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“It’s bad form to mention money laundering. Instead, you talk about asset management structures and tax-beneficial schemes.”
— John Sweeney 
Money laundering 201
I wasn’t going to start this newsletter off with another hypothetical, but then I remembered, if it ain’t broke, don’t fix it — so here it goes:
If you were a criminal, how would you go about laundering your money?
Let’s get more specific and use a popular example from this week. If you were a Russian oligarch that needed to launder $1 billion, how would you do it?
Now, if you are a Russian oligarch, chances are you have been one for a long time. There aren’t a lot of new, self-made oligarchs after all. Most of them earned their wealth during the perestroika.
Because you’ve been a Russian oligarch for the past 30-odd years, and presumably you didn’t get that way from being incompetent, you have established systems and processes for laundering.
You have shell companies. You have various corporate structures and (perfectly legal) tax schemes in place. You have relationships at prominent banking and wealth management institutions.
You likely have a web of accomplices and or personal relationships that help obscure the true owner of your assets.
My point is, you have a system that is tried, tested and already operating at scale.
So my question is, if you already have a system that works, why fix what isn’t broken?
Criminal enterprises are just like any other enterprise: risk averse.
The “criminals use bitcoin to launder money” argument has always been a bug-a-boo for me.
This argument assumes, for some erroneous reason, that criminals will abandon their current functional systems for money laundering in favor of a risky, new technology (crypto).
I have no experience operating a criminal organization, but I think it’s safe to assume they aren’t wildly dissimilar to their legal counterparts.
Moral judgements aside, successful criminals don’t get that way by accident. Presumably they have people, processes and technology in place that allow them to achieve their goals.
Organizations are naturally averse to adopting new forms of technology because people don’t like learning new systems and nobody wants to take on the risk of the technology failing.
Here’s a real example from my own life. Blockworks has been using the same CRM since 2018.
I have known for three years that it’s the wrong CRM for us. The thing is…the pain of replacing it is simply too high for me to seriously contemplate.
Our sales team has been trained on it, all our reports get generated from it, we know their customer service team. It’s just so sticky.
And even though we could save money by changing systems, I’m not going to do it. Partially because I don’t want the headache, but partially because my inner boomer distrusts all technology. Besides, the next solution would probably suck, too.
Now, let’s imagine you are an employee in a criminal organization. What sane person would advocate for a new, relatively untested technology to manage your criminal overlord boss’ personal wealth?
Talk about high stakes.
New rule
I’m going to channel my inner Bill Maher and propose a new rule.
Anyone that says crypto is a tool for money laundering must first imagine what a junior employee at a criminal enterprise proposing that to their boss would look like.
I’m sort of joking here, but not really.
Two or three years ago, I spoke to many “crypto teams” at big financial institutions
It didn’t take me long to find out that the “crypto team” meant one, extremely enthusiastic 24 year old who was trying and failing to internally advocate for crypto.
This is my mental model for how criminal organizations would react to crypto as well. After all, they are also most likely run by old guys who hate technology.
Imagine the pitch:
Employee: I have a new way for us to launder money: crypto.
Boss: Bitcoin? Isn’t that a Ponzi scheme?
Employee: No, it’s a decentralized digital bearer asset. But that’s beside the point. We can use it to launder.
Boss: But I already use my bank to launder money. Why do I need something new?
Employee: Yes, but this is…it’s decentralized, you see. There are no intermediaries, so no one could seize your wealth.
Boss: I like my intermediaries. I trust them. I go golfing with my Swiss banker Jan Van Valburg every Wednesday.
Employee: Yes, you like these intermediaries, but maybe you won’t like the next ones. What if Jan gets fired?
Boss: Ok, I will try this with 5% of our funds. But keep in mind, this is my personal money. If I lose it, I will probably kill you.
Employee: On second thought, bitcoin is a Ponzi.
And to all my young employees out there who have had to teach their boss how to PDF a Word document, can you imagine getting them set up with multiple wallets, moving funds cross-chain and washing them through mixing services?
No thank you.
Jokes aside
As I’m sure you can tell, this conversation was inspired by Elizabeth Warren’s bill and recent questioning of Jonathan Levy, CEO of Chainalysis.
The truth is, crypto has a host of issues that make it deeply unappealing for oligarchs and criminals to use crypto.
All great debaters try to force their opponents into black and white terms, and Warren is no different.
The false equivalency that Warren is trying to force here is, “If you support crypto, you support Russian oligarchs.”
There are factual problems with the argument. Crypto is not, and has never been, a good system for laundering money.
The fact of the matter is, on both a relative and absolute basis, far more money laundering happens in the traditional finance system than in crypto.
Crypto is a bad solution for criminal institutions for the same reasons crypto is still uninvestable for most investing institutions. It’s still too small and risky.
Big picture
Zooming out, I think Warren’s testimony does raise some interesting questions.
Specifically, there is a growing divide between political factions that see financial exclusion as a one size fits all policy tool and those who view an open financial system as a basic tenant of free society.
This thread by Punk6529 sums up the latter position quite nicely. The TL;DR is all other rights we enjoy as a society (free speech, assembly, etc…) are reliant on the ability to transact.
Seen in this light, sanctions and other forms of financial exclusion start to seem less like a clever policy tool and more like a violation of basic human rights.
So the facts remain that today, crypto is a poor system for money laundering. The question our industry needs to ask is, “What values do we want in a new financial system?”
A financial system that is 100% permissionless opens it up to criminal activity. A system too subject to rules and intervention risks authoritarianism and cronyism.
There are no easy answers to these questions, but I think this is the implicit trade off society is beginning to digest.
I only hope we arrive at the right conclusion. — Mike Ippolito (Byron will be back next week)
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Written by @MikeIppolito_ and @aaronhasapen.
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