The ethics of mixing – a comprehensive essay on financial regulation and a defense of personal privacy
This research was made possible with the help of Wasabi Wallet
“Civilization is the progress toward a society of privacy. The savage’s whole existence is public, ruled by the laws of his tribe. Civilization is the process of setting man free from men.” – Ayn Rand (1).
In ‘For The New Intellect – The Soul of An Individualist’, Ayn Rand makes the case that civilization is the process of an individual acting based on reasoning. “The Creator” is the enabler of civilization.
The creator must be an individual free from other men. He has to think on his own, act on his own, and achieve his own ends. He can only do so if he is not coerced by other individuals.
For an individual to act on his own, he needs to be private. His actions should not be subject to interference from what the author called the second handler “the Second Hander”. The second hander is the opposite of the creator. The former wants to live off of the creations of the creator. He does not want to create; he simply wants to leech off of him.
However, a creator cannot be “The Creator” if he is not independent if his mind is not free from others’ compulsion. This is the importance of privacy. Privacy allows you to act, act freely to create.
In today’s world, the fight between those who seek to strip away personal privacy and those who fight for it is very much the same struggle between creator archetypes and their adversaries. Any productive professional, employee or entrepreneur would probably prefer to keep his personal matters private. However, big administration and governments require a host to maintain their rather unproductive existence. The net beneficiaries of value transfers within the big welfare states are in favor of total control and surveillance.
Our ancestors understood this. Privacy is a long-standing tradition. From the bronze age to the medieval times and all the way to the digital age. It had always been known that people’s true names are a vulnerability (18).
Authoritarian governments would take advantage of crowded places like public parks, markets, and schools to spy on people. This tactic was used to prevent any uprising or plans to overthrow or go against the ruling class. People aware of this threat “spoke in code”, encrypted their language, used mysterious names etc. They maintained privacy to protect themselves from the ‘second handers’.
Privacy Activism Is A Revolt Against Surveillance
From a real-life perspective, how important is privacy? Champion of the Austrian school of economics, Murray Rothbard, describes private property as a basic human right. One could say that Rothbard came up with the same conclusion as Rand. The right to privacy stems from the idea of protecting private property.
“As in the case of the “human right” to free speech, there is no such thing as a right to privacy except the right to protect one’s property from invasion” – Murray Rothbard from the Ethic of Liberty (2)
The argument goes as follows. Humans have ownership over their own body, and therefore they have ownership of the information inside of their body. In the same sense, humans have ownership of their own homes, phones, computers, notebooks etc. And therefore, they have ownership of the data and knowledge inside of these properties. No one should have the right to invade and steal this information. It is an outright violation of private property rights. In the same way that you would have to authorize the transfer of property to another transacting party, you must also authorize the transfer of your own data to a receiving party.
A violation of private property is a violation of all human freedoms. Without private property, we cannot have freedom of speech, freedom of movement, financial freedom, markets etc.
With the rise of the internet and the digital age, life has become globally connected. Sharing information and storing it has become simpler than ever. This meant one thing; the individual is much more visible. Everything you do on the internet can be used against you, even if it is perfectly legal or perfectly moral.
The law is an important tool to protect people’s freedoms, including the freedom of speech and the free exchange of information. However, history is full of instances where the law is easily bypassed, especially by those who claim to maintain it (The Second Handers).
From our understanding of the importance of privacy on the internet, and the awareness that our data is a vulnerable Achilles heel, a movement of activists called Crypto Rebels arose. (3)
“The people in this room hope for a world where an individual’s informational footprints—everything from an opinion on abortion to the medical record of an actual abortion—can be traced only if the individual involved chooses to reveal them; a world where coherent messages shoot around the globe by network and microwave, but intruders and feds trying to pluck them out of the vapor find only gibberish; a world where the tools of prying are transformed into the instruments of privacy.” – Crypto Rebels by Steven Levy
The Crypto Rebels’ goal was to attain sufficient internet privacy, by which the owner of the data can choose to expose his/her information as they see fit. Through cryptography one can selectively reveal information to the world. This dream was almost impossible before 1975, when most cryptographic technologies stemmed from the government, specifically the National Security Agency.
However, in 1975, legendary “computer wizard” named Whitfield Diffie came up with the “Public Key” cryptographic system, which would later be used everywhere on the internet, and famously integrated in the Bitcoin system in 2008.
In spite of that, it seemed the cypherpunks were fighting a losing battle. A couple of decades after the cryptography movement was born, big governments had found new ways to attack privacy, and more so financial privacy.
KYC Regulation: Impotent And Does More Harm Than Good
25 years later, threats to privacy start looming again in the 1990s. The dollar is devaluing heavily under the FED’s monetary policy, but internet startups soak up millions of funding to enter the ‘new economy’.
By that time, the internet, and all things digital are starting to be adopted by the masses. KYC (Know Your Customer) laws are introduced to financial institutions.
Opening a bank account without providing personal information? History. The narrative used to introduce these laws is that they are necessary to fight terrorism financing, financial fraud, money laundering and other financial crimes.
The dotcom bubble burst in 2001 and ten years later KYC and compliance obligations should become stricter once again. The twin towers blew up in a moment that paralyzed the entire globe.
In the following years, nations agree to implement a new generation of regulatory frameworks that are still in place today.
While we all agree that terrorism financing is bad, these laws are problematic not only from a functional point of view, but also from a moral and natural law standpoint.
Functionally, these laws were supposed to protect society from terrorism. The data shows that they had absolutely no impact. In fact, terrorism around the world got worse.
In the last decade, on average 24,000 people were killed by terrorists yearly (4). More than 52 grand scale terrorist attacks happened all over the world since the 9/11 incident in 2001 (5). 18,811 terrorist attacks happened in Europe since the beginning of the 1970. The number of terrorist incidents per year peaked in Europe in 2014 with around 1,200 attacks that year only (6).
While the underlying theory may sound reasonable, in practice these laws have been a failure. There’s no evidence that these laws and regulations, which impose heavy costs on business and consumers, have produced a reduction in criminal activity.
These laws also have no impact on preventing financial frauds/scam nor have they any impact on fighting money laundering.
Not only did financial scams become more common, they are also performed on a much larger scale by the top financial corporations. Including but not limited to, the Enron Scandal (2001) which led to shareholder loss of $74 billion. The Wells Fargo scandal which cost the bank nearly $3 billion in fines. The Freddie Mac Scandal (2005), the Bernie Madoff ponzi and the infamous Lehman Brothers bankruptcy which occurred as they bank sold toxic investments to other banks (7).
Further, these laws fail to do any service to law enforcement when real criminal cases are investigated. Criminals know dozens of tricks to circumvent any of these laws.
Moreover, individual financial scams are on the rise. In 2020, $19.7 billion were lost in the United States to phone scams, a number that was as little as $8.6 billion in 2014 (8).
While Bitcoin is often accused of being used for money laundering, it is actually cash that is used to move money without traces. 90% of money laundering crimes go undetected with $800 billion to $2 trillion being ‘laundered’ each year. The United States makes up to 38% of the money laundered globally. With that being said, it doesn’t seem that KYC and AML regulations are useful at all (9).
Banks are fined for failing to comply with laws and regulations or for cases of money laundry. In 2022 banks paid $1.8 Trillion in fines. The institutions hit with the biggest fines are as follows:
- Bank of America: $225 million
- Citigroup: $200 million
- Goldman Sachs: $200 million
- Morgan Stanley: $200 million
- Credit Suisse: $200 million
- Barclays: $200 million
- Deutsche Bank: $200 million
- Nomura: $100 million
- Jefferies: $80 million
The Danske Bank scandal in 2018 brought to light that around €200 billion of suspicious transactions had flowed through the bank. This led to resignation of the bank’s CEO, significant fines and penalties for the bank, and ongoing investigation and charges for money laundering (15).
It is also known that the cost of implementing and complying to such laws is much more expensive than the potential benefit. According to UN estimates, the seizure of criminal assets is around $1.5 billion yearly for a global cost of around $180 billion in AML compliance (9).
“Society accumulates and compounds losses when entrepreneurial creativity is curtailed. What could have been the case if entrepreneurs were unbound, if the regulatory chains were cast off? We can’t know. But we can know that The Unrealized is a cost to society.” Per Bylund
Thus, how did KYC and Anti Money laundering laws help make our life more secure? The data suggests they simply did not.
A survey conducted by the Bank Policy Instiute found only 3.85% of suspicious activity reports (SARs) and 0.44% of CTRs required some form of follow up by law enforcement (16).
These laws make the life of non-criminals much more burdensome. Regular market participants must jump through multiple hoops in order to accomplish a certain business transaction. This cripples the economy and reduces growth and wealth.
Worse, it completely stifles startups. Small businesses and startups can’t afford to hire expensive lawyers just to be in compliance with all the up-and-coming and ever-changing regulations hence an invaluable amount of innovation is never making it to the market, leaving consumers with outdated and bad products.
Meanwhile, big business and institutional crime can find and afford ways to circumvent these routine “checks”. They do so through hiring professionals, bribery and lobbying.
It is mostly individuals and small entrepreneurs who have to comply with these laws and potentially be driven out of the market as a consequence.
KYC Laws Are Unjust And Absurd
Considering the ethics and principles of our justice system, KYC laws are not aligned with basic concepts such as the presumption of innocence. Any suspect for a certain crime shall be considered innocent until proven guilty.
With KYC laws, every citizen is assumed guilty (of money laundering or terrorist financing) until they prove they are not.
In a way, the criminal is being treated the same way as the innocent. Everyone is a criminal and assumed guilty by default.
Not only is that immoral and should be considered unlawful and unconstitutional, but it is again a great deal for the actual criminal who will simply circumvent the measures. If everyone is considered a criminal by default, the real ones have the ability to bypass all these routine checks. The data shows us that they are doing so successfully.
The founder of the famous media company WikiLeaks, Julian Assange proved this idea. As he makes the case that the so called “elite of society” would manufacture a war in Afghanistan just to use it as a money laundering machine (10).
In an article written in 2010, the author Matthew J. Nasuti, lays down the proof that it costs $50 million to kill one Taliban soldier. It would theoretically cost $1.7 trillion to kill all the Taliban roster.
Numbers that suggest , in the words of the author, that the Taliban must be indeed “super soldiers” (11). But they aren’t “super soldiers”. The reality is that this is a scheme to launder “public funds” by privatizing it. Big corporations overcharge for contracts and increase the cost of war. Billions of taxpayer funds as well as money in the form of debt are turned into private profits. This is the process of monetizing war. The cost is your money, and millions of lives around the world – the profit is privatized.
Taxpayer funded warfare is used to privatize public funds without legal checks while normal people have to send selfies to the bank and provide ‘source of funds’ documents.
AML And KYC Regulation Pose A Risk To Privacy
AML/KYC are only applicable to individuals like you and me, they indeed pose a huge threat to our livelihood and functioning of society. Banks are a huge target for criminals who seek to steal individual data and use it for illicit activity.
It’s not surprising that consumers are hesitant to share their confidential data. A McKinsey survey revealed that no industry achieved a trust rating of 50% for data protection.
To name a few incidents. In 2019, more than 885 million financial and personal records linked to real estate transactions were leaked from The First American Corporation. In the same year, data related to 100 million credit card applications were leaked from Capital One. In 2014, we witnessed the infamous JP Morgan Chase data breach of 83 million accounts (12). It is said that 1,108 data breaches occurred in 2020 alone. It is safe to assume that your date may have been leaked or will be leaked one day (13).
Nearly every bank and financial business hoarding customer data has experienced a data breach in the past. To name a few more:
- First American Financial Corp: 885 million credit card applications
- Equifax: 147 million customers
- Heartland Payment Systems: 130 million debit and credit card numbers
- Capital One: 100 million credit card applications
- JPMorgan Chase: 100 million credit card applications
- Experian: 24 million customers
- Block: 8.2 million customers
- Receivables Performance Management: 3.7 million customers
- Elephant Insurance Services: 2.7 million customers
- Flagstar Bank: 1.5 million customers
- Lakeview Loan Servicing: 2.5 million customers
- Revolut: 50,000 customers globally
- Cash Express: 100,000 customers
- First Financial Credit Union: 220,000 customers
- Boeing Employees’ Credit Union: 340,000 customers
The incentives to gain access to large retail datasets are obvious. Personal data has value and is sold on black markets and on the dark web. Hackers target big banks and corporations, to collect personal data (names, passports, addresses) to be sold to criminals who might use them to hide behind your identity and perform all sorts of illegal activity (13).
The Rise Of Financial Tyranny
The most famous example of this is China, where the government surveys all individual purchases and has the authority to dictate where people can spend or not spend their money. Also banks and the government can liberally freeze bank accounts as they see fit.
We witnessed this phenomenon in Canada. As the government froze the bank accounts of certain individual organizers of a trucker convoy that went against covid mandate measures.
Recent history shows us how much the Second Hander class of society, loathed by the likes of Ayn Rand, relentlessly works against your privacy. They do so to maintain their role as second handers, as they leech off your hard work.
This brings us to bitcoin. Much great literature has been written about bitcoin being a tool to defund the ‘raison d’etre’ of the second hander. However, can bitcoin be used as a way to escape their clutches in the meantime, and more importantly is it morally justified an can be considered “ethical”?
What is CoinJoin?
While there are many ways to ‘mix’ bitcoin in order to obfuscate the transaction history, we will only focus on the method of CoinJoin which is one of the most respected privacy technologies.
We must first understand that Bitcoin is not a “privacy tool”. Bitcoin is an open, fully auditable and traceable ledger of transactions. Every transaction that has ever been made – since the first one in 2009 – can be looked up.
With that being said, you can reach a certain level of pseudo anonymity as a bitcoin user if you make sure that your address is not connected to your real personal identity.
However, as the use of bitcoin in the real world is most of the time burdened by the above mentioned KYC/AML regulations, users nowadays are finding it strenuous to detach their identities from their bitcoin addresses or UTXOs.
Arguably, the most convenient and cheapest way to buy bitcoin at the moment is to go through conventional exchanges and regulated onramps.
These exchanges have to abide by the aforementioned regulations. So when withdrawing bitcoin from these exchanges, it is fairly easy to connect your data on the exchanges with your personal wallet addresses through advanced chain analysis techniques.
According to Coindesk Research, chain analysis companies do sell user data to the government:
“Public records show Chainalysis made more than $10 million in five years from the U.S. government and stands to take in more than $14 million, dwarfing its competitors in the blockchain surveillance industry.”
We can never know whether or not and when these techniques will be used by big governments and big corporations against you. We can never know whether or not the data on big exchanges could be leaked by hackers and sold on the dark web for criminals. Surely, as proven previously, history showed us how astonishingly substantial this possibility is.
Mixing Your Bitcoin Protects Your Personal Data
Bitcoin development never sleeps and there are ways to make the use of bitcoin more private. Coinjoin is considered one of the best methods to maintain financial privacy with bitcoin. It works by pooling transactions of a large number of coinjoin participants and ‘mixing’ them.
When the CoinJoin is complete, outsiders have no way to figure out which input belongs to which output. Or in other words, meaningful analysis and tracing is intercepted and the bitcoins are not linked to identities or a specific transaction history.
With wallets such as Wasabi, CoinJoin is easy to use for anyone and experts anticipate that coinjoin can soon become a default for wallets and also businesses.
Is Coinjoining Bitcoin Ethical?
This brings us to the last and most powerful insight on this topic. To truly answer the question whether bitcoin coinjoining is actually ethical, moral or immoral we have to understand the five-markets theory developed by Samuel Edward Konkin III (14). The theory suggests that all actions should be judged by the ‘non-aggression principle’ which simply asks if a third party is harmed or not.
The Five Markets diagram explains how to clearly identify moral and immoral market activities. The model also shows how the state has judged those markets. War, torture and compulsory education are clearly immoral but they are fully legal thanks to the state.
Drugs or consensual work agreements are made illegal by the government for various reasons, yet they aren’t immoral at all as no third party is harmed directly.
Instead of asking whether something is illegal or legal, you should ask whether it’s moral or immoral and make your own decision. As a moral basis the “golden-rule” or “non-aggression-principle” is a near perfect guiding principle. Harming any third party with your actions is inherently wrong.
But moral principles do not always align with your nation’s legal system. When dictators rise to power and governments turn into tyrannical regimes, the law is always twisted so all immoral action is perfectly legal. Hitler came to power through a democratic vote and never broke a law as all the laws were changed to justify all the immoral and horrible activities.
Therefore any sound contemplation of the ethics of mixing has to distinguish between legal, illegal, moral and immoral. Money laundering itself is not an immoral action. It might be an illegal action depending on the legal environment set out by the government but it does not directly harm a third party. Simply put, mixing bitcoin bears no ethical concern as long as nobody takes direct harm from it.
You could of course consider whether there is a general downside of mixing. These arguments however, are simply disarmed. A kitchen knife is designed to cut things not to stab people. Cars and airplanes are made for transport not terrorism. A gun is made for defense not to kill or rob. It’s always the individual who is acting immoral, not the technology. With the same argument we could ban kitchen knives and cars as they are often used for immoral or criminal action. Or, at least enforce KYC regulations when you buy a new kitchen knife or a car.
The cash we are using every day has most likely been used to purchase drugs at some point. Perhaps someone has been paid to do immoral things with the same cash we buy our eggs with. The bank that you have an account with, most likely has enabled some form of money laundering and terrorist financing. But that doesn’t mean that all banking and all money is immoral, it means the individuals who act immoral are acting immoral. In case the actions are immoral and also illegal, the offenders should be penalized not innocent users.
A rather immoral yet legal activity would be systemic theft such as taxation. Or institutionalized counterfeit-fraud (quantitative easing) that the system of theft (big government) is based upon.
Finally, safety is important. Being safe from criminals, scams, malicious behavior etc. can improve the market. They can allow the individual to properly calculate and act. However, a bigger surveillance government is absolutely not the anti-dote. The answer is aligned incentives.
The data shows that the more financially and economically free individuals are in society, the less likely said society is to suffer from the actions of bad actors. The free market has an excellent mechanism of weeding out bad actions and actors. People simply cancel their subscription or stop purchasing if a company is not honest.
It is rather possible to peacefully remove bad market actors, but it is quite unfeasible to do so for a violent non market participant the same way. Using bitcoin in a private matter is an excellent and completely ethical way to opt out from the systemic second hander society, while at the same time defunding it from its roots.
Mixing bitcoin does not harm any third party directly or indirectly. It is a peaceful technology that anyone can use. It’s sole purpose is to allow users to protect their personal information from bad actors.
Financial privacy, fully aligned with our right over our own body and the fruit of our labor. It’s our choice how much we want to reveal about ourselves to others. Banks are mandated by law to keep customer records a secret but fail to do so. Bitcoin mixing is more efficient to protect personal records because there is no central point where data is stored.
Using bitcoin in a private manner is no different than using cash for daily purchases or making use of private banking. If you are not involved in immoral activities, you are not doing anything unethical if you seek to protect your personal data.
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Thanks to Sasha Hodder, Gerard Matthews, Plebpoet, Leon Siegmund for editing and WasabiWallet for enabling us to do this research.
1) The Soul of An Individualist – Ayn Rand From The For The New Intellectual
2) The Ethics of Liberty – Murray Rothbard
3) Crypto Rebels – Steven Levy
4) Terrorism – Hannah Ritchie, Joe Hasell, Edouard Mathieu, Cameron Appel, Max Roser
5) Since911.com – Terrorism Timeline
6) 46 Years of Terrorist Attacks in Europe, Visualized – Chris Alcantara
7) Top Accounting Scandals – CFI Team
8) 19.7 Billion Lost to Phone Scams – Lori Crippen
9) AML Isn’t Working – David G.W. Birch
10) What Did the U.S. Get for $2 Trillion in Afghanistan? – Sarah Almokhtar, Rod Nordland
11) It Costs $50 Million to Kill One Taliban – Matthew J. Nasuti
12) 10 Biggest Data Breaches in Finance – Edward Kost
13) The Digital Black Market for Identity – Richard Marley
14) Samuel Edward Konkin III – Wikipedia
15) Danske Bank Scandal
16) Bank Institute Survey
17) GDR spionage
Study: The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business – Estimation of total federal regulatory costs reaching $2.028 trillion in 2012
“Ask yourself what a chinafied world would look like? The Merriam-Webster dictionary gives the following definition to the word chinafy: “to reduce (a country) to a state of passivity and helplessness.”
Wells Fargo Fraud Scandal
The Sovereign Individual