The New York State Department of Financial Services recently announced a $100 million settlement with cryptocurrency exchange Coinbase. The story is largely being reported in the context of the collapse of another centralized exchange, FTX. But the implication that regulators are riding to the rescue of consumers and taming the wild west of crypto is not a reasonable takeaway.
While the full account of Sam Bankman-Fried’s rise and fall has many odd twists and turns, the overall story of FTX is a rather easy one to understand: a malicious actor defrauded clients to enrich himself and his political allies (there’s presently no evidence that recipients of his significant donations were aware of his fraud). This sort of thing is hardly new, and has happened in all manner of financial systems.
Outlets are framing the Coinbase fine as part of a larger effort to combat the sort of fraud committed at FTX. Here’s how NPR put it:
Wednesday’s announcement of the settlement between Coinbase and the New York State Department on Financial Services comes on the heels of other actions by other regulatory agencies to monitor cryptocurrency companies. Those efforts have gained urgency after the November collapse of FTX, one of the largest cryptocurrency exchanges in the world. Its former founder, Sam Bankman-Fried now faces multiple criminal charges.
You might be forgiven for thinking that New York regulators found some practice at Coinbase that was fraudulent or otherwise jeopardizing customer funds. But no such activity is at issue, at least in this action. Instead, they are fixated on the behavior of customers, and whether they are being properly stripped of financial privacy rights and sufficiently harassed by Coinbase before being allowed to engage in financial activity.
That’s right, it’s yet more “anti-money laundering” nonsense.
The $100 million trumpeted in headlines combines $50 million for the agency’s own pockets, and $50 million Coinbase will be compelled to spend on “compliance programs” to formalize its status as a de facto deputy of the state’s financial surveillance apparatus.
There is no benefit to consumers here. Far from it.
Sen. Elizabeth Warren similarly took advantage of the Senate hearing investigating FTX’s implosion to introduce her entirely unrelated “Digital Asset Anti-Money Laundering Act” that brazenly attempts to resuscitate a failed FinCEN rule requiring reporting on self-hosted wallets. The Cato Institute’s Nicholas Anthony correctly concludes that the bill “merely uses the dust from the [FTX] collapse as a cover for increasing financial surveillance.”
In a recent article, I identified anti-money laundering laws as one of several key regulatory and legislative battles ahead for the burgeoning cryptocurrency industry:
The history of anti-money laundering rules is one of constant expansion despite considerable evidence that the rules simply do not work.
Financial crime expert Ronald Pol concluded in a study published last year that global anti-money laundering efforts could be “the world’s least effective policy experiment.” Compliance costs for banks and other businesses, as much as US$180 billion per year according to a survey of professional published by LexisNexis, dwarf the amount of illicit money captured.
Efforts to impose this failed regime on cryptocurrency are explainable in two primary ways. First, legacy financial institutions, having largely given up on improving their own situation, want to saddle crypto start-ups with the same onerous rules that have so bloated much of today’s financial infrastructure and left it unrewarding for consumers. Second, governments see crypto as a threat to long-standing efforts to impose perpetual and pervasive financial surveillance.
Anti-money laundering laws are an expensive failure. The US has pushed to spread these laws throughout the global financial system with no regard to the cost to other jurisdictions and customers.
The expansion of anti-money laundering regimes into cryptocurrency will do nothing to limit future fraudsters like Sam Bankman-Fried. But that’s just fine in the eyes of regulators. They’re much more interested in ensuring that your every financial move can be monitored, cataloged, and evaluated for acceptability in the eyes of those in charge.
