't think they're

gonna go away I think you can still use them just like anybody can use tour and use all types of security software you can still use it you vote this other in a one of the article you talked about you know this potential kind of divergence and you're talking about how we might have a sort of you know good crypto and bad crypto and yeah like is that kind of what you're talking about you know let's say that coin base says okay you know we're only gonna let you withdraw your bitcoins to some like maybe they won't let you after all to maybe some wallet that really favors and tries to emphasize noncustodial privacy centric approach and that you didn't

have this more kind of isolation where you may have the same blockchain right like that's a Bitcoin and some of the bitcoins kind of like moving in this regulated rearm and then some more in this other rearm is this is that something that you could see or like what do you mean with this division of good versus bad crypto or here's another scenario perhaps just add on to that where you know you have perhaps you know companies that are operating in a jurisdiction that is you know not part of the eff ATF or that is deemed on favorable by sanctions more regulated space yeah sanctions but it could be just like someone who moves their company to

Panama or something I don't know if Panama's in their 50s and then all of a sudden like you you sort of have these tokens that are like Brian said right they're no longer fungible they're short like these two realms operating within the same cryptocurrency it's not funny but in essence this is the problem particularly with the right of public blockchain that is visible the fact that now you can see the origin right you see the provenance of your crypto you've hit the nail on the head which is from the standpoint of folks who are looking at risk who are trying to minimize risk who don't want sanctions Act to come after them or authorities to come after them yeah it's sort of the logical conclusion is that you're gonna try to minimize

that you're you're gonna minimize situations where it's likely illicit activity is going through your platform and the biggest factor is do you know who that person is and if you don't know who that person is yeah you were incentivized again not to drop them but maybe you're gonna put in measures right maybe you're gonna put in a threshold where you only allow certain amount to go through a noncustodial wallets because you don't want to get rid of them and you want there to be financial inclusion I think you can see those things and so the two crypto ecosystem that you're mentioned that I wrote about I mean it's funny because this was like I think I wrote that in 2017 it was just this idea that it just makes sense is you as Kryptos gets more institutionalized as it gets more

accepted right you're actually gonna have institutional money going into it you're gonna have a more of a formal use of it and a lot of people don't like that you're going to have people that want things to remain quote-unquote dark or to stay anonymous and there's lots of blockchain projects that are doing that to this day right nimble Wimble like there are all these protocols that are trying to maintain anonymity and I just think that if the broader sector grows there's gonna be the clash that we talked about at the beginning of this that clash out of all the things and we're as great because we're having this very spirited conversation I would say not even a debate but a good conversation my thing that I will push back for the crypto space is okay you have to reconcile these issues and you have your argument cannot just be the

they're gonna be bad people using crypto regardless it's just not enough when you're talking about things on a large scale so I would put it again back to the crypto space needs to think more about these issues and I'm not saying that they have to do with the government then like the US government is not telling people what sort of protocols to make US government is just saying this is the financial sector this is how we deal with finance globally these are the standards you want to do something on your own one-to-one but government has a role in terms of Business and Finance and if you want to create something different and new that's gonna go against that you've got to figure out how you're gonna reconcile I don't have the answer I do want to talk about the kind of a related question and you know

supposed to mention Panama before I think there was just like last week or something I thought there was a this crypto currency derivatives be changed called Arabic which is one of the largest they were in the Netherlands and they announcer cable moving to Panama you know because we don't like the new AML rules they're coming and you know we think it creates too much of a burden for people to like onboard and use the platform so of course the crypto space probably more than any other industry that I'm aware of at least is very global and you know companies almost from the start like target customers all over the place protocols you know they're also completely open right they can't even

enforce things like sanctions rules how do you think it's gonna play out do you think that we will see in increasing maybe regulatory divergence right where you have you know companies go to favorable jurisdiction some of them use this as a competitive advantage they get business right they get attract startups others try to crack down but we have just this ability for people go where it's favorable and then that kind of prevails which I would say is kind of what we're seeing today a little bit but you're a bit makes finance many of the biggest platforms tend to kind of take that approach somewhat or do you think that maybe large players like aus maybe do you reaction and

managed to you know almost create a greater harmonization and impose these rules cross the globe well I think you're in the midst of of seeing this sort of transition one you mentioned Europe is the funny thing about Europe is I'm pessimistic about how Europe can manage all of this or the EU because there's I mean I visited just a couple places in Europe but I was in Germany recently a few months ago and it just there's just I think just so much confusion right between what the EU says and then what the local country is is gonna say and how do you coordinate that I think what we're seeing now is crypto being welcomed to the issue of

regulatory arbitrage right that that happens in the financial sector in general which is certain jurisdictions certain countries have quote-unquote good or high levels of AML standards and certain ones don't and they're questionable that's really what's at eff is about that F is about trying to bring all these countries to a certain standard the u.s. sees it as an ongoing problem don't mention encrypted not even with crypto but with money service businesses in general and with banks it's already an issue for the u.s. from the US perspective that certain jurisdictions you know allow so much private you know shell companies actually the u.s. is bad with shell companies I should acknowledge so this

is already an issue with AML regulations writ large I would actually just say that all that's happening now is crypto being welcomed into it and that crypto businesses have had the benefit of their regulators not really knowing what to do with crypto and they're not being clear guidance it's the new technology so people have been able to create businesses that have customers and that are earning money and now the landscape is shifting because regulators are catching up and so what is gonna happen they're gonna be people moving to Panama there's gonna be people moving to these other jurisdictions and it's gonna be a bit of a for regulators there's gonna be a cat-and-mouse game because crypto is global and how do you crack down on this how do you keep it's gonna be difficult to I'm not saying that you know this is a

easy sort of issue this is regulatory arbitrage that occurs in the banking sector even you mentioned Europe with regards to the ml5 directive which came from the EU how does that relate to the F ATF is it the F ATF puts out recommendations and then the EU also then applies them in these directives and then that gets kind of trickled down into the different European countries the way to think about this is which can be confusing is a lot of this is happening or has happened simultaneously and they're not always directly connected it's almost like different authorities are responding to the same set of problems I would put it like this

I would actually say 2013 the US actually put out guidance about how cryptocurrency businesses should be run or should be regulated and that was actually before European countries had had done anything like that so the u.s. said are you sort of put out a model then there were conversations with fat F which you know the US had probably informed because the u.s. is a big player in fat of so there have been conversations and fat.if about how how should all countries deal with this at the same time Europe and the EU was also thinking about the same question and they came up they figured out well we need to have like a new way of anti money laundering so a lot of this is happening concurrently they're having the discussions at the fat if level EU is having discussions and then the countries are having discussions five

AML D is you know already voted on that was already in train I guess before fat if came out with this thing and now what you're gonna have is with fat F the five AML D and ferrite they're sort of both ordering something I think the way you can see it differently though is that fattest doesn't have any ability to enforce it's just these are the standards five AML D I mean that's the EU thing and B whatever powers the EU has over the actual Central Bank's right there's a power leverage there fat if does not have the authority to enforce what a country does the only thing fat if can't do is that if can say oh well this country doesn't meet the standards it's not making you do anything big it can assess you it could put you on it

what's called the fat if gray list or the the black list which there aren't a lot of trees on but fat.if can do that so they're all sort of inter playing at the same time right and we should point out that individual EU countries like France and Germany are part of that of also the European Commission itself is a member of FATA and so these recommendations are then making their way into EU directives that then make their way into nationalistic regulations there's a lot of layers here to unpack so before we wrap up I just want so to get your high level thoughts on where do you think the space is going and where you see cryptocurrencies in the next 10 years with regards all this stuff well I'll just put the caveat there right that no

one knows and whatever I give you right is obviously not a prediction could happen or will hold your chair words I don't think this is gonna be a do or die thing for crypto honestly I think the world evolves I think the space is going to evolve so that there is I won't say happy medium but I will say that I'm not one of those what blockchain not Bitcoin people at all so I don't I don't want this to be misconstrued I think there's going to be a role for crypto once a lot of this amo stuff gets worked out that some of the features of crypto that people do like like real true public blockchain crypto that some of those features will be integrated and will be part of the global financial way of doing things the global financial system

I actually think and yet if we're looking further out there that there may be a place for public blockchain cryptos in financial transactions that maybe even banks will service allow their customers to use them now it's not gonna look the way it is now maybe you know we haven't talked that much about privacy coins maybe there's gonna be an adaptation of things like the Z cash type of protocol right where there are private transactions and shielded and unshielded transactions I actually see that there could be value in that I don't know how it's gonna look but I think that that at least in the value transfer the somewhat decentralized transfer value I think there's gonna be placed for it I don't think that the anonymous aspect that some folks

advocate for is going to scale I don't think it's going to scale very well you're gonna still have it but it's not going to scale like many people want it to and maybe that's that's fine you know maybe that's the happy medium the other thing that I would say maybe this is a good thought to leave with which is again more philosophical maybe even somewhat political maybe a lot of this back and forth that were that this script of space is having on these issues is gonna have to be dealt with by society at a societal level maybe there has to be a compromise when you look at the banking sector it's interesting because you earlier you were talking about this clash with your banks being deputized and banks having to do what the government you know doesn't want to

do itself now there's another way to look at that right which is yes it's burdensome on banks nothing it doesn't want to do that it can't do it okay right would that the government can't do right the government can't do it in most of the societies that we're in where we're broadcasting from because there would not be much openness to a government policing in real time all of your financial transactions enact in most of our societies what we have is we have this sort of interesting compromise where banks actually have access to your financial activity they know what you bought the credit cards are used in paper like they all know fortunately though the government is not seeing that data in real time and they have to go

through certain things in order to get that information and when they show up at the bank store they can get it but it's not in real time and that is that came about because of the way our societies are structured the way government structures the way industry is structured that sort of evolution may need to happen incorporating crypto into there how does that fit into that framework where we don't give the government 100% insight into everything everyone is doing but there are you know there are these stopgap measures so that people that have authority can get that maybe that needs to be developed somehow in crypto what I'm fearful of and not nice to take it to very dark places but you know let's have a look at this through this more dystopian lens is that effectively as government's and through the eff ATF and its reach as things

become more complex and government's want more and more access to people's financial data for under the guise of anti-terrorism and anti money laundering that we may get to a point where in fact governments complete access you know in real time to everyone's financial records so that's one thing and then the other thing that I think is potential risk is that these tools of surveillance might not have that much effect on you know us who live in affluent societies and have the means cetera but they will most likely have more adverse effects on like the more tools of oppressions are often used against more vulnerable populations than less vulnerable populations and so

that's where I see the risk of this thing going is one you know governments in fact inching their way into having more and more access to our financial data in real time and then also these tools being used to to oppress people that really shouldn't be oppressed this the question is then how do you deal with it is it we're tiptoeing into a non-technical conversation how do you have a society that respects that if there are settings where there's authoritarianism how do you do change that with technology or does that change or evolve in a different way and it's a tough issue to solve but I think it else it should make those of us who care about those issues need to think more about the non technological things at play that's an excellent way to end it

before we do though I want to direct our listeners to anywhere where they might find your excellent writings and why'd you tell us about your podcast briefly well in terms of the crypto stuff I'm a contributor to Forbes so if you know Google my name and Forbes you should see a lot of my articles I try to produce an article every month or so and we'll link to of many of the articles we referenced here great you can find me on twitter at sine curve although I'm taking a Twitter break right now but siga NCUR ve sebastian thanks for mentioning my podcast so yeah I created a podcast actually a few years ago which is sort of a personal storytelling podcast that

talks a lot about my own journey going you know working in national security a lot of personal stories that podcast is called rhythm of wisdom the rhythm of wisdom podcast and you can find it on your podcast platforms be great if you want to hear more of my my personal story oh this is a couple episodes it's really cool it's like a storytelling of your time and the CIA and I stuff it's really cool well thanks a lot yeah and it was great talking to you it was a really fascinating conversation and I look forward to being again sometime thank you both thank you thank you for joining us on this week's episode we release new episodes every week you can find and subscribe to the show on iTunes Spotify YouTube SoundCloud or wherever you listen to podcasts and if you have a

Google home or Alexa device you can tell it to listen to the latest episode of the epicentre podcast go to epicenter TV slash subscribe for a full list of places where you can watch and listen while you there be sure to sign up for the newsletter so you get new episodes in your inbox as they're released if you want to interact with us guests or other podcast listeners you can follow us on Twitter and please leave us a review on iTunes it helps to be behind the show and we're always happy to read them but thanks so much and we look forward to being back next week [Music]