33 MIN9 Jun 2024

Illicit Financial Flows: Crypto Is the Solution, Not the Problem

How centralisation contributes to IFFs and how blockchain technology mitigates the problem

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P

Peter Ludlow

J

Jarrad Hope

Trillions of dollars in illicit financial flows slosh around our financial system today, facilitated by the most powerful centralised instiutitons. Current efforts to address IFFs are ineffective and result in harmful side effects for some of the most vulnernable in society. In this article, we investigate the causes and impact of IFFs. Despite what certain bankers and politicians might have told you, the transparency and programmability of cryptocurrencies are a solution to, not a cause of, the problem. 

On Dec. 6, 2023, JP Morgan Chase’s chief executive officer, Jamie Dimon, testified before the United States Congress, saying that crypto was a tool for ‘criminals, drug traffickers, money laundering, and tax avoidance,’ adding, ‘if I were the government, I’d close it down’. The irony is that just a few weeks after Dimon’s congressional testimony, JP Morgan Chase was fined $348 million for ‘inadequate trade reporting’.[1]

This was just the most recent fine in a string of many enforcement actions that have been taken against the world’s largest bank by market capitalisation, including a fine of $920 million in 2020 for participating in fraudulent schemes involving precious metals and US Treasury bills.[2] And that fine, in turn, followed over 80 regulatory fines against JP Morgan Chase for banking violations and other crimes dating back to 2003, with a total amount paid of over $39 billion.[3]

Of course, these were just the cases in which JP Morgan was caught and punished. In other cases, the multinational finance company avoided penalty thanks to important records ‘accidentally’ disappearing. In June of 2023, the SEC was forced to file a cease and desist order against JP Morgan after it had deleted 47 million electronic communications. As the SEC complained in its filing, ‘In at least 12 civil securities-related regulatory investigations, eight of which were conducted by the Commission staff, JP Morgan received subpoenas and document requests for communications which could not be retrieved or produced because they had been deleted permanently.’[4]

The problem is that fraudulent activity by JP Morgan Chase is merely the tip of the iceberg in the global financial system; it has not been an outlier. As we will see, banks all over the world are implicated in the same activities. It is not by accident, after all, that global banks have large offices in locations like Medellin, Colombia and every other drug capital in Latin America.

But banks are not the only bad actors when it comes to shady economic dealings. The problem actors include any centralised authority with control over money. The corrupt agents are not just banks and businesses but governments themselves. Sometimes, local governments are the bad actors, and sometimes, nation states are. If there is money passing through an organisation that is centralised and non-transparent, then that organisation is most likely a target for corruption and a particularly apt agent for what are known as ‘illicit financial flows’ or IFFs.

For example, many people know that the drug cartels impose a tax on businesses in many parts of Mexico – extortion by another name. What people don’t know is that these taxes are often paid directly to local municipalities as ‘fees’ that are passed on directly to the cartels [Source: personal experience]. In other words, local governments have been captured by the cartels. Control of local governments is an ideal strategy for cartels because they can carry on the business of laundering money behind closed doors. In this and other ways, centralised authorities are ripe targets for those that traffic in IFFs – centralised governance is the best friend of criminals.

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The 20th-century American bank robber Willie Sutton was once famously asked why he robbed banks, and he replied, ‘Because that’s where the money is’. But that statement is no longer true. Some money can be found in banks, to be sure, and even more money is to be found in deals that banks are involved in and the transactions that they engage in, but as we will see, an even greater pile of money can be found flowing through governmental and non-governmental organisations around the world. These are the places where 21st-century Willie Suttons operate because that is now ‘where the money is’.

As we will see, fraudulent activity today comes in many forms throughout the world. There are many kinds of IFFs and many ways of hiding those IFFs behind the curtains of centralised governance. There is a staggering amount of dark money in the world, and once that dark money finds its way behind the closed doors of banks and governments and other centralised authorities, corruption is inevitable.

Our thesis in this essay goes against what Jamie Dimon has said (and what mainstream media has repeated unreflectively), cryptocurrencies are not the problem here. To the contrary, we believe that crypto is the only available solution. It is the only answer to what has become a worldwide blight of governmental and corporate corruption.

Crypto can be a problem solver here by making business and government transactions transparent and immutable on the blockchain (no more deletions of 47 million records to hide them from a dozen securities fraud investigations). Crypto takes control out of the hands of corruption-vulnerable central authorities and distributes control among all stakeholders. Furthermore, crypto provides tools that can help automate government actions in ‘smart contracts’ and make them transparent and reliable, eliminating counterparty risk. And finally, crypto accomplishes all this by moving on from centralised authority and putting critical governance functions on the blockchain.

We will discuss the positive solutions offered by crypto in some detail below, but before we get to the solution, we need to come to grips with the massiveness of our current problem.

Quantifying Corruption

Many people suspect that there is corruption afoot in big business and in our many layers of governing institutions, but it is not a trivial matter to locate and quantify that corruption. As noted above, one way of identifying and quantifying corruption is by the metric of IFFs. While there is no single, agreed-on definition of IFFs, they generally include tax evasion, multinational tax avoidance, the theft of state assets, the laundering of the proceeds of crime, and they also cover a broad range of market and regulatory abuses, including payment for favours, drug smuggling, and human trafficking. 

IFFs thus constitute a basket of financial crimes, and given that basket of crimes, we can begin to put a dollar value on their cost. For example, the UN estimates that between 2% and 5% of global GDP ($1.6 to $4 trillion) annually is currently connected with money laundering and illicit activity. Notice that we are talking about trillions of dollars in IFFs, all currently occurring without the help of crypto and quite possibly being made possible because crypto is not being widely used in our global financial system.

It is important to note that IFFs of all types are associated with either ineffective state functioning or illegitimate use of state power and are, without a doubt, an international problem – no country or region of the world escapes the blight of IFFs. Furthermore, these capital outflows via IFFs can be considered lost GDP; IFFs reduce the revenue available to states and ultimately weaken the quality of governance. This means they weaken the ability of governments to crack down on crime and IFFs, thus creating a flywheel effect in which corruption begets more corruption.

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In the Research Handbook on Money Laundering, Donato Masciandaro describes the societal costs of money laundering by criminals, outlining how every dollar of criminal proceeds reinvested can lead to more crime. Brigitte Unger summarises the report thusly: 

In order to understand the issue, it is important we trace its origins, identify who the criminals are, and determine the scope of the problem and the costs associated with it.

Who?

If IFFs are a problem, it is natural to ask who is behind the problem. Are the bad actors crypto bros swapping stablecoins on the blockchain? Apparently not, since it was a problem before crypto even existed. As we will see, the bad actors with respect to IFFs are big players in business (particularly finance) but also actors in traditional governance structures. For now, though, let us focus on banks.

We shouldn’t be picking on JP Morgan Chase; it is just one of the key offenders. Documents leaked from the US Treasury, known as the FinCEN Files, detailed an astounding pattern of persistent abuse by five leading global banks, even after their hands were repeatedly caught in the cookie jar. The International Consortium of Investigative Journalists (ICIJ) summarised the documents as follows:

According to ICIJ’s summary of the leaked documents, five global banks – JP Morgan Chase, HSBC, Standard Chartered Bank, Deutsche Bank, and Bank of New York Mellon – ‘kept profiting from powerful and dangerous players even after US authorities fined these financial institutions for earlier failures to stem flows of dirty money’. And we must couple this with the fact that the government rarely takes action anyway.

US agencies responsible for enforcing money laundering laws seldom prosecute megabanks that break the law, and the actions authorities do take barely ripple the flood of plundered money that washes through the international financial system. But in those rare cases where the government has shown an interest in these banks’ corruption, the banks largely just ignored the government hand slaps. In some cases, the banks kept moving illicit funds even after US officials warned them they’d face criminal prosecutions if they didn’t stop doing business with mobsters, fraudsters, or corrupt regimes.

The consequences of all this corruption have been to prop up and finance some of the worst criminal actors on the global scene. Former Treasury sanctions official Elizabeth Rosenberg observed that banks like Jamie Dimon’s facilitate this corruption by providing a mechanism for dirty money to ‘slosh’ around our financial system:

Too much of the process takes place behind closed doors, so the temptation to fudge the books, or keep separate books, or ‘accidentally’ lose the books is just too great.

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Alleged Attempts to Deal with the Problem

One might think that the gravity of all this corruption, the propping up of criminal actors, and the global loss of wealth would lead to some attempt to solve the problem. And indeed, if one pays attention to congressional testimony about the dangers of crypto, one would think that government leaders are very interested in this problem. However, the fact of the matter is that one can focus on where the problem isn’t (crypto) as a way of ignoring where the problem actually is (centralised governance and TradFi banking systems).

In a paper published in the journal Policy Design and Practice, Ronald F. Pol found that ‘anti-money laundering policy intervention has less than 0.1 per cent impact on criminal finances’; more precisely, 99.95% of criminal proceeds are unaffected by anti-money laundering efforts.[8] Similarly, United Nations data for 2009 reported the figure for unaffected IFFs to be around 99.8%.[9]

One would think that with all the corruption in the world – and all the IFFs sloshing around in our financial system – finding and cracking down on corruption would be like shooting fish in a barrel. Whether by design or incompetence, this is not the case. Indeed, Pol notes that ‘compliance costs exceed recovered criminal funds more than a hundred times over, and banks, taxpayers and ordinary citizens are penalised more than criminal enterprises’.[10] In other words, whatever actions governments and banks are taking to crack down on corruption, they are not going about it in a cost-efficient way; for every dollar they spend on financial crimes, they recover one penny from the bad actors. And who is paying for these failing efforts? Ordinary citizens!

After seeing Jamie Dimon’s unrelenting media campaign against crypto with the backdrop of JP Morgan’s crimes, one begins to wonder if the campaign isn’t designed to deflect attention away from his own and similar organisations. If, after all, governments are concerned with cracking down on crypto, they aren’t focused on the real source of the problem – centralised organisations like large banks acting behind closed doors. It is also possible that Jamie Dimon believes what he is saying about crypto, but if this is the case, he really isn’t campaigning against IFFs as much as he is concerned that crypto will steal his grift.

Similarly, many in the US Congress have, for all practical purposes, been bought by traditional finance. Large banks and other financial institutions are now the biggest donors to political campaigns in the United States. Thus, the campaigns against crypto are perhaps better understood as campaigns to protect TradFi donors and, by extension, their money-making machine – some of it legitimate, and as we have seen, some of it very much in the service of criminal activity.

If this scenario is true, and it very likely is, then it is just one additional case in a worldwide phenomenon about the application of anti-money laundering (AML) policies. These AML laws and policies should be designed to stop IFFs, but unfortunately, they are being deployed as tools to harass political and economic competitors. There are plenty of examples to pull from, but to get a glimpse at the international scope of the problem, we can begin with the use of AML policies by the Indian government to crack down on political enemies.

Amnesty International has argued that Indian authorities are exploiting AML laws to target civil society groups and activists and deliberately hinder their work. In a publication titled ‘Weaponizing counter-terrorism: India’s exploitation of terrorism financing assessments to target civil society’, Amnesty revealed how the recommendations of the Financial Action Task Force (FATF) – a global body responsible for tackling terrorism financing and money laundering – have been abused by the Indian authorities to bring in draconian laws in a coordinated campaign to stifle the non-profit public interest sector. These laws are, in turn, used to bring terrorism-related charges and, amongst other things, to prevent organisations and activists from effective fundraising.

In particular, Aakar Patel, chair of the board at Amnesty International India, observed that:

As you may have guessed, India is hardly the only place where AML laws and policies have been weaponised to assist despotic governments. The Open Dialogue Foundation published an article asking, ‘Can the EU’s anti-money laundering reform help dictators?’, arguing that it not only can, but that AML legislation does hurt civil society and does ‘harm the rights of law-abiding customers, including those fleeing from or fighting authoritarianism’.[12] The article goes on to provide a number of case studies to support its conclusion that ‘politically-exposed organisations or individuals can become victims of the so-called false positives in AML compliance, which disproportionately affects low-profit customers’. For example, one class of victims of these policies are people trying to escape from despotic rule – AML policies prevent them from escaping with their own money.

As so often happens, AML policies that are alleged to crack down on crime – in this case, IFFs – don’t really target the true bad actors (who are too powerful to bring to heel) but rather target individuals who are in no position to lobby against the policies. Perhaps you have noticed the difficulty in sending money to friends in other countries or had your bank account or PayPal account frozen temporarily for some random reason or other. This shows that the frictions are very real for little guys, even though they may be absent for larger players like JP Morgan Chase.

In the paper ‘Money Laundering’, Michael Levi and Peter Reuter offer a diagnosis of the problem: Current enforcement mechanisms fail to do the most obvious thing – follow the money – with predictably poor results. The regime does facilitate the investigation and prosecution of some criminal participants who would otherwise evade justice, but fewer than expected and hoped for by advocates of ‘follow the money’ methods.[13]

So, rather than follow the money, the current system for controlling financial crimes utilises ‘know your client’ (KYC) methods that don’t seem to be very effective against actual bad actors (drug cartels, corrupt governments, and international banks) and create hassles for regular folks that just want to send a little bit of money to a relative that needs help. And this generates a problem of its own: such policies can create enough friction to drive otherwise law-abiding citizens underground; they push people to utilise the dark money economy. This is the conclusion drawn by Pierre-Laurent Chatain, Andrew Zerzan, Wameek Noor, Najah Dannaoui, and Louis de Koker in an essay titled, ‘Protecting Mobile Money against Financial Crimes: Global Policy Challenges and Solutions.’ In their view: 

Of course, small-fry individuals are not the only victims of AML policies. We will ignore examples like Venezuela and Cuba, which are politically charged, but a good example is the greylisting of the Cayman Islands. As Andrew J. Perkins wrote in the Journal of Money Laundering Control, greylisting the Caymen Islands was something that should never have happened – the nation was held to standards that were not asked of onshore jurisdictions, with unfair and economy-wrecking consequences.[15]

Finally, as usual, these policies have been enacted with little concern for low-income individuals. Costs of money transfers have skyrocketed because of all the frictions introduced, with the consequence that the people who most need money transfer services – for example, migrant workers who need to send their meagre income to families back home – are the ones who suffer. They ‘exclude low-income people from financial services through onerous regulations’.[16]

AML laws worldwide have not been effective at combating the IFF problem, recovering less than one cent for every dollar invested, forcing regular citizens to pick up the bill, and placing an enormous burden on poor citizens who depend on money transfers to aid their families. At the same time, governments have not shown much interest in applying AML laws against large banks and other financial institutions. To the contrary, there have been instances of using the legal tools of AML laws to crack down on democratic movements and to support totalitarian regimes. 

In summary, AML laws are powerful tools that have been granted to governments for the purpose of fighting IFFs, but given that over 99% of criminal proceeds are unaffected by AML efforts, they clearly have not been effectively applied against the actual offenders (e.g. large financial institutions). However, they have been deployed to harass political and economic enemies and migrant populations. Needless to say, we believe that Elizabeth Warren’s so-called ‘anti-crypto army’ is just the latest example of this ruse – directing AML policy against the crypto industry because it is perceived as a competitor to big banks.  It is, in fact, directing AML policy against the tools that can liberate citizens from tyrannical, despotic regimes around the world and, in the process, harming refugees and impoverished migrant populations.

The case of Elizabeth Warren is a matter that deserves some parenthetical attention, in part because of its tragic nature and in part because it provides a fine example of how regulatory capture works. Warren, for those who don’t know, is a United States Senator from Massachusetts who gained attention early in her career for her campaigns against abuses by banks like HSBC. But subsequently, she has shockingly aligned with big banks’ interests and with CEOs such as Jamie Dimon, as their joint act in his congressional testimony revealed. Her ‘anti-crypto army’ is, in point of fact, fighting a war on behalf of traditional finance, with migrant populations being collateral damage. We wish we could say the problem ended there.

Corruption All the Way Down

Earlier, we mentioned how cartels in Mexico rely on local governments to launder money and make their extortion collection policies more frictionless. No doubt, this takes place not just at the local level but at the national level as well. Certainly, on the global stage, there are nation states that are very much active in facilitating IFFs. Some nation states may rely on IFFs for their very survival. But it is worth focusing on lower levels of governance for a while.

The fact of the matter is that corruption is not limited to large governments, and local-level corruption when considered in the aggregate, can be as massive as state-level corruption and IFFs. The key to understanding corruption is that it has nothing to do with whether the government is large or small, and it has nothing to do with the private versus the public sector. Large states, small states, large corporations, and small corporations can all be corrupt. The secret ingredient in every case is centralisation.

Centralisation gives someone sole control over the books, which in turn invites abuse. Even if there are independent authorities to ‘audit’ the books, only the centralised authority can know if there are multiple sets of books and whether the auditor has the true set of books. In our book on post-nation state governance, we go into the details about lower-level governance structures like homeowner associations (HOAs) and the astounding level of corruption that takes place in those organisations – again, because they are centralised governance structures. For example, we spoke of the almost 50 thousand HOAs in both Florida and California alone and drew attention to one particular case, reported by the Miami Herald in a story titled ‘HOAs from hell: Home associations that once protected residents now torment them’.[17] According to the article, the board of the Hammocks Community Association in the West Kendall suburbs of Miami, Florida, had faced criminal charges for stealing $2 million worth of their HOA’s maintenance fees. Another article in the Miami Herald (this one titled, ‘Wild allegations at Miami homeowners association show why Florida needs HOA crackdown’) suggested that it was even worse than that sounds: ‘It involves charges of racketeering, money laundering, fabricating evidence and using shell companies.’ During a recall election, the association board threw out two-thirds of the ballots. According to the Miami-Dade State Attorney in charge of prosecuting the case, the board was a ‘criminal enterprise’.[18]

We won’t trouble you with more stories like this, although there are plenty to go around. The point we want to drive home here is that the problem is not just with bankers like Jamie Dimon, nor with cartels, nor with corrupt municipalities in Mexico. The problem exists at every level of government in every part of the world, and the common denominators in every case are a lack of transparency and the centralised control over records that makes IFFs and other forms of corruption possible. Nothing good comes out of smoke-filled rooms. Somehow, we need to inject transparency into the system, from top to bottom. The question is, how to do this?

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Crypto to the Rescue

We closed the previous section of this essay by noting that transparency is the only answer to the catastrophic state of affairs in which dark money moves freely around the world. Michael Levi, in his 2015 paper ‘Money for Crime and Money from Crime’, echoed this sentiment:

But is crypto really the answer? How can this be? What of all the stories about money laundering from the likes of Jamie Dimon and Elizabeth Warren? Given what one hears in the media, it is a fair question, so perhaps we should take a closer look at the facts before we get into the details of how and why crypto will ultimately solve this problem.

According to Chainalysis, in 2023, 0.34% of total onchain transactions could be classified as illicit activity, falling from 0.42% in 2022.[20] To put this in perspective, recall that according to the UN, between 2% and 5% of global GDP ($1.6 to $4 trillion) annually is connected with money laundering and illicit activity.

Rand Corporation, a not-for-profit research organisation that helps improve policy and decision-making through research and analysis, conducted a study on use cases for cryptocurrency and privacy coins. The report noted that despite the ‘perceived attractiveness of cryptocurrencies for money laundering purposes… an estimated 99 per cent of cryptocurrency transactions are performed through centralised exchanges, which can be subject to AML/CFT regulation similar to traditional banks or exchanges’. Meanwhile, a 2020 report by no less than SWIFT (Society for Worldwide Interbank Financial Telecommunication) concluded that ‘cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods’.[21]

We would only add that insofar as IFFs transpire on the blockchain, it is only due to a lack of effort from those who want to crack down on them – in other words, a failure to simply ‘follow the money’. To understand why this is an obvious and effective and not particularly difficult solution to any potential IFF using crypto, we need to say a bit about how crypto actually works – at least at the level of abstraction we are concerned with here.

At its basic and most fundamental level, blockchain technology is a tool that allows human beings to engage in activities that are decentralised yet coordinated. That may not sound like much, but we believe it is one of the most important inventions in human history. It was far from obvious that such a technology was even possible, and a moment’s reflection should show why.

A standard assumption would be that if everyone is to be coordinated, for example, on values on a ledger, it is necessary to have one ‘official’ or centralised ledger to which all the correct ledgers must correspond. So, coordination requires centralisation. Lack of centralisation would just lead to anarchy – literally anarchy in the original Greek meaning of the term (without a head), but also in the contemporary sense of disorganised chaos. But this turns out not to be the case. We can be decentralised yet coordinated.

People assume that blockchain technology came out of nowhere with the publication of Satoshi’s White Paper, but in fact, Bitcoin and blockchain technology grew out of important work on building decentralised systems in the aerospace industry in the 1950s.

To see why, consider an aeroplane with multiple computers that might fail. You don’t want one failure to bring down the whole system, but how do we engineer around these inevitable failures? In the 1970s, researchers at Draper Laboratory published a technical report on the Fault-Tolerant Multiprocessor (FTMP) – a multiprocessor computer that eliminates single-fault vulnerability for aircraft modules. During the same decade, Honeywell developed the Multi-Microprocessor Flight Control System (MMFCS), which focused on the detection of Byzantine failures. Then, in 1981, SRI International published a technical report for aircraft control computers called Software Implemented Fault Tolerance (SIFT).

As noted, these papers were connected with the aerospace industry, where there are plenty of distributed systems for which some failure is inevitable, and the wrong kind of failure could be catastrophic. It was not for nothing that the research behind the ‘Byzantine Generals’ paper by Lamport, Shostak, and Pease was funded by NASA, the Ballistic Missile Defense Systems Command, and the Army Research Office.[22]

There is plenty of literature on how blockchain technology works, so we won’t rehash that here, but we want to highlight one very important consequence of the technology. Once you free yourself from a centralised authority, there is no longer one official version of records (for example, a centralised ledger). If everyone has equal access to the official ledger because that ledger is distributed yet reliable, then the records can also be completely transparent. To everyone. There need be no more secrets. Every transaction can be visible to everyone in real time. It doesn’t matter if it is the transaction of the government on the blockchain or a big bank; if the transaction is onchain, then everyone with access to the chain has access to what actually happened.

This is a revolutionary development in many respects since it means that not only transactions will be transparent, but the government archive can be transparent as well. As Jaques Derrida pointed out in his book Archive Fever: A Freudian Impression:

In other words, the success of democracy itself can very much depend on the accessibility of archives, and this is precisely what blockchain technology provides.

Of course, if we return to the topic of IFFs, then the question is naturally how crypto and blockchain technology can help with them. And the answer is that IFFs are flows of money that are not visible to us. They take place behind closed doors. Once such transactions are placed on the blockchain, they are visible to all.

You don’t need to take our word for this. You can go to any blockchain explorer, open it, and follow the flow of money from any crypto wallet address that you might be interested in. You can follow the money from that wallet to the next wallet and on and on until it leaves the blockchain and enters the shadowy world of traditional finance, which, let’s be honest, is the only point in the whole process where deception becomes possible.

But more importantly, blockchain technology offers us the possibility of ‘programmable money’. To illustrate the idea of programmable money, imagine that we designed a currency that was programmed so that if it was in the wallet of a minor, it could not be used to buy alcohol or tobacco products. The transaction would simply not go through. The money would not be functional for that purpose. This would not involve presenting IDs or KYC but simply the idea that the money coming from the wallet of a minor would not work for certain purposes. (If one wanted, one could program the money so that money transferred from the minor’s wallet to a second wallet would not work for such transactions either.)

Applying this idea to IFFs, you don’t actually need to rely on ‘following the money’. You could program the money in such a way that it could not ‘go dark’ or be passed through the wallets of known criminals.

Sam Bankman-Fried is often associated with corruption in crypto, but none of his corrupt actions took place ‘onchain’ – nor could they. He did his dirty dealings behind closed doors at his centralised exchange, FTX. It was only there, in that centralised exchange, that he could take money from clients and repurpose it elsewhere. He created an environment where crypto could go dark. But programmable money could be engineered so that if it was placed in reserve in an exchange it could not be used for other purposes. One wouldn’t need to rely on the honesty of SBF. One could rely on the integrity of programmed money.

So where do people like Jamie Dimon and Elizabeth Warren get the idea that crypto is a tool for money laundering? Presumably, from the idea that one might not know who a particular wallet address belongs to. But if someone is moving dirty money onchain, it had to come from someplace offchain that made it dirty in the first place, and it has to go someplace new offchain. If it goes offchain into the account of a terrorist organisation, then that is a clue that it is dirty. If it goes onchain, coming from a narcotrafficker, then that is again a clue that the money is dirty, and with programmable money, that designation could not be laundered away. The good news is that once the money is onchain, one can follow it to its destination, or alternatively, you can program the money so that it shows itself as dirty given its origin and thus not transferable to legitimate businesses (or to politicians). This is in marked contrast to the current system in which wealth is transferred in piles of cash, or diamonds, or artwork, or gold, or transfers of property, or any other method of hidden wealth transfer that you can imagine.

Now, you might imagine that if there are centralised onramps to the blockchain like FTX, then these are routes by which dirty money can enter and leave the blockchain. But this is easier said than done, for there are precious few on/off ramps for crypto that can handle any serious monetary liquidity, and those ramps (like Coinbase) are regulated (and ultimately, they too can be decentralised). To be sure, some guy on the street can send you some crypto for a handful of cash, but this is not a serious problem in a world where trillions of dollars in dark money move about the planet with the help of nation states and global banking. Crypto and the blockchain are the only part of the entire process that is currently pristine.

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This is why, in our forthcoming book on post-nation state governance, we make the case that the most important application for blockchain technology will not be for financial matters alone but rather for the business of human governance. It, too, must be made transparent, and it too must be placed on the blockchain because until it is, governments will just be centres of power doing things behind closed doors, including the transmission of dark money around the global financial system.

The Value of Corruption-Free Governance

We’ve argued that crypto isn’t the problem with respect to IFFs, but rather, it is the solution. And we’ve argued that the problem is indeed massive – trillions (not billions but trillions) of dollars of dark money slosh through the international financial system thanks to bad-acting banks and governments and other centralised authorities. But even this fact does not do justice to the harm caused by IFFs and what we could do to better lives were we to have effective policies against IFFs – in other words, policies designed to actually stop IFFs as opposed to policies that attempt to protect the interests of large banks or policies that harm the interests of migrant workers that are simply trying to send money home to their families.

The World Bank’s 2006 book Where Is the Wealth of Nations? highlights the profound impact institutions have on national prosperity. It found that the rule of law and human capital are the largest factors in the creation of wealth, dwarfing natural resource extraction and physical capital.[24]

A study on institutional development and transaction costs in the Journal of Institutional Economics found that a mere 0.1% reduction in transaction costs could quadruple a country’s wealth. To put this in perspective, this is the difference between the financial health of Argentina and the financial health of Switzerland.[25]

Optimising our institutional processes and eliminating the corruption that so naturally flows from centralised governance could not only halt the losses of trillions of dollars currently robbed from global GDP but eliminating corruption can also unlock vast economic potential worth additional trillions in value.

Public Confidence in Governance

In the previous section, our thesis was that eliminating IFFs could have a flywheel effect in that minor improvements in financial efficiency can have massive positive consequences. Additional efficiencies could flow from having a more capital-efficient financial system – a system in which there are fewer frictions to the legitimate movement of capital. But there is another flywheel effect that we could benefit from.

As matters currently stand in our world, there isn’t much confidence in government. In countries like Mexico (which currently has the 14th largest economy in the world), it cannot help their economy that people are cynical about the role of criminal elements in their governments and financial institutions. Seeing businesses that are clearly money laundering operations and seeing skyscrapers bearing the names of banks that build their empires off of the profits of the drug trade generates a lot of cynicism. Understandably so.

Even in the United States, there is widespread public perception that governance at every level is corrupt and that financial institutions are equally corrupt (no doubt due to the ineptitude of governments in fighting corruption). Nor is this perception somehow mistaken. The people are right! Their systems of government are corrupt, non-transparent, and not at all working in their interests.

We can even quantify this perception. Public confidence in governmental institutions has been in decline for decades, and it is happening everywhere. For example, a report published by the Institut Publique de Sondage d'Opinion Secteur (IPSOS) found that France has reached a new historic low where 82% of citizens believe the country is heading in the wrong direction. Great Britain experienced the biggest fall in optimism in the same month of the report, dropping 14 percentage points.[26]

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In the private sector, there is something equivalent to the Public Trust in Government measure – the Customer Satisfaction (CSAT) score. Across a wide variety of industries – be it finance, energy, technology, shipping or airlines – industry average CSAT benchmarks are often found to exceed 70%, basically the inverse of the poor scores that people assign to their national governments. The question, of course, is why governments do so much worse than other institutions – even airlines, of all things. One possibility could be the quite justified perception that governments around the world are dens of corruption.

Transparency International’s 2023 'Corruption Perceptions Index' (CPI) report monitors 180 countries and territories around the globe by their perceived levels of public sector corruption.

Over two-thirds of countries score below 50 out of 100, which strongly indicates that they have serious corruption problems. The global average is only 43, while the vast majority of countries have made no progress or declined in the last decade. What’s more, 23 countries fell to their lowest scores to date this year.[27] Both authoritarian and democratic leaders are undermining justice. The global trend of weakening justice systems is reducing accountability for public officials, which allows corruption to thrive.

Let’s step back a bit and remind ourselves why this is so important. We began by pointing out that most of the wealth in the world is tied up in the effectiveness (or lack of effectiveness) of traditional political governance systems. We also saw that tiny changes in efficiency can have huge consequences on whether a government can be effective in helping its people. Just a slight change in efficiency can affect whether the economy is going to be equivalent to that of Switzerland or to that of Argentina in recent decades. And given the importance of good governance, we are brought back to the question of when we are going to do something about it.

The good news is that we already know what needs to be done. The first and most important thing to do is continue to develop blockchain technologies and apply them to all aspects of human governance, from the financial system to elections. Doing so will make government actions transparent, and applying the technologies to our financial systems will make them equally transparent. 

Crypto shines a bright light on activities that today take place behind curtains and in smoke-filled rooms, with little to no accountability. The scourge of centralised governance has been a magnet for corruption for too long. It is time to tear down the curtains, kick down the doors of the smoke-filled rooms, and shine the light of transparency on all aspects of human governance, including our financial system. 

Crypto is not the problem; it is our best and only solution to the problem.

[1]

 Pete Schroeder, ‘JPMorgan fined nearly $350 million for inadequate trade reporting’, Reuters [website], (2024), www.reuters.com/business/finance/jpmorgan-pay-nearly-350-million-penalties-inadequate-trade-reporting-2024-03-14

[2]

 US Department of Justice, JPMorgan Chase & Co. Agrees To Pay $920 Million in Connection with Schemes to Defraud Precious Metals and U.S. Treasuries Markets, (2020), www.justice.gov/opa/pr/jpmorgan-chase-co-agrees-pay-920-million-connection-schemes-defraud-precious-metals-and-us

[3]

 Good Jobs First, Violation Tracker Current Parent Company Summary [website], (2024), https://violationtracker.goodjobsfirst.org/parent/jpmorgan-chase

[4]

 US Securities and Exchange Commission, Order instituting administrative and cease-and-desist proceedings, pursuant to sections 15(b) and 21c of the Securities Exchange Act of 1934, making findings, and imposing remedial sanctions and a cease-and-desist order, (2023), www.sec.gov/files/litigation/admin/2023/34-97787.pdf

[5]

 Donato Masciandaro, Money laundering and its effects on crime: A macroeconomic approach’, in Brigitte Unger, (ed.), Research Handbook on Money Laundering, (Edward Elgar Publishing Limited, 2013)

[6]

 ICIJ, ‘Global banks defy U.S. crackdowns by serving oligarchs, criminals and terrorists’, International Consortium of Investigative Journalists [website], (2020), www.icij.org/investigations/fincen-files/global-banks-defy-u-s-crackdowns-by-serving-oligarchs criminals-and-terrorists

[7]

 Ian Talley and Dylan Tokar, ‘Leaked Treasury Documents Prompt Fresh Calls for Updated Anti-Money-Laundering Regulations’, Wall Street Journal [website], (2020), www.wsj.com/articles/treasury-plugs-gap-in-anti-money-laundering-regulations-11600680611

[8]

 Ronald F. Pol, ‘Anti-money laundering: The world’s least effective policy experiment? Together, we can fix it’, Policy Design and Practice, Vol. 3, (2020), pp.73–94, https://doi.org/10.1080/25741292.2020.1725366

[9]

 United Nations Office on Drugs and Crime, Estimating illicit financial flows resulting from drug trafficking and other transnational organized crimes: Research Report, (2011), www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_flows_2011_web.pdf

[10]

 Pol adds the important caveat: ‘The data are poorly validated and methodological inconsistencies rife, so findings cannot be definitive, but there is a huge gap between policy intent and results.’

[11]

 Amnesty International, ‘India: Weaponizing Counterterrorism: India’s exploitation of terrorism financing assessments to target the civil society’, Amnesty International [website], (2023), www.amnesty.org/en/documents/asa20/7222/2023/en/

[12]

 Lyudmyla Kozlovska, ‘Can the EU’s anti-money laundering reform help dictators?’, Open Dialogue Foundation [website], (2023), https://en.odfoundation.eu/a/578069,can-the-eus-anti-money-laundering-reform-help-dictators/

[13]

 Michael Levi and Peter Reuter, 'Money Laundering', Crime and Justice, Vol. 34, (2006), https://doi.org/10.1086/501508

[14]

 Pierre-Laurent Chatain et al., Protecting Mobile Money against Financial Crimes: Global Policy Challenges and Solutions (The World Bank Group, 2011)  

[15]

 Andrew J. Perkins, ‘Does holding offshore jurisdictions to higher AML standards really assist in preventing money laundering?’, Journal of Money Laundering Control,  Vol. 25, No. 4, (2021), pp.742-756, https://doi.org/10.1108/JMLC-10-2021-0116

[16]

 Jennifer Isern and Louis de Koker, ‘AML/CFT: Strengthening Financial Inclusion and Integrity’, CGAP [website], (2009), www.cgap.org/research/publication/amlcft-strengthening-financial-inclusion-and-integrity

[17]

 Judy L. Thomas, ‘HOAs from hell: Homes associations that once protected residents now torment them’, Miami Herald [website], (2016), www.miamiherald.com/news/nation-world/national/article93434422.html 

[18]

 The Miami Herald Editorial Board, ‘Wild allegations at Miami homeowners association show why Florida needs HOA crackdown’, Miami Herald [website], (2022), www.aol.com/news/wild-allegations-miami-homeowners-association-214951325.html

[19]

 Michael Levi, ‘Money for Crime and Money from Crime: Financing Crime and Laundering Crime Proceeds’, European Journal on Criminal Policy and Research, Vol. 21, Issue. 2, (2015) pp.275–97, https://doi.org/10.1007/s10610-015-9269-7

[20]

 Chainalysis Team, ‘2024 Crypto Crime Trends: Illicit Activity Down as Scamming and Stolen Funds Fall, But Ransomware and Darknet Markets See Growth’, Chainalysis [website], (2024), www.chainalysis.com/blog/2024-crypto crime-report-introduction

[21]

 SWIFT and BAE Systems, ‘Follow the Money’, SWIFT [website], (2020), www.swift.com/sites/default/files/files/swift_bae_report_Follow-The%20Money.pdf

[22]

 Leslie Lamport, Robert Shostak, and Marshall Pease, ‘The Byzantine Generals Problem’, ACM Transactions on Programming Languages and Systems, Vol. 4, No. 3, (1982), https://lamport.azurewebsites.net/pubs/byz.pdf

[23]

 Jaques Derrida, Archive Fever: A Freudian Impression, (Univeristy of Chicago Press, 1998)

[24]

 The World Bank, Where is the Wealth of Nations?: Measuring Capital for the 21st Century (World Bank Publications, 2006)

[25]

 Mitja Kovač and Rok Spruk, ‘Institutional development, transaction costs and economic growth: Evidence from a cross-country investigation’, Journal of Institutional Economics, Vol. 12, Issue 1, (2016)

[26]

 IPSOS, ‘What Worries the World - March 2024’, IPSOS [website], (2020), www.ipsos.com/en-nl/what-worries-world-march-2024

[27]

 Transparency International, ‘Corruption Perceptions Index’, Transparency International [website], (2023), www.transparency.org/en/cpi/2023

From Offline to Online Piracy: A Genealogy of Logos
J

Jarrad Hope

24 January 2024
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Peter Ludlow

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Jarrad Hope

8 April 2024
From the Stepped Reckoner to Smart Contracts
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Peter Ludlow

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Jarrad Hope

13 May 2024
Obsessed with Archives
P

Peter Ludlow

J

Jarrad Hope

8 April 2024
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