The Breakdown - Where Europe Fits In a Tech-Powered World

Episode Date: April 3, 2022

This episode is sponsored by Nexo.io, Arculus and FTX US.    On this edition of “Long Reads Sunday,” NLW reads:   On the EU Giving Up - Punk6529  Crypto Should Disrupt Current Anti-Money Laundering Practices, Not Adopt Them - Boaz Sobrado  - From cash to crypto in no time with Nexo. Invest in hot coins and swap between exclusive pairs for cash back, earn up to 17% interest on your idle crypto assets and borrow against them for instant liquidity. Simple and secure. Head on to nexo.io and get started now. - Arculus™ is the next-gen cold storage wallet for your crypto. The sleek, metal Arculus Key™ Card authenticates with the Arculus Wallet™ App, providing a simpler, safer and more secure solution to store, send, receive, buy and swap your crypto. Buy now at amazon.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Consensus 2022, the industry’s most influential event, is happening June 9–12 in Austin, TX. If you’re looking to immerse yourself in the fast-moving world of crypto, Web 3 and NFTs, this is the festival experience for you. Use code BREAKDOWN to get 15% off your pass at www.coindesk.com/consensus2022. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with today’s editing by Rob Mitchell and Eleanor Pahl, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “I Don't Know How To Explain It” by Aaron Sprinkle. Image credit: artJazz/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8. 

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, April 3rd, and that means it's time for Long Reads Sunday. Before we get into that, however, if you were enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX.

All right, so for this Long Read Sunday, we are doing a combo. We're going to read one thread and then one written essay, and they both kind of come out of this discussion that we've been having around the European Union and the European parliaments vote this week to add new pretty cumbersome AML rules to unhosted wallets. The first is a thread from the one and only punk 6529. It's called On the EU Giving Up. I watched a panel on AI and machine learning at a conference hosted by the European Commission. Nine people on the panel.

Everyone agreed that the USA was one. 100 miles of the EU in machine learning and China was 99 miles ahead, except for those who believed that China was 100 miles ahead of the EU and the USA 99 miles ahead. In any case, everyone agreed that in the most important technology of the 21st century, the EU was not on the map. The last person on the panel was an entrepreneur. He noted that the EU had as many AI startups as Israel,

a country 150th the size. And, by the way, two-thirds of those were in London that was heading out of the door due to Brexit. So basically the EU had one-third the AI startups of Israel, and this was a few years ago. So the panel discussion turned to what should the EU do. And the more or less unanimous conclusion, except for the entrepreneur, was, we're going to build on the success of GDPR and aim to be the regulatory leader of machine learning. I literally laughed out loud.

Being the regulatory leader is not a real thing. Imagine it is the early 20th century and imagine that cars were invented, and that the USA and China were producing a lot of cars. The EU of today would say, building cars looks hard, but we will be the leader in stop signs. This is defeatism. This is surrender. This is deciding to be a vassal state of the United States and China in the 21st century. The EU is already a web-to vassal to the U.S. tech companies. None of its own, so it has to try to limit their power. And it is a form of defeatism whose implications are just starting to show. If the EU decided that it would not make cars in

the early 20th century, the loss would not only be no car manufacturers. It would be loss of all types of industrial and manufacturing expertise. There would be no Airbus. There would be no BMW. There would be no German companies selling high-precision equipment to Chinese manufacturers. The fact that we can sit in a hip cafe in Barcelona and not break our backs in the fields like our ancestors is because over the last 150 years, Europe industrialized and, in many areas, was the world leader. German car manufacturing, for example, was in many ways a leader for a long time. I think it goes without saying, but I will say it. Industrial capacity is dual use. If you can make cars, you can make tanks. If you can make self-driving cars, you can make self-flying drones.

And while maybe in the future we will have peace in our times, today the world is still a rough place. If you want to protect European interests, yes, it is nice to project soft power and culture and values. I am all for it. But you also need to be able to defend your borders and your values, and even better, have enough of a deterrent capacity that no one would dare. The basis for development and industrialization in the 21st century is one and only one thing. technology, machine learning, crypto assets, robotics, biotech. These technologies will raise the quality of life for citizens and civilians, but also drive military strength. The idea that Europe can concede the field in these areas to the USA and China and just be the referee saying you can't do this and you can't do

that is a complete joke of a strategy. Now, this is not officially the strategy. Officially, the EU is for all these things, but done under the careful guiding hand of Brussels. It won't work that way. You can maybe build military aircraft in a centralized way, but tech fields are built on startups. Startups need flexibility, and startups are mobile. Given the wide range of actual and proposed restrictions on, say, machine learning and Web 3, why would any startup that has a choice not try to launch instead in the United States? And the best ones will find a way to do it, and the EU will be left with the less good ones. The EU already has some structural disadvantages in startups, smaller fragmented national markets

without a common language, less flexible labor markets. And you add on, here are a bunch of rules that your competitors across the Atlantic don't have. Well, good luck to you. But not everything is about money, 6529. Sure, but this is not about money per se. This is about industrial capacity, the ability to operate a modern productive society. The social rights of Europeans, the social benefits, are paid for by prior industrialization efforts. If you want your kids and grandkids to also have that sweet, sweet European life, well, you, Anon, and your elected officials, have to do the work like your grandparents did. The world is a competitive place. There are no free lunches. The idea that the Europeans can rest on their laurels for 50 years, while the Americans and Chinese do the work of digital industrialization,

and also expect that the Europeans will have the best lives in the end, well, that is a fairy tale, a bedtime story for children. I am of European heritage and currently live in Europe. I can assure you it is perfectly possible to grill fresh fish and drink nice coffee, and also not have dumb ideas about the future of technology. You can do both. The EU should try to do both. Europeans are smart, but often constrained. America might do a lot of things wrong, but the wide open space that it provides in its mythology is very powerful. The EU should encourage its citizens to take more innovation risk, not less innovation risk. This thread is a bit off topic from the focus on decentralized crypto rails, as a counter to the centralizing force of machine learning, but it is all related.

The EU's overly conservative position on Web3 is a subset of its overly conservative position on all tech. The EU is the only other economy in the weight class of the United States and the only economic superpower that also believes deeply in constitutional democracy. It is important that the EU comes along for Web 3 and for a rights-based approach to digital architecture. Now, this is a fire thread from 6529. And of course, there are a million specifics that one could debate around industrialization and war and defense and all those sort of things. But I think that the point, that people have to be future-oriented and they have to ask, how the decisions that they're making today will impact future generations in terms of productive

capacity in society is a super important point. The only thing that I will say is that I disagree with the letter, if not the sentiment, of Punk's point that, quote, being the regulatory leader is not a real thing. I think that there is a chance to be a regulatory leader. And that neither means what I think he thinks Europe thinks it means, which is being the referee for new technologies, nor is it what the average libertarian might think it means, which is having no rules whatsoever. Instead, it is some sweet spot, some combination of incentives for entrepreneurship, investor protections that keep the rails on, respective property rights, and so on and so forth, that actually does allow a polity to become a regulatory leader. The challenge,

of course, is that it just doesn't seem like that's the type of regulatory leader that the EU wants to be right now. But it's a very big place with a lot of different types of people. And certainly there are a lot of voices who are looking for exactly those lines. And I'm excited for one to support and amplify them when I can find them. Looking for ways to step up your crypto game? Then go with NXO. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily. Ideal for you hardcore hodlers. You don't even need to sell. Instead, borrow instant cash against your assets. Get the most out of your crypto with nexo at nexo.io.

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Buy Arculus on Amazon today. The breakdown is sponsored by FTXUS. FDXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDX U.S. is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FtX app today and use Referral Code Breakdown to support the show. Speaking of regulatory practices, the other piece that we're going to read today is from CoinDesk, and it's by Boaz Sabrato, a London-based fintech analyst and cryptocurrency enthusiast. The piece is called Crypto should disrupt current anti-money laundering practices, not adopt. them. Modern know-your-customer anti-money laundering regulations are ineffective. Crypto represents a better

option to address this problem. Until the early 20th century, highly respected doctors would routinely engage in bloodletting to cure ailments ranging from acne to tuberculosis. While we have left bloodletting behind, we are still engaging in putatively helpful but variably destructive practices. Modern know-your-c-c-money-laundering, K-Y-C-A-MLailations are equivalent to financial bloodletting today. They do little good and may cause a lot of harm. Yet whether we like it or not, the KYC AML nightmare is coming to crypto. A few weeks ago, news broke that a consortium of U.S.-based crypto companies had formed trust, a travel rule compliance platform that expands financial surveillance. Incorporated companies must abide by the law of their local jurisdiction.

Yet crypto shouldn't blindly follow legacy AML rules from the Financial Action Task Force, the Global Money Laundering and Terrorist Funding Oversight Group. It should disrupt them. A recent phenomenon. The idea of money laundering is a relatively recent one. In 1970, Richard Nixon passed the euphemistically named Bank Secrecy Act, which required financial institutions to spy on their customers. Keep in mind, Al Capone and other U.S. mobsters had already been successfully prosecuted for tax evasion 40 years before. The Bank Secrecy Act was passed. Since then, the scope of surveillance has grown exponentially. For example, banks in 1970 were required to report transactions in excess of 10,000. Today, the limit remains 10,000, but 10,000 in 1970s is equivalent to 73,000 today.

Only after the 1990s did the rest of the world criminalized money laundering, mostly because of U.S. pressure after the 2001 terrorist attacks on the World Trade Center and Washington, D.C. What have been the results of this policy experiment? According to financial crime specialist Dr. Ron Paul, very little. Current AML rules don't stop the vast majority of money laundering. The United Nations estimates that less than 1% of all criminal assets are seized globally, meaning that over 99% of criminal assets get laundered with impunity. Why would criminals use the relatively small cryptocurrency

market to launder funds on a public record when they can easily launder billions through the conventional financial system without a trace. AML regulations also come at a great financial cost. Worldwide spending on AML and sanctions compliance by financial institutions is estimated to exceed $180 billion a year, about 100 times more than the $1 billion to $2 billion in criminal assets that get seized annually. Social costs are also high. The bureaucratic rules designed to keep criminals out disenfranchise millions of legitimate customers. More often than not, these are marginalized groups. If you live in a smaller poor country, you might find it impossible to jump through the arbitrary hoops designed by a San Francisco product manager on the advice of a London lawyer. The author has personally

been locked out of accounts because a small EU government-issued document was not accepted as a valid proof of address. The company's KYC service couldn't comprehend that there are places where people do not use utility bills to prove residents. AML departments and financial service companies are more about complying with AML legislation than actually stopping money laundering. A 2014 study found that identity verification, quote, principles, guidance, and practices resulted in processes that are largely bureaucratic and do not ensure that identity fraud is effectively prevented. In other words, fraud has been growing at astronomical rates worldwide, and KYC laws have already greatly contributed to this. People are now accustomed to share their personal identity documents with a wide range of

actors ranging from banks to telecom providers to pornography websites. Is it surprising when their information gets compromised? Crypto is well suited. How can cryptocurrency disrupt AML Cryptography-based systems are uniquely well-suited for proving identity and source of funds. Moreover, they can do so in a privacy-preserving and transparent way. For instance, you could open accounts at a centralized entity suit anonymously, using a public key verified by a trusted authority. That way, you only have to trust one entity with your details. A similar privacy-preserving method could be used in decentralized finance using zero-knowledge proofs. Indeed, there is evidence that crypto is starting to disrupt

sanctions enforcement. Coinbase announced it had limited access to its services in 25,000 wallets that may be related to sanctioned Russians. The non-custodial privacy-focused wallet, Wasabi has announced it will be blocking sanctioned addresses from its coin join pools, meaning that users can be confident they won't be mixing funds with sanctioned individuals. These measures, while countering the censorship-resistant ethos of cryptocurrency, generate much less collateral damage than the blanket bans and creeping surveillance of the current regime.

Although medical bloodletting was probably well-intentioned over centuries, it caused a lot of unnecessary suffering, came at great societal cost, and did nothing to treat disease. The cryptocurrency industry was born from a realization that the modern financial system leaves individuals vulnerable to abuse by trusted third parties. Current regulatory hodge of FATF-driven K.YC and AML regulations have birthed ineffective systems that do little to stop money laundering. Instead, they enable political censorship, financial surveillance, fraud, and inequality. The cryptocurrency industry should lead by example through the use of new, innovative, and effective anti-crime methods instead of forcing old, ineffective

ones. Now, I think this is a good piece. I don't necessarily agree that the crypto industry's job is to willfully disobey the law, and that's not exactly what the author is advocating for. But I do think that the crypto industry could be a leader in a larger national and global conversation about the cost of financial surveillance regimes and the potential that these new types of systems actually offer more scalples than hammers. I think, in other words, that there is a positive, productive, future-oriented conversation to be had that aligns financial sovereignty and the needs of a society as a whole. But inertia is a hell of a thing, so having that conversation will not be easy. For now, I want to say thanks again to my sponsors, nexus.io, Arculus and FTX.

And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesks Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators.

Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.