On The Brink with Castle Island - Zachary Kelman (Kelman Law) on the lingering effects of Choke Point (EP.179)

Episode Date: February 15, 2021

Repeat guest Zach Kelman joins the show to break down the contemporary effects of Operation Choke Point from his perspective as a lawyer having worked in compliance and regulatory for large financial institutions. In this episode:  The (pre)history of Choke Point – and how it wasn't a bolt from the blue  How Choke Point was mechanically enforced against the banks  Why industry-wide politicization of financial services is a poor policy to pursue  How Choke Point lasted far beyond its original mandate Have banks been permanently politicized as a result of OCP?  How Choke Point's effects are being felt in the crypto industry What to expect on an ongoing basis Prior episodes in the Choke Point 2.0 series  Iain Murray (Competitive Enterprise Institute) on the history of Operation Choke Point Amber Scott (Outlier Canada) on crypto-bank relationships in Canada

Hello and welcome back to On the Rink with Castle Island. This is the third episode in the Operation Choke Point series. Our prior episodes featured Amber Scott on the reasons why crypto firms have such a hard time with bank relationships in Canada and Ian Murray, which was a deep dive into the history of Operation Shoke Point. This time, we bring repeat guest Zachary Kelman onto the show to explain the contemporary dynamics around Shoke Point and how it affects the crypto industry. Zach Kelman has been on before. He is a managing partner and co-founder of Kelman Law. His experience is in AML compliance and regulatory affairs. He spent a lot of time working with large financial institutions. He's perfectly placed to explain the prehistory of chokepoint

and how it affects the industry today. And our big focus on this episode is how choke point nominally ended in 2015, but the aftershocks are still being felt today and how it has begun to affect the crypto industry. I think Zachary, for his patience, and for appearing on the show, for the third time, let's jump right into the episode. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep.

The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped $75 billion. more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Zachary Kilman, welcome back to On the Brink. This is your third episode, thus making you officially the most prolific guest.

So congratulations on that. Wow. Well, what an honor. I didn't expect that intro. Wow. Well, thank you, Nick. It's always a pleasure to be here. Can you believe that?

Yeah. It's because your prior episodes, we did one on. sort of the international dollar system and how the dollar is not just a financial network, but it's a tool of power projection. And then we did one on the FinCEN files. And, you know, those are some points that we just like to hit again and again. And now we're doing one on choke point and the politicization of the financial sector. And you're totally perfect to talk about it. So that's why we brought you back. Yeah, we should do one that's just a whole episode on my life has changed since I've become this celebrity as a result of the podcast.

That works. Has it? Well, we're not among the biggest crypto podcast, but we are the most focused, I would say, on policy maybe. Well, I don't know. I haven't done the full survey of all the podcasts out there. I'm a believer in you have to find the best, smartest audience, and that still exists. And you don't play for the cheap seats. You go for actual smart people that want real content.

I'm always willing to come on here and speak about these things for that reason. I was one of the listeners. I'm one of the speakers, I guess. You've graduated. Yeah. So we have a small but extremely high quality listener base. Exactly. Very, very thoughtful.

So there's a lot that's happened since you were on last. Technically, the show is about Operation Choke Point or this mini-series. I want to touch on that, but also go beyond that. There's a lot of fun stuff related to sort of AML policy compliance of the bank sector. Some very recent news out of the office of controller of currency, which I presume you saw, kind of mandating the big banks not exercise discretion in who they do business with. Is that the correct way to describe it? Well, okay, so maybe we should set the table a little bit.

And it sounds like this is the bookend of the beginning of Operation Joke Point would be what happened two days ago with this, essentially what the ruling that they came down with from the OCC is January 14th, which should be yesterday, was that the government cannot give you categories and say, hey, these are the categories of things you want to look out for. and instead, this is for the purpose of banks monitoring anti-money laundering, you need to do anti-money laundering compliance policies and monitoring their customers and seeing who's high risk. Essentially what they've said is you have to do the work on your own. You know, your job is to prevent money laundering and have an anti-money laundering policy, but you can't just dump categories, which is what happened with Operation Chug. You have to actually figure out on an individual customer-by-customer basis why you're doing it. Show your work.

It sounded like what their basic message was. Yeah, and I was very encouraged by it because I am still kind of outraged by Choke Point. And, you know, it's kind of like a forgotten scandal. Like a lot of people will say, you know, the Obama administration was scandal-free. I probably consider Operation Choke Point to be a scandal because it was sort of a secret for a long time. and it caused a lot of damage to businesses that had not broken the law, but that just fell on the wrong political side of the fence, basically. So maybe, I mean, we're covering it on this podcast in a number of different ways,

but I really want to hear your take on it. Shall we go back to the origins of chokepoint or maybe even the prehistory of chokepoint if you want to take us that far back? You know me. I mean, I like the whole history. I can't even contextualize it without it. So very quickly, you know, you had the Bank Secrecy Act in the early 70s. That rule required banks to keep track of all their customers and do KYC essentially to begin with

in case there was a criminal investigation or something like that. I mean, this is on the tail end of decade. Within a decade earlier, you'd had all these anti-mafia litigation on the federal level, from DOJ and whatnot. not. So, you know, organized crime was a serious issue that kind of led to that. And the rule, the difference was it was a Wild West before then. It was, and afterwards it was the banks have a job to keep all these records in case, you know, there's law enforcement reason for it. Then, you know, you had the Patriot Act, which I think we talked a lot about a lot. And that, in my view,

was very ill-conceived in a lot of different ways. But it had a rule which deputized the banks and said, hey, it's not enough that you're recording this information. You've got to track at all. You've got to come up with a system. and sort through it all and find out, find your own money laundering and do your own programs. But these, when I say it's ill-conceived for two reasons. I mean, one, the rule behind this is vague. It doesn't tell you exactly what this program needs to do and how. It kind of just tells you you need to have one. And the industry standards kind of been guiding it.

And two, the problem is it presumes that there's this labor market that doesn't exist. I don't even know if it could be trained for, which are people who can sort through bank, documents and find out whether there's money laundering or not. And if you actually think about what that job entails, it's not so hard if you're talking about U.S. banks, but if you're talking about some correspondent banking system all over the world, you're going to have to know about the ins and outs of thousands of hundreds of countries

and thousands of, you know, cities and places all over the world. And it's, you know, who are these people? Sometimes these are in other languages. It's, you know, it's very difficult. So then you had the financial crisis. And I think we've talked about this in the last podcast, but I think the general response was there's pressure to go after the banks. We have all these laws to go after banks. A few years later, they came up with this Dodd-Frank.

But there was obviously not political will to go after bankers, you know, for a variety of reasons, which we won't go into. But, you know, I think the audience can draw their own conclusions on why that didn't happen. But so what you ended up with was a compliance regime. Nobody quite knew what to do. for the first time you started seeing significant penalties post 2008. So, you know, mostly foreign banks, but HSBC and a few other ones, a few major banks. And these were sizable billions of dollars. And if you think about what it costs to maintain a compliance department, you know,

let's just say you're paying 10 people 100 grand a year. That's a million dollars. It's a, you know, a thousand years of that to pay for the worth of compliance for one of those penalties, ignoring the whole time value of money situation in taxes, just to give you a sense of that. So suddenly compliance became a big deal. There wasn't a lot of granular detail about how to run a compliance program. And then the Department of Justice came up with an initiative called Operation Choke Point, which said, hey, this whole swath of industries, which anyone that understands money laundering

knows most of which are actually probably are high risk. But they said category by category, these are the things we want you to certainly. looking at because we're going to start prosecuting people from them. So because the government's now forcing these banks to produce these suspicious activity reports, they're like, okay, so these are the things that are going to be, in our view, suspicious. We're the Department of Justice. Our job is to go after these guys. We're going to end up with this data. We're going to go after these categories. And, you know, it was some things that are, you know, it should be a state issue, in my opinion, but payday lending and things like that. It's hard to defend those folks. Some things that are just

high risk by nature from compliance standpoint, like pawn shops, you know, coin dealers and things like that. But then some of it was just political. Firearm sales, you know, I'm trying to think of of some other things. Tobacco sales even and like paraphernalia for like your, your local, you know, bong dealer would have been caught up in this. So it clearly was political in nature. And from the bank's perspective, they just sort of derisking these folks and targeting them. And I think payday lending was the biggest one because that's a huge industry. So that's Operation Choke Point in a nutshell. And the law that was passed, well, not law, but initiative from the OCC, the guidance was, and by the way, in 2017, once Trump was in office, according to the FDIC, they stopped Operation Choke Point.

But this codifies that, no, banks need to look at these on an individual. level, you can't look at the whole categories, you know. And I just wanted to say that it's kind of funny when you look at the list. It really is kind of a wacky list. You got get rich quick teams and lotteries, tickets. It's almost like it reminds me of that Neemauer quote, you know, but instead it's, you know, first they came for the, uh, the, the lifetime memberships and, uh, in bongs dealers, you know, but nobody was there to care. And then they came for the crypto community. That's right. That's, uh, yeah. I've seen that quote.

I don't know if I want to use that, reuse that quote. It's kind of a Godwin's law situation. So you would contextualize choke point. It was not a bolt from the blue. It was kind of a progressive, it was just the latest step in the progressive creep of sort of deputizing banks for sort of state purposes. Is that how you would put it? And if you look at the list, you know, it's from the context of someone who knows, There's a bunch of these that are high risk industries, you know, money transfer networks.

And, you know, like I'd mentioned, coin dealers is a good example because, yes, coin dealers are a really good vector for money laundering. You know, the coins can be worth a lot of money and you can do it in cash and that makes sense, right? Or get rich quick products. These are the most unpopular. I believe telemark, I don't quote me that, but I believe telemarketers are on this list. And I think that tells you all you need to know about, you know, who are the people that are. being targeted by this, right? Yeah. And no one wants to defend most of these categories of industries. I mean, for the most part, they're pretty reprehensible, if we're going to be honest. Yeah.

But, you know, like no one likes payday lending. I don't even think the clients are payday lending like payday lending. No, it's awful. It's usurious. And, you know, the point is that it's legal and it's on a state-by-state level. I was traveling from Arkansas to Oklahoma one ton. And what's funny is you cross the border and you immediately see dozens of these payday loans because it's illegal in Arkansas and it's legal in Oklahoma. Maybe it's the way around. It's the state issue. It's the same with fireworks. I went to Pennsylvania to buy fireworks last New Year's Eve and bought some gigantic fireworks.

And then, you know, illegally set them off somewhere. I hope nobody retroactively enforces illegal fireworks setting off. But yeah, so what's the problem with having federal kind of sanction on whole industries and using the banks to do that? What would be like the correct mechanism to do this? You have to buy into a classic slippery slope logic to be concerned about it. I mean, I think the issue is how do you get this? Okay, so I should say from the perspective of a regulator, how do you get this thing started? it because I mean, this may be my opinion.

I don't know where else you're going to hear this, but I think there was kind of a failure to launch issue when they passed a Patriot Act. The banks didn't quite know what to do. You look at all these whistleblowers before the financial crisis who were saying compliance departments at banks are a joke. And we saw what happened with the financial crisis. And again, that's not really money laundering related. But there wasn't a huge crackdown on bankers for the issues that caused the financial crisis.

But there wasn't a crackdown on AML compliance. And this is just laying out categories of what the banks need to look at. Like I kind of look at it as a smuggling in of some areas that are, you can look at it, depending on which category you look at, there's different motives. There's motive A. These are actually helping banks figure out these are the groups that are money laundering vectors. Like I mentioned, coin dealers. I'll give you one example. This isn't on an operation choke point, but if you look at the lists of what are considered high risk industries,

Most doctors offices are not that high of risk except dentists. Well, why is that? It's because dentists deal in gold and silver and whatnot. So theoretically, they're a higher ML risk vector. So that's why coin dealers and things like that are on there. And then there's other issues which are, hey, we want to be, we went to legitimize this list and go after bad people that nobody like. So, you know, racist pamphleteers and, you know, telemarketers and, you know, escort services and whatnot. These are, you know, and I think some of them are legal.

And in Las Vegas, most of these are legal, I think. If it's illegal, I don't know why they'd have it on here. But in any event, the point is that the second category are bad guys that nobody likes, nobody wants to stand up for. But the third category are these political groups, you know, that they'd like to smuggle into the bad guy territory. The fireworks literally, like you'd mentioned, it was on one of the targets, if I recall, of, of choke points.

So, in firearms, obviously. obviously is another one. And firearms, yeah. That was probably the one that cop. Actually, I think the people realized this was happening when adult performers started getting kind of de-platformed, you know, like webcam models, that kind of thing. And again, like pornography, not illegal at the federal level. Supreme Court's very clear on that. I guess if you want to make some genre of activity illegal, you do that through the courts. You don't try and subtly ban that thing from existing through the banks? Yeah, it's a, it hits two strange areas that are modern that, you know, are concerning.

One is just this general federalism. I don't even know if we use the word federalism for this anymore, but the erosion of checks and balances and consolidation within the executive branch of power. So this, how did this happen? Well, the DOJ just said, hey, we're going to start going after these guys and let, you know, the FDIC, the regulators of the banks know this, and then they told the banks this, right? So it became this kind of behind the scenes bureaucratic dance from the executive branch. Legislators didn't have any say in it.

The public didn't choose their legislatures. Like I mentioned, these were meant to be held by states. That's why they have payday lending laws in states. None of that mattered. And then secondly, the deputization of banks is a mechanism of power, of federal power. So the, you know, the government used this deputization of banks to crack down and de-risk and, you know, to prevent these groups from having commercial activity. And they clearly chose the baddest of the bad guys that nobody likes. I mean, I keep going back to telemarketers, but I just feel like that one says at all, you know.

That's the problem with sticking up for the principle is that you end up having to stick up for the worst examples. It's kind of like with free speech. like free speech is a great principle to defend, but then in practice, you end up having to defend completely odious speech. It's kind of the same with sort of high-risk businesses. Well, what would you say, like how do they get the banks to comply? I mean, if you're the DOJ, how do you actually get the banks to do exactly what you want them to do? It seemed like with choke point, what they did was they just, they sort of indicated that there was an investigation or initiative that, went to other regulators that they found out about.

The regulators are collecting all the information in regulating banks directly, that these categories are what they're going to be looking at, what they've deemed as high-risk activity. And so they made a list. And that's what they did. Before then, like I mentioned, you had the law saying you need to come up with an anti-money laundering program. You know, there's, there are, we know what money laundering is as a crime in the federal code. So that was what the banks had to work with.

And so this rule made it specific. Now, these industries are what we consider high risk. And so it was almost like, I don't want to say it's a mystery. It's not a mystery. Banks and regulators should know what money laundering it is and what high risk is. But they removed a bit of that mystery by painting in, you know, putting some color to it and saying these are the categories that are high risk that we're going to start looking at closely. So you better, you know, focus on them.

And you can look at sanctions as an analogy. You know, the government knows that, hey, Venezuela, you know, Cuba, North Korea, places like that, they have to look very closely at them because they're sanctioned. So it's a little bit like that, I would say. That's the way that it gets communicated. So for context, this kind of started, and I believe in 2012, 2013. I think the FDIC circular went out in 2012, if I'm not mistaken. And then fast forward to 2015, a bunch of businesses and industries rightly start to freak out because they realize their bank relationships have been withdrawn all at once.

And I believe he was representative, a Missouri representative might be mispronouncing his name, Ludemeyer, who kind of called attention to this and had some subpoenas and so on and convinced the FDIC to stop. So, you know, purportedly it ceased in 2015. But in reality, I don't want to get too kind of conspiratorial here, but it's obvious that banks still exercise this industry by industry approach to determining whether they're going to do business with firms, banks and payment processors. Right.

And kind of downstream from banks. So, for instance, you know, if you work in the adult industry, you almost, undoubtedly have a very hard time with your bank relationships. And of course, the crypto industry, we all know this, people in the crypto industry, almost every entrepreneur in the crypto industry has a story about being deplatformed from a bank and having a hard time, especially getting commercial bank relationships. So is it possible that this guidance was just sort of internalized and banks began to practice it kind of informally, even though? though they didn't have any explicit guidance, how would you explain the, you know, the apparent

persistence of these sort of industry-wide kind of red linings that seem to keep going afterwards? Yeah, I know. I think you kind of hit the nail on the head. The wrinkle that I would put on it is this. I've noticed that there's a difference in terms of how the largest banks behave prior to the financial crisis and post-financial crisis. And to me, I think they behave in a more cartelized way than they did before, before they seemed to be more self-interested. And there's a positive aspect of this as well, because it was that self-interest that in many ways led to the financial crisis,

that they weren't interested in stability. They were interested in individual self-interest. And obviously, the difference to me is Dodd-Frank. And obviously, Dodd-Frank did a lot of positive things for stability in terms of making them do stress testing and whatnot. But one interesting provision of Dodd-Frank is a provision which required all these large banks to become bank holding companies. So they had to buy commercial investment banks and so forth. And one, two, they became regulated by the Fed.

And by the way, I shouldn't say they're required. Doing this became the only mechanism by which you could access the discount window and get unlimited loans from the Fed. Goldman Sachs bought some little bank in Utah to jump into that. But the interesting part of this that I think is kind of glossed over is that it's impossible to no longer be regulated by the Fed. So there's no exit. I had a professor in law school that used to refer to it as a Hotel California provision of Dodd-Frank because once you get in, you can never leave. And I wonder to what extent banks are now sort of permanently deputized. They don't have an exit strategy.

They don't have this mechanism of pure self-interest. They now kind of permanently tied to the Fed and to the system and to the dollar in a way that they weren't prior to. So, you know, putting, I'm just putting it in broader context. I mean, there's no doubt that the banks have kind of gained this sense of what are the industries we're supposed, that we'll get dinged for in which ones we won't get dinged for, right? They're just, their role is as a deputy, but also as the potential target of punishment. And it's worth noting. The targets that have gotten hit by the banks are mostly foreign banks.

They really, I mean, I can't, there's a few for like Citigroup got hit for some really nasty It was not AML related, but some sort of fraud on customer fraud. But yeah, from an AML standpoint, it's mostly been foreign banks. But that's the mechanism. It's a stick and carrot approach, which they can never get out of at this point. Sure. So what do you expect from the coming administration? I know that's kind of a hard question to answer.

Do you see a resumption of explicitly kind of trying to deputize banks for political purposes or no different from what we've seen under the Trump admin? Like, what do you expect? I mean, I think it's just going to be a good, it's, the Trump administration was a bump in the road for the direction. And it looks like this recent OCC rule is just a really big roadblock they put up, but it's not going to stop the train from going, you know, going forward. And again, that's my opinion.

But when I look at that list, if the list I saw was, purely, like the list isn't operation choke point targets, didn't contain guns and didn't contain telemarketing. I'd say, okay, good, they're helping these banks get a color on what is high risk anti-money laundering activity and what's not. But the fact that they've included A, political targets like guns, manufacturers, and B, baddies, like telemarketers, that people they don't like that the public doesn't want to defend, suggest that there's a longer-term, you know, kind of strategy here.

and banks are going to be increasing deputized to go against these groups. And so that, you know, I look at what the OCC has done here, you know, yesterday. I mean, frankly, it's very positive. They're trying to institute a roadblock. The types of language they're using in this initiative are very, you know, kind of general. And they're noting how across the board, this is how it's supposed to work. And like I said at the beginning, it's, hey, you know, show your work. You have to actually, this, you know, you passed, we pass all these laws around anti-money-lottering

to stop money launderers, you're going to need to prove that this bank decision to de-risk this client is about that thing. You know, they're stopping this kind of regulatory shift toward politics, you know, a lot of like what we're signing with the other post-9-11 rules, which at the time were about stopping, you know, Osama bin Laden and his people. And, you know, I think it's not a difficult point to argue that that's shifted into other direction. Yeah, I think it was a conversation I had with you, which inspired me to read

Treasury's War, the book by Zarate. I don't know if you've read that one, but an incredibly eye-opening book about, you know, former member of the Treasury explaining how they realized that they could use the Treasury's tools for explicitly political and sort of strategic and military. objectives all in the wake of 9-11 and how that they undertook that process of learning and really begin to turn the treasury from this very sleepy backwater into a really active tool of international power projection so total side note but I recommend that for all bit corners yeah I think the issue is that we've become such a partisan society that we

that we forgot what politics is you know you create power and The power will do things that politics deem, and politics is this kind of game between various power brokers. So a lot of power was created in these laws, and it's reflecting a political reality. If it had not been Obama, maybe there would, and it was, you know, I don't know who was maybe McCain, maybe Romney. I don't know. Maybe instead of gun manufacturers on the list, it would be like abortion clinics or something, right? Yeah, yeah. You don't have to be too creative to imagine how it could have gone the other way.

That's absolutely right. But it's always hard when these regulations and state intervention is sort of furthering your own political objectives. It's hard to see how it could get turned on its head and be turned against you. Right. The goal, I think, is take a step back. And again, telemarketers, come on. Why is that on this list? Right.

some baddies to put on there, so nobody would want to defend it. And in which case, yes, perhaps they were trying to find legal cover or kind of public opinion cover to do a good deed of spelling out actual money laundering. But to me, the telemarketer thing is there because the firearm sales thing is there, not because, you know, the payday lenders thing is there, right? So on another topic related, there's an interesting news story. that broke, which is really being used as a stick to bash Bitcoin with, which is unfortunate. But it appears that a French individual sent around $500,000 worth of Bitcoin to various kind of

far-right political figures, you know, like Nick Fuentes and other folks on the right, and then some of whom subsequently participated in kind of the riot of the capital. And this is like a perfect storm for people who don't like Bitcoin. because now we have quote unquote evidence, the Bitcoin quote unquote financed the attack on the capital. Although as far, I mean, rioting is kind of a free activity in my view. So I don't know why it needs to be financed. But that aside, you know, this is sort of making me a little nervous that we're going to see some kind of like Patriot Act 2.0 in the wake of the riot or insurrection, whatever you want to call it. And Bitcoin will be one of the,

one of the things, which is, you know, specifically attacked or gets more focus. Do you kind of have a view on this? Yeah, I mean, you can just look at the rules that have already been proposed about, you know, a general direction of how non-custodial wallets are being treated, right? I mean, that's if you're, if regulated financial institutions are the only groups that are allowed to hold Bitcoin on your behalf, you can own it, but they have to be holding it, again, I'm not saying there's a rule that says that, but that seems like the direction that they're pushing, the regulators are pushing toward. Then there is no issue with this, right? So if you believe in individual privacy, you have to defend all of these people and what they're doing with the money.

You can't just decide that these guys are the baddies. And again, they did the same thing a few years ago with terrorists and terrorists moving Bitcoin around. And the position, the correct position is and it will always be, you know, what about cash? Cash is used for this as well. Somehow, I don't know. I just think that we're all in this crypto news. I put the onus on people in the crypto space

that are buying into this. People that are outside the crypto space, it's nonsense. They're not going to know, they don't know what's going on. They're going to view this as money laundering. But the people in the crypto space that I've seen retweeting and pushing, oh, my goodness, it's so evil, this is so great. I know a chain analysis came out is very proud that they tracked that this happened.

if they did some great service. At some point, there wasn't like all these groups that try to track crypto and make it no longer private with a mask slipping moment. In the past year or two, they just tore the damn mask off, threw it on the ground, stomped on it, and said, this is not about privacy. We're going to track everything, basically. I never really saw it in a subtle way. Yeah.

It perturbs me somewhat that these chain analysis companies always champion the quote-unquote transparency of Bitcoin. It's very convenient as a rebuttal to people who say the Bitcoin is from money laundering to say, oh, no, no, no, it's transparent. You know, we tracked it. And in fairness, in this case, tracking it was the easiest thing in the world. It's not like chain analysis is like pulled off anything magical here. All these guys have had static Bitcoin addresses on their websites for years. So you don't have to be a genius to track this stuff. But somewhere along the way, we forgot that all of the cipher punks were super focused on true privacy, true transactional privacy. And I'm sure I don't want to invoke Satoshi, but I'm sure Satoshi himself would have been

trying to layer on more privacy to Bitcoin. And, you know, I'm nervous that we've got stuck at this kind of local maximum where we have just enough privacy for it to sort of be reasonably good, but not enough privacy. for it to be a truly mature system. And in fact, the lack of privacy is now a selling point. Right. It happened overnight. There was no transitional period.

Yeah. This was kind of one of the more educated critiques of Bitcoin, I suppose. I wonder what the prospects are for actually reversing that. I mean, do you feel that it's inevitable as Bitcoin gets more financialized as we get more you know, large financial institutions that get a stake in it, that they will basically push for the not only the transparency of the blockchain, but also the, you know, basically bifurcating Bitcoin into the lit and sort of the clean sectors of the market, or the lit and the dark sectors. I mean, literally that was like a crackpot conspiracy theory I thought of five, six, seven

years ago. Oh, that's going to be the light area and the dark area. And I just, It was just me, like, thinking I'm really smart, making up what's going to happen, like, total tinfoil had and literally happen. Yeah, I wrote an article for Coin Telegraph recently where my basic point is, okay, we had the Bank Secrecy Act in the 70s, which was designed to collect information for crime. And originally, that's what these analysis tools were like five, six, seven years ago, you know, elliptic and whatnot, where it's, okay, the government catches actual criminals, people that, that, you know, hack exchanges like Mount Cox and whatnot. And, you know, these groups help trace that and trace the coins and make it, and it worked. That was a decent system that no one really object to that.

That helped Bitcoin. It helps the system because of people that are actual bad guys that steal and commit actual crimes and steal people's crypto, it makes it harder for them to do anything with it. So that was useful. But, you know, trying to make it so that you need custodians. and they need to track who it is, and we're eventually going to use all this metadata to figure out who's in the safe coin and, you know, and who's not. And, you know, like, to me, the good area is the gray area where you don't really know where it comes from. Like, the way I put it in the article was you have white, you have the light area, which they're trying to create where everyone knows where at least banks and institutions know all the data on the blockchain.

You had the dark area where, you know, are actual bad guys who, people that hack Mount Cox and whatnot. But everything in the middle is gray. If gray is not the enemy, it should be a system. We don't need to know where ever, we don't need a panopticon. We don't need to know everything that's going on. You just need to know once you have criminals where they got the money from and kind of trace that. And that utility was built into Bitcoin. And I'm sure that was on some level of feature.

And the thing I keep coming back to is just the fact that for whatever reason, the state has decided that their number one way to go after crime is through the financial vector. and not just to identify crime, but to sort of inhibit it and to try and almost prosecute criminal elements by freezing their bank accounts and by, you know, stopping their ability to get financed. And somewhere along the way, we got incredibly lazy and forgot about actually going after crime and meet space, like in the real world. And it's almost like the financial vector became a substitute for actually putting in the work to go after criminals.

Right. Look, it's political. You know, people don't like crime and people vote. So in a healthy political system, criminals go to jail not because the public doesn't like crime. But in a highly politicized system where it's not responsive to public's will, politics will determine what's bad. So you'll have, like on some level, the fact that telemarketers is on Project chokepoint shows that the public has some power here because people that everyone hate are on this list. But the firearm sales part shows that there's a political element to it for whatever reason, ammunition sales or whatever, whichever it was on that list, fireworks, right? So the actual political targets are on there.

Yeah. So last time we had you on the show, we talked about the FATIF a lot. And I guess the FATF stuff is still sort of percolating through. I don't know if it's 100% related to the FATF, but Fin Sen had their guidance, of course, or proposed rulemaking, I think it was called, you know, dramatically increasing the disclosure burden for exchanges. Now the news on that is that the comment period has been extended, which will take us into the next administration.

So does this kind of freeze the rulemaking? What do you expect from that? I mean, how do you think that the next, you know, successor to Manukin will sort of inherit this? And what will they do with that? I think if you put on the full-on, you know, regulatory capture hat, things make a lot of sense. And if you don't, it just doesn't make a lot of sense. So I think the rules will be designed to make sure that banks and Wall Street and whatnot have as much control of this as possible. I think there's assurances and communication there.

And again, this is speculation right on saying I'm in on these chats, but this is my best speculation on it and that the rules will continue to shift in that direction. And I think the crypto institutions that work their way in that route, the easiest way to get in there is to get your bit license and, you know, make your dues will benefit from it. And I think ultimately banks will get into that. I mean, last year we saw Germany allow its own banks to get involved in crypto. So to me, there are places that are encouraging it. And again, it's kind of shocking that banks haven't gotten in on this, you know, custody and things like that. So.

Well, I mean, we have, we have the bank charters in Wyoming. Now we have the crypto bank notion from the OCC, although I don't know if that's going to last because the leadership's changing at the OCC, but Anchorage got a charter as well. And we have Switzerland and Singapore. I believe, where banks have the equivalent of bank charters or crypto firms are also banks now. So it's sort of changing a little bit. I'm sort of excited about the intersection between crypto firms and banking. If I had to put as glib and succinct as I could, it's almost like the systems is going to continue exactly as it is.

The difference, the only casualty is going to be the dollar, right? So if Bitcoin is going to survive because it's going to become more like the dollar in every way, other than its inflationary aspect, right, in the sense, it seems to me that the regulatory apparatus is just pulling it in and, you know, institutionalizing it to serve the same role or similar role. That's an interesting hypothesis. So you're kind of suggesting that even if the dollar loses its dominance as the kind of reserve currency and the main medium of exchange for international trade, the U.S.

financial apparatus that mediates those dollar transactions could service a different asset, but it would remain in place. Yeah, I mean, yes, I don't think it's a conspiracy that I would say it's almost like there's not enough power to stop that from happening. It's, you know, if you can't beat them, join them kind of thing. And you mentioned Singapore and Switzerland and, you know, the direction of current OCC and Treasury Department's headed and kind of just the nature of the technology and the nature of the dollar. I mean, look at the efforts the Fed's had to go through since a financial crisis to keep it afloat,

the amount of income equality that's caused. And, you know, I don't think they really have many other options. I don't think it's, I don't, you know, I think they're just kind of reacting to it and trying to find a way to keep their powers kind of base in place and keep their plans. going forward and you know there's not much anyone could really do about it so and maybe this is getting more into your actual line of work here so you know since we talked Hong Kong was kind of I don't know what the right word is but basically sub subjugated by you know China basically and Singapore actually interestingly took like a hard right turn as far as I can tell so but they became sort of more nationalistic and more hostile to foreign entrepreneurs and so on.

So, and additionally, the UK totally turned against crypto. The FCA really said no more, no crypto businesses allowed here. So, and of course we have these hostile rules from FinCEN, don't know if they'll stack up, but there's an interesting situation developing where some places that we kind of thought would be havens for crypto entrepreneurs and, you know, places to do business with cryptocurrency are becoming closed off one by one or kind of turning away from the industry. Obviously, Malta also sort of turn their back on their sort of formally pro-crypto stance.

Are there still havens? Like, where would you kind of recommend that crypto entrepreneurs consider as a domicile in light of all these changes? In general, I think you look back at, I think our first conversation, maybe it was around springtime or over the summer. You know, we were talking about how it seems that there's this general fragmenting of the world economy and kind of nationalism, things like that. And I definitely think that, you know, the winds of change have turned the opposite course. I think the plans from FATF with the travel rule have been more and more successful.

And it's interesting, you look at a lot of the offshore jurisdictions that you would normally expect to resist this, the ones that have been more resistant against FATCA, which was this kind of, you know, international requirement for banks all over the world to disclose U.S. money so that they could tax it, kind of a compromise there. The countries that would fight that are not really fighting the travel rule and embracing it. So I don't know. I think honestly the bottom line is, you know, people are going to have to play by the rules. There's not a really, the loophole's, the system that was gray is not, it's becoming kind of flacker. I don't, I don't know, know whether you mean black or white, but basically it's becoming a situation where you're going

to have to play by the rules and be really careful, especially if you're American or associated with Americans. And it does seem like UK is increasingly going that route, although the UK seems more targeting finance crypto institutions in that country, as opposed to users. America is just kind of, you know, the global police on this one. And as mentioned before, I don't, I think European countries have staked an interesting position. And like I mentioned Germany, once their banks to succeed to their, they're being really lenient on their banks as it relates to crypto. Countries like Portugal and France have said that crypto transactions are exempt, so they don't have to worry about pushback from their population, likes to trade crypto, and you're allowed to do that

without any kind of oversight as long as you don't take it into fiat, at which point you pay it, I think a reduced tax in these countries. So there's, but what are you going to do, become French? You know, there's not many options you have to be American. So I think you've got to play by the rules. And, yeah, I mean, I think the things that you're getting the signal that these institutions like, and remember, SEC told us a few years ago they like Bitcoin, they like Ethereum, are the things that will be safer.

That world's going to get safer. And the things that they've indicated, they don't like the dark coins and whatnot are going to be less safe. Well, so ray of light in the darkness, perhaps. Zach on that somewhat sobering note, we'll end it there. But this has been great as always. Hopefully we can get you back on in, you know, eight months or so. And you can, you know, paint a sunny picture of how things have changed in crypto.

But either way, thanks so much for coming on. Totally pleasure. Absolutely. I'll be back. And, yeah, bottom line, though, is the OCC initiative from yesterday was very positive. So we'll leave on that. Love it. All right. Thanks again.