Why is the SEC Concerned about Privacy now?

Point Center's main day-to-day work our #1 mission priority is always to defend the developers of open blockchain networks from inappropriate regulations or unjust prosecutions. I think it's becoming more and more self-evident that a transparent layer 1 is not a neutral layer one, not in the long run. Ultimately, transparency will destroy neutrality. And this is not me saying that like we should be building things that enable money

laundering. It's me saying, no, we should build global neutral communications networks for things like underlying settlement. This was true of SWIFT in the 80s. It was neutral. If we're going to build a better system, we should be building more like SWIFT used to be, and less like what Swift's becoming, where it's just a fully mediated underlying settlement Ledger for even for messages for for settling transactions, let alone transactions themselves.

We're here at Deaf Connect and today we're speaking with Peter live and in colour. This is It's nice to see you here I. Sort of worn a more expressive outfit. If we're yeah, I think we're all a little bit dropped, but I think it's OK. Kind of like the background makes up for it. So it's a it's a little for everyone who's listening to this. It's a little trippy, but it trophy and kind of. Creepy AI slop. It's probably AI. There's some text in there.

That's definitely, Yeah, Chat GPT's idea of words. How? How has Buenos Aires treated you so far? Oh. It's been great. I think, I think one of the and it's become sort of widely discussed, one of the interesting things about Devcon this year or Devcon actor, whatever the big Ethereum conference this year is that privacy is actually being discussed more fully.

And you know, Coin Center, my organization has been trying to focus people's attention on the need for financial privacy and the need to protect the builders of financial privacy for over 11 years now. And sometimes there's periods in that history where you're like, yeah, like Z cash or things like that. And sometimes there's periods where it's like, OK, everything's going to be done with stable coins on chain and we'll have full transparency

into all transactions. And that's what we'll tell law enforcement why they don't have to worry about the technology because it's a panopticon. And now we're kind of swinging back to like, Oh, well, actually, maybe that would be bad not just for the criminals. We want it to be bad for the criminals, but actually bad for all legitimate uses of the

technology as well. Because who wants to use a global financial system where every time you buy a can of Coke, a billboard pops up with your name? It's like Peter just bought a can of Coke. Everyone. It's bad. This episode is brought to you by Gnosis building the Open Internet one block at a time. Gnosis was founded in 2015 and it's grown from 1 of Ethereum's earliest projects into a powerful ecosystem for open user owned finance.

Nosis is also the team behind products that had become core to my business and that are so many others like Safe and Cow Swap. At the center is Nosis Chain. It's a low fee layer one with 0 downtime in seven years and secured by over 300,000 validators. It's the foundation for real world financial applications like Nosis Pay and Circles.

All of this is governed by Nosis Dow, a community run organization where anyone with a GNO token can vote on updates, fund new projects, and even run a validator from home. So if you're building a Web 3, or you're just curious about what financial freedom can look like, start exploring at gnosis dot IO. How much? Of that, do you think the interest in privacy is driven by market movements or, or is it like the demand for privacy that's driving markets or is it the markets that's driving

privacy like you know? Yeah, it's, it's probably, it's probably the markets driving privacy because you know, as much as you, as much as I would like to as an advocate, as a lawyer, as a person who stands up for like what we should like normatively what we should have, you can be like, build privacy. And people are like, why would I build something no one's going to use? And I like the thing that infuriates me more than anything else.

At all of these conferences, I meet all these great people and usually they're like, oh, how can we stay in touch after we leave this conference? And they're like, do you have Telegram? And I said to them, why would I use Telegram like those strange half baked, not encrypted for group chats and vaguely encrypted for individual chats platform where they rolled their own hash functions. Like that's a disaster. Like we've had Signal for decades now. What's wrong with you?

Why aren't you using Signal? And it's because people don't take their privacy seriously. Ordinary consumers don't take their privacy seriously, especially people who are like new to crypto or new to block chains that we all want to on board now. Like they have no idea. And rightfully so. They're time constrained. They're not sophisticated. But the thing that bugs me is that sophisticated people, people have been coming to

Devcon for multiple years. People in the Etherium community are like, let's let's just give all our information to to the Russian Secret Service, which is compromise this app and and the the French intelligence services as well, right. I mean like that, that's just odd. Why wouldn't we use signal anyway? I mean, I think. That I think there's a good reason why people didn't use signal up until recently and maybe. It's bad for creating a boiler

room because the group chat function is complicated. Well, the group chat, the group chat function is complicated, but also up until just a couple years ago, you had to give your phone number. That's true. And the UI around that was not great. I think that gave Telegram the opportunity to really like create a a huge. You found a more forgivable argument. Yeah. But also Eli is not great. The group chat UI was bad.

So like people who wanted to, like, pass insider information about what thing they're going to pump next, Like we're like, let's be on Telegram because we can have a good group chat. Yeah, I don't know. So yeah, I think it's market driven because not because consumers are demanding it, but because the new potential consumers of like typical consumers, new potential consumers of block chains are institutions. And institutions take their shit

seriously. Because if you're JP Morgan or you're a proprietary trading firm or whoever you're like, you're not interested in just hemorrhaging all of your information to the public block chain because that's not how the traditional financial system ever worked. You have trade secrets, you have practices that you don't want revealed, and that's not because they're nefarious. That's just because how business is always run.

So we have a more serious sort of institutional potential user for this tech and I think they demand privacy. So I think that's real. I think the other thing that's driving the privacy conversation is also this is maybe more my biased view because I come from Washington DC and I see the evolution of these things from a legal standpoint. The I think it's becoming more and more self-evident that a transparent layer 1 is not a neutral layer one, not in the

long run. Ultimately, transparency will destroy neutrality because if you're validating on this chain and you see all this activity, at what point is someone going to run up to you and say you're kind of culpable for that activity? Like maybe you didn't directly promote it, but you facilitated it, you hated it, you abetted it. Like if you see a multi sig or if you see a, a money laundering transaction, multi sig money laundering and you you you validate that as part of a

larger block. What's your long term argument for? You're not being complicit, especially if you could have used chain analysis as a validator to identify these things and you didn't like. That's called willful blindness in the United States and it's not a defense to culpability for criminal law. Actual blindness is. And so this is the difference.

People say like well how will they ever allow Z cash to be a thing or something with base layer privacy or Aztec built on top of Ethereum. My answer is like that's the only thing they will allow because actual blindness is a defense to crime. Like if you hadn't literally no knowledge of some criminal act that you facilitated, you didn't actually facilitate a criminal act not with intent to facilitate. And you can't be held culpable and you shouldn't be held culpable.

And so that's the only way to actually have credibly neutral systems is to have systems that are actually blind to the underlying transactions in the block. I said in my talk the other day, if you really want dumb pipes, you need the pipes to be actually blind to the shit that flows through them, because otherwise it's not a dumb pipe. Yeah, I, I feel like there's, there's a lot to unpack here.

So kind of like, I think we should distinguish between kind of absolute privacy and relative privacy, right? So kind of like people, people kind of regular consumers don't want absolute, don't want, don't want, don't need absolute privacy. So kind of like, oh, they, they don't think they need this. So kind of like they have no issue with Telegram reading their stuff or their bank knowing kind of like where their money goes. They don't want everyone to know it.

So they kind of need relative privacy. And I think kind of like that's, that's also something that that kind of plays into this a lot. I really feel your discussion, discussion point on protocol level blindness because we, we recently did a thing on NOSES chain. I don't know whether you follow the balancer hack a little bit, a little bit. So basically there was a hacker,

he was clearly malicious. He stole 128 million across many chains, almost 10 million of which were on NOSES chain and there were there were some attempts to kind of freeze some of it with the freezable stable coins. And then he concentrated on main net and kind of sold positions for East. So kind of it gave us a little bit of time to kind of think what do we do here? Because clearly this is someone who is stolen actual people's money, kind of like it was stable, stable foods.

It wasn't kind of like some sort of degen sort of thing. And it was also a pretty blue chip protocol. So it was balance of V2 stable pools. So it's it was yeah. So what we ended up doing is first we kind of asked a bridge governance to kind of reduce liquidity so that the hacker wouldn't be able to bridge off

noses chain easily. And then we tried to get validators on board for a soft fork, meaning kind of, and I mean, just just to kind of clarify a hard focus where kind of like you change the state kind of like some some time in the past and a soft focus basically where everyone agrees

to not process certain transactions. So kind of like you don't include them in your block and but you also don't attest to them. And I think not including things in your block, this is something that kind of has been done before and is currently done on Ethereum. But kind of saying I'm not going to attest to this if it's in there. Yeah, this is this is a line that so far hasn't been crossed until now. So on until now, our nose has

changed. I'm not proud of this, but kind of like it. It made us and kind of it made us appreciate that kind of like why we still have this power. It's probably the arguably the right thing to do, but we still want to get to where we do not have this power anymore. Yeah, I, I mean, so one thing I think about a lot lately is the SWIFT interbank settlement. So that's the Society for Worldwide Interbank Telecommunications. How is that? What that means? Something like that? OK.

Yeah, I just learned that. I was started in Belgium in the 1970s and the central bankers at the time didn't even know what the heck all this computer nonsense was. And so they didn't, they were, they were like given an option to have a seat at the table amongst the, the, the banks that were developing this under bank settlement tool. And they were like, we don't know, like computers. That's not what banking is about.

And SWIFT end up ends up becoming the most like single most important cross cross-border settlement messaging network. They're not doing the settlement themselves. They're a messaging network. Sounds familiar to a lot of stuff in that space in the world. They settled 150 trillion in transactions or they don't settle. They message them so that banks can settle them every year, 150 trillion. And up until 2012, SWIFT was

credibly neutral. And if you think about the early days of SWIFT as a messaging network, it's all plain text transactions between their bank, their their member banks, their member banks. It's a permission set. But they are credibly neutral in a way because they don't have the computational ability at that point in history or really the the wherewithal to accumulate all the messages on their proprietary network and really know who's sending what

to who and unwind it all. Like it's just not something that's feasible. By the time we get to the 90's, the 2000s, of course it's totally feasible. They know everything that happens on their network and if they continue to claim to be just a messaging provider, neutral. And that finally breaks down when the US government and the EU parliament and others say, like, you need to stop relaying messages to Iranian banks who are, you know, facilitating Iranian government's nuclear

program. We have sanctioned them. Until then, Swift said, we are not an obligated entity for purposes of US or EU sanctions because we are not actually involved in the underlying economics of the transaction. We are just a messaging provider. And there's a good reason for that. You want a messaging provider to be globally neutral, otherwise we won't have a like throughput in the global economy.

Every transaction will end up mediated and a whole council will have to decide whether to let it through. And the whole thing collapses when you Fast forward to the Russian invasion of Ukraine and SWIFT removes the, the, the, the Russian banks from SWIFT and now, and that was in 2022. So we're not, we're not long beyond that.

To me, there's this slow moving crisis where SWIFT is going to become a fully mediated, fully obligated global settlement tool for messaging for settlements and it just won't have the throughput and and and viability that a truly neutral tool would have. It's going to collapse.

This is one thing that makes me actually very bullish about open blockchain networks is because we're going to have to find alternative tools that don't become political footballs in geopolitics if we're going to have actual free and open global markets. But I think that to to Philly because example about Gnosis, there's there's a there's a distinction between coordination within a group of participants in a blockchain network and coercion.

And in the case of Swift, Swift is being coerced, yeah, by. But any individual validator can be coerced. Yeah, right. And I mean, so kind of The thing is Gnosis is 300,000 validators, right? I mean, not, not as many individual entities, but kind of like we still had to make the case to them that this is the right thing to do. And kind of like they, they kind of, they had to press the button themselves to kind of upgrade their node or not upgrade their node.

And kind of like in the, and most of them decided to upgrade their notes are kind of the soft folk went, went through. But kind of like if you have a three letter agency kind of calling you up and saying you're, you're, you're, you're, you're processing some really dodgy transactions here. This is, this is the dynamically updated list of things you

shouldn't be processing. And please, please make sure you subscribe to this and and and and it it informs your, your validator at any given time that that's a totally different situation, right? Right. I mean, I, I think that's true, but I think that we need to make sure that our systems are resistant to coercion so that right and maybe privacy fixes this, but like we're are.

Not resistant to coercion. And and the original project of Satoshi and the project of Vitalik and the larger Ethereum community is not necessarily to, you know, ensure that validators

are incapable of all malfeasance. But that there are so many validators that even if some are like regularly censoring or blocking, either because they've been coerced or because they are themselves not interested in the free and open blockchain. There will be some minority participants on the network, like located in far-flung areas of the world who will continue to put things in in the blockchain, right? But I think. No longer true kind of as as long as kind of like you have

this attestation thing, right? Because then you kind of need a two third majority kind of like to to attest to this. So kind of like not only do you need a block builder who knows this, but you also need to kind of like to luck out and have 2/3 of the testers kind of be on the on the non three data agency.

I'm just learning about this here at Devconnect, But this proposal fossil, which would be a theorem improvement proposal where in block builders would have to sort of the mandatory and be required to include the transactions that are validated by like a committee of some 16 or something like that. And there'd be minority members in that committee who might be the people likely to put in transactions that aren't wanted by the majority of the staking power on the network.

It's like, this is interesting because it's like, oh, let's, let's rebuild censorship resistance in a world where we're starting to lose it because we we don't have those far-flung validators on chain. This is actually very bad from a regulatory standpoint. If you don't get this with privacy, because now an American staking individual or company is going, if they want to build ballot box is going to be forced to include transactions in the block that might that might

violate say OFAC sanctions law. And I don't know what their defense is going to be. If it's if it's a plaintext transaction that clearly actually can be read by law enforcement or anyone with chain analysis or blockchain analysis tools that shows North Korea using the Etherium blockchain. You had to put it in your block. They come to you as a validator and say, why did you put this sanction transaction in a block? And you say, well, the Etherium protocol demands that I do it.

And then they say, well, you don't have to be on the Etherium protocol, right? You violated sanctions. Law, but I think kind of like, I think that's, that's an interesting distinction here because kind of like the, the kind of like putting, not putting certain transactions in blocks. This is currently the status quo, right? I mean this is and it's been 4 years but kind of not attesting to them this is new. This is new. OK, right. So it's that hasn't been done before.

Clearly it can be done. But yeah and yeah and I think, I mean I think it'll happen and you goes put kind of like it just drives home kind of like how we need to improved system such that you have no way of knowing what you're validating. Be actually blind, not willfully blind and not and certainly not just like eagerly looking at me like, yeah, sure, I'll get that one and then wait for the knock on the door.

The case that Coin Center has recently worked on that really brought this into focus for me just before Dev Connect here is actually the Pereira Bueno case. The Pereira Bueno brothers are the the guys who found the exploit in the MEV Boost software and then sandwich attacked sandwich attackers and. It was hilarious. It was hilarious.

What's kind of not hilarious and rather terrifying is that you could have imagined that the victims victims, because they also just lost in cutthroat competition. They didn't actually like get, I don't think they're criminal victims, but the victims of that exploit. They could have brought a civil case maybe and said, like you misused the MEV boost software in a way that that hurt us. We want to reclaim our $20 million. That didn't happen. That would have been bad enough.

What actually happened is prosecutors in the Southern District of New York, criminal, federal criminal prosecutors brought a wire fraud case against the brothers, saying your behavior on the Etherium blockchain as a validator is fraudulent, is wire fraud because you were not. And this is a quote from the jury instructions that they actually asked the judge to provide the last moment in the case a couple weeks ago because you were not an honest

validator. But this is absurd because kind of like the entire point of MEV boost is that kind of like you extract from from unwitting users of kind of whatever defy protocol, yes, like let the robbers rob in peace. Yes, well, I'm not even let the robbers rob in peace. It's just like you wouldn't go to a marketplace that is known for having established rules of commercial conduct that are effectively like. Like if you rely as bitter, you

win. It doesn't matter if if you made people think you were going to bid lower earlier or bit higher earlier. Like if this is a market where the expectations of all the participants is that like people will profit maximize up to the bare rules of the protocol, then there is no fraud or misrepresentation. Everyone knows that in the world of minor extractable value, people are going to compete to extract as much maximum extractable value, as much as they can get out of the

protocol. And that might be not desirable, but we intend to fix that using technology, not layering a whole system of duties and honor that would then be enforced by criminal prosecutors on top of all validators. Because if that's what happened, we'd be in a very bad situation. And there's specific claims in in that prosecution, because they did equivocate according to the Etherium consensus rules.

They presented 2, you know, blocks that can't be reconciled with each other simultaneously, for which they got slashed. And so in a, in a highly technical, like going all the way back to the Satoshi's white paper, what is an honest on honest chain? They did something that is not honest validation. They equivocated.

But this is not dishonest, dishonest commercial conduct in the wire fraud sense where they made a representation to someone that someone relied on in a fiduciary or contractual relationship and then they were able to profit from that.

And so this notion that like honest validation and dishonest validation being something that you could actually criminally prosecute just further indicates that we're going to have a huge problem with transparent ledgers wherein the government's going to see validator behavior and figure out all kinds of ways to get jurisdiction over it, including when they're being self interested in a way that maybe some people in the community don't want them to be self interested.

But everyone knows that they're self interested and it's, it's just, it's not going to work. So we filed an emergency amicus brief in this case because that jury instruction was something the defense flagged. And we've been in touch with the defense, and they were like, we can't have the jury decide that they committed wire fraud because they were a dishonest validator. That that doesn't make sense.

And so we wrote an emergency brief basically explaining the history of that term, honest validation within these networks and how the Etherium blockchain and the community at large has an expected penalty. So a slashing fine or a slashing fee for exactly that behavior. And that's carefully calibrated to be actually quite modest just to prevent constant equivocation

on chain. And to think that you'd have now a slashing penalty for that behavior and possibly like multiple years in jail from a felony criminal charge completely unseats the the calibrated norms and established rules within the protocol and it just would make Ethereum not

work. Yeah, yeah. This is a lot, but yeah, no, it's fascinating me lately and. Yeah. I mean, it's, yeah, I, yeah. It kind of, it breaks kind of like this closed system game theory of kind of, of, of the protocol itself. What, what kind of what struck me while you were talking?

I mean, obviously, kind of like we have this entire situation way worse on a way bigger silver platter with L twos, right, kind of like and kind of like the multi sig L twos where kind of like you can you can upgrade from hopefully you're Mikey Sig and not a single address. I mean, this is, there's also some of the EOA whatever, whatever, but kind of like and where you can, where you typically have a single sequence of a very small set of sequences.

So basically, in fact, in fact, in effect, the entire chain is built by a single entity. How, how do you think we'll see that play out in a choose first? Or do you think they'll go for for the base layer? I think no, no, that's going to be a very appetizing target because you'll, you'll have an identify identifiable criminal defendant. They have very clear control over a lot of relevant aspects

of the transaction flow. If we're talking about some illicit transaction in the bundle that they that the sequenced and they're probably well moneyed defendants too. So you could extract large penalties from them because they're all like these companies that raise tons of money to build L twos, right? So it's a very dangerous state of affairs. And I mean, I've said for a long time that we need truly decentralized sequencing on L twos and there's efforts to build that.

I do feel like some of those efforts got maybe stymied or put on the back burner when, you know, like American politics changed and everyone was like, oh, the SEC is maybe not going to care as much anymore, which is not necessarily true, by the way, but also still not the right way to build because you should be building decentralization for decentralization's sake, not just because you're afraid of a

wells notice from the SEC. And then the other thing I would say is like, I'm much more for obvious, like this was not a would not be a surprise to anyone right now. I'm much more of a fan of like the the let's find ways to to have fully private blind sequencers like a like an Aztec

type model. So that, you know, even if we have a certain amount of centralization with the sequencer, they are not, they are not like looking into what they're actually sequencing in a way that would make them responsible for mediating disputes. Whether that's filtering out, you know, transactions that might be related to money laundering or whether it's just like favoring their own transactions on chain or a number of other things for which they could be held culpable.

And this is not me saying that like we should be building things that enable money laundering. It's me saying, no, we should build global neutral communications networks for things like underlying settlement because that's the only way we're going to have a global economy that actually functions at the scale and efficiency that we want the global economy to function. This was true of SWIFT in the 80s. It was neutral. They were just moving money for

Iran all the time. And that was a necessary cost of having a liquid and free and open global economy. And you say that like this is ultimately going to be good for human freedom because totalitarian regimes will suffer in that world, even if they get occasionally the benefit of the underlying transaction rails because they're free and open. You lock them down, you actually empower totalitarians.

And so like, if we're going to build a better system, we should be building more like SWIFT used to be and less like what Swift's becoming where it's just a fully mediated underlying settlement Ledger for even for messages for for settling transactions, let alone transactions themselves, you know? I'd love to talk about KYC AM L and compliance as it relates to privacy. I have a hunch that a lot of the reasons why we have so many. Let me let me put this another

way. The the the compliance cost to companies to funds not even just in crypto, just broadly individuals is absolutely massive yes. I don't know that there are any real estimations of what this costs to the economy, but I'm I'm sure it's in the. 10s or perhaps hundreds of billions of dollars. Yeah. I think, I think of a reliable estimate was some firms in the US spending upwards of 20 billion just individually and that the total cost was something like 300. Yeah.

I mean, there's some guy named Robert Pohl who's a big a very good critic of anti money laundering. We've also published a report recently, so I hope I'm not misstating any of these. I'm sometimes bad with decimal points, but I think we're actually on target here. We were published a report called Tear Down this Walled Garden. It's a Coin Center report. It was authored by myself and he admires and the first half of it or maybe the first quarter just lays out how expensive MLKYC is.

And that would actually be fine if it had bang for buck. But there's also good, there's actually more reliable estimates as to like how much illicit finance is actually deterred and how many, how much illicit money is actually frozen or blocked in the economy. These are estimates from they're not estimates from weird crypto libertarian org.

That's the United Nations and the Financial Action Task Force. Their estimate of the amount of illicit funds actually seized within the global economy thanks to a MLKYC is sub 1%. In fact, it's about point 2% of all illicit funds and. This is coming from the FATF, the very organization that is implementing or pushing to implement. The Financial Action Task Force, yes, they have a stock take that actually basically puts that number up and the UN as well.

So these systems, now a counter argument to that is, OK, yeah, the seizure and blockage rate is actually extraordinarily low compared to how much illicit money is out there. But the deterrence is what makes it work. When a criminal goes to use one of these tools, they go, Oh no, I have to put in my mother's maiden name, they're going to catch me now, you know, and I'm making this counter argument

sound too weak. Maybe there probably is some deterrence, especially for like low sophistication criminals. There's no deterrence for high sophistication criminals. In fact, the very fact that financial institutions have been collecting all of these documents and keeping them in insecure facilities means they constantly get hacked. And you can buy on the black market any number of like identity credentials that you can use to open bogus accounts if you're a sophisticated criminal.

So sophisticated criminals, I don't think are effectively deterred at all by the system. If anything, they might be empowered in a way because they know they can find readily available fake documents that have been hacked from an institution that was obligated under law to collect all of them in the first place from their users. So that system is not working, and that's the point that we make in the first quarter of this paper.

The rest of this paper is OK. We're not just here to be mean to financial crime authorities. We all need to recognize that there's a deficiency here. And we all do want to stop terrorism and terrorist usage of financial networks as best as we can without destroying the global economy, of course. So what can we do better? This approach clearly isn't not working. It's not working for law enforcement. It's not working for ordinary persons whose privacy is invalidated.

Or I would also add, whenever people factor the cost of KYC, they, they factor the cost of financial institutions. You rarely ever see anyone actually measure the, the costs of say the, the global identity theft losses from people whose privacy has been compromised or just the psychic losses of knowing that your privacy is fully compromised, which would be hard to monetize or, or or account for, but are are real, like if you believe in, in a right to privacy setting all

that aside, we can do better. And a lot of the technology that's been pioneered in this space, 0 knowledge proofs, multi party compute, verifiable credentials is actually like exactly what you need to sort of brew up in order to build a system that works better. And we're seeing some of these as like early proofs of concept prototypes, like in the, in the Aztec token sale that's happening right now.

I think you can use their own, their own passport, which means you create a proof that you, your passport, you, you are in possession of a passport, at least in this moment that says you're an American and this is your name. And then they can cross check that against the sanctions list and things like that. These are still not enough though. And this is the paper. The paper we're writing says, look, isn't this cool?

These are already here. But what we really need is global composable user sovereign digital identity wherein I know I have a passport, what I can create 0 knowledge proofs of that I have a bank account, they will allow me to attest to my balance. I have a Gmail account that's had this message history for the last 11 years and I can actually make an attestation to that effect.

And I can compose these myself into a risk score that might be recognized by some particular authority as being credibly not a criminal or credibly of a low risk. And there's some important features there. It should be multi factor. It should be attribute based. Maybe they don't learn my identity when they, when, when I provide them this risk score. They just learned that I had the ability to construct this risk score out of credentials that I

myself possessed. And it, it should be far better, I think than than just, you know, oh, you want an open account? Send us a scanned version of your passport, which is a garbage version of actually putting deterrence in. So I think you can build deterrence into these systems, but you should be building them with as much as possible attribute proofs from zero knowledge proofs rather than identity proofs like I am.

This is everything about me. And they need to be modular so that we can like assemble the right series of credentials that would be difficult for a bad actor to fake, but actually quite easy for a normal person who's just a good person to

accumulate. But. But I mean, sorry you have to be conspiratorial here, but my feeling is that there is, there will be and probably is a lot of resistance to these systems because of the amount of control and information that financial institutions, indeed governments are able to collect from the blanket capture of everyone's financial data, companies, financial data documents, etcetera. And then of course, all the service providers and businesses that sort of live off of this

off of this model. I guess my, my, what I wanted to get to here. What what do you think within United States Congress and and policy makers is the appetite for moving towards the world where we have more sort of ZK at the station base KYC and AML compliance rules? Because, you know, coming from from Europe, I feel like yeah, the consensus view in Europe is that we should just collect everyone's information and know what everyone's up to all, all

the time. I don't know if that's the same in the US. In fact, at the end of the day, it's the. U.S. policy that will dictate what the FATF does in the future. That's usually what happens usually. Usually the US says to FAT if this should be the global policy implement it and bullies the world into doing it and then actually often doesn't implement it for its own citizens because they're a constitutional right concerns.

So it's a bad I call it policy laundry actually, like we'd love to impose these on ordinary Americans, but we can't. So we'll go to we'll go to Brussels and we'll tell people to do it globally. Then we'll come back to the US and be like, see, it's now the global standard. And then Americans will be like, actually, you can't you can't do that with our anyway, that's a digression. So to answer your question directly, like what's the

appetite? And you framed it very well in like maybe it's not conspiratorial, but maybe the reason people really like AMLKYC is not actually deterring criminals, it's mass surveillance and there may be

some truth to that. I think that the less conspiratorial reason why there isn't the appetite we would hope is simply that if you're a regulated financial institution today, what incentive do you have to stick your neck out and try alternative modes of of anti money laundering compliance?

Like, are you really going to be the bank that talks to your probably like mid level bank examiner and says this year we decided to stop doing KYC and instead we're relying on these risk scores, which are actually amalgams of much more credible information about the likelihood of criminal behavior from our users. But we don't know their names anymore. No one is going to do that.

And no, no bank compliance department is going to support their chief innovation officer going to treasury and being like, hey, let's do this, right? Like there's there's no money in it for them. There's no reason for them to do it. It's just downside risk. And so it's a collective action problem.

At the end of the day, we might be able to get to a better world where financial institutions and technologists could build these tools that actually make a bigger dent in illicit finance while still protecting our privacy. But who's going to be the first to do it? Government's not going to design that system. They don't have the technical competency, and it's really maybe not their place to even develop the technical

competency. The private sector, as far as any individual bank, is not going to lead by sticking their neck out because there's no incentive for that. This is why we think there's this opportunity in our space, in the more novel fintech and blockchain space, for a group to get together and say, like, actually, we can do a lot better. Share these ideas with

regulators. Regulators who are general, genuinely interested in deterring illicit finance, whose day job is watching terrorist financing and just knowing that there needs to be a way to stop it. We're more concerned with that than they are with mass surveillance, like knowing whether Peter is buying the wrong books today. Domestic terrorism might kind of conflate some of these things together, and maybe that gets

questionable. But in the free society, we wouldn't, we wouldn't want to collect surveillance data on what books people are reading. So we take these ideas and we socialize them with those regulators. And ideally, and this is Coin Center's goal for work over the next few years, actually, we're we're doing it under a internal project we call the John Hancock project because it's the most famous signature on the Declaration of Independence.

The goal is to see if we can actually get regulatory buy in once we present like truly robust and viable alternatives to KYC that are privacy preserving. And by regulator buy in, I don't mean like a strong like yes, if you build this, it will be 100% compliant.

I simply mean a credible statement from the administration, from Treasury or maybe from the SEC if they're starting to talk about tokenizing equities and things like that, that we are open to doing pilot programs for regulated financial institutions to do alternative customer onboarding where a risk score is maybe preferable to a full, full

identity documentation. Because I think if you got that signal from regulators, that starts to break the collective action problem, wherein who wants to be the first to stick their head up with a new, a new system for deterring illicit finance when everyone seems to be fine with the bad system that's working today. And there's no no incentive or or money for you to build a better system. Well, I'm, I kind of, I, I really commend you for this.

I think it's, it's, it's a terrific initiative. Are you worried about the fact that most people just don't care because it deals like, it seems like in principle kind of like this, this will be kind of like a political fight.

And kind of if if you look at how much people winning the divide of themselves, how much they use extractive services despite the fact that they are that feature equivalent private privacy preserving ones, Do you think it's kind of like a cultural battle that kind of we have to win first? So if we were just talking about changing consumer behavior, yeah, this would be fairly hopeless. But I'm talking about something. OK, let's drop it off.

I'm talking about something far more narrow, which all down today, even if you have a consumer who cares deeply about their privacy, when they go to open an account at a regulated financial institution, they have to submit something very specific. They have to it. In most cases it will be a photo of your passport and your face right now. And that will be stored in a in a, probably in an unencrypted database at some point in the in the flow of data. And that's just bad, right?

It's really bad. And so just that is all a regulatory function that's not consumer behavior being, you know, not not conscientious enough about your own online safety. That's literally just a rule that is an interpretation of the Bank Secrecy Act in the US that says institutions need to collect this information for their customer due diligence. And that rule could be changed if you had people who cared not in the consumer base, but just in the regulatory and compliance areas.

And I think I think there are more people that Care now. Just from my meetings with people in Treasury and the SEC over the last five years, there is a growing awareness of the how how bad the current AML efficacy is and. You know, it's kind of like finding fun common ground with people. I hate it because it's the system that destroys my privacy and I have certain civil libertarian ideological underpinnings.

You hate it not necessarily for exactly the same reason you you might believe in in a certain like rights to privacy and freedom, but you hate it because it's just not even stopping criminals anymore. It's in fact stopping disenfranchise people, poor people, people who are easily dissuaded from using financial services when they put up

barriers to them. And it's not dissuading, you know, hardened criminals who can easily amass a whole dossier of, of fake passports or passports that are not their own, right. Yeah. I mean, I I think the there's, there's two parts to this. I mean, there, there is the consumer part and I feel like it's probably fintech apps that would implement this sort of risk based KYC using attestations. You know, I could see like a Revolute doing this right for consumers, but it gets so much

more complicated for companies. And we run a small fund and the cost of compliance and the amount of compliance work that we have to do is just like, I don't even want to imagine like a, you know, a fund twice or three times their size or like a company like Nosis, The amount of compliance work goes into just day-to-day operations and the cost that has the company. And if you extrapolate that to the entire economy, it's a huge

number here. You've loaded some numbers earlier and, and, and I think it gets much harder then because it's not just, you know, your passport and what your salary is, why it's, you know, it's the, the entire organizational structure. You know all of your UB OS and I mean you know. Well, so much of it is still human driven today, which is wild and part of the reason the system doesn't work well. Like if you if you had more composable proofs that are difficult to that are difficult

to forge and you had some ability, probably from a third party like a watched dog organization or even the government to recalibrate. When one particular aspect of a proof say, like your say, you say a particular financial institution gets hacked. And they were one of the ones making at the stations about like past bank transaction history for civil prevention, just proof of human or maybe

that they'd KYC these people. Then you need to be able to on the fly devalue that as a bundle of a risk score. Maybe it doesn't go to 0 within the risk score, but suddenly that which was providing some robustness to this risk score gets unweighted to down to like half of what it was before. Because we think it's compromised and we don't think all the identity data they have is bad and all the attestation.

So they make it bad, but it should definitely be lower in, in the, in the, in the ultimate cumulative calculation of of risk. And like that's what you want. You want a system that's got the ability to observe threats and rapidly recalibrate, sometimes referred to as an OODA loop. It's like observe, I don't know. I don't know what it stands for. It's it's in like military, it's like a fighter pilots.

They're supposed to like survey their realm and then make decisions based on new information and rapidly iterate. That's what you want in an in an environment with revolving threats, Right. But that's not what we have right now. Right now we have like people who actually manually look at passports still. And like when you go to the airport, all the security theory is like, yeah, it looks like you. It's like you have facial tracking now. Like why are you still doing this?

I don't know anyway. How much I think this is kind of like part of part of the equation, kind of like making sure that actual bad guys are more easily catchable, right? But I think kind of like you can also see it from the other, from the other side of you actually owning your identity because kind of like if you, if you look at the way how we use identity services, mostly we're renting. I kind of like if I kind of like login with Google, kind of like, what do I have?

I mean, they have they have all my stuff, they have my data, they know who I am and kind of like I, I am beholden to them that they don't that they don't off board me. And same for all other kind of it's there's there's that kind of like in web tool, there's nothing that's truly yours. It's kind of like you are the renter for everything. And it's a huge power imbalance kind of like in kind of puts every single person at an enormous disadvantage.

And if you could just say this is yourself sovereign identity and you can kind of you, you can you can use this to validate your identity in whichever way you choose against whatever you don't need. You don't need someone else kind of stand up for you and say, yeah, this is really Peter. I think, I think this, this, it's super powerful.

I've started saying that like when you are you online, you have a different name, like going back to like the feudal medieval period, like where your name was like Peter Blacksmith because you were the blacksmith, right? When you're online, you're Peter Instagram or your your nirajx.com like you're not yourself, you are you are a vassal of the feudal Lord. That's a problem. This has long been discussed in crypto circles as being part of

the problem. And a big a big the the the goal is the end goal is to be self sovereign over your identity

over your persona online. And this does factor into things like KYC because the simplest way to do better KYC would be to have one big corporation that collects all of this information and generates a risk score that is far more computationally efficient than trying to do it using disparate credentials, multi party compute, and maybe some like anchoring on open block chains which require proof of stake or proof of work or any number of other inefficient non paralyzable processes.

It would be much better if it was just one company. But then of course we all understand why it shouldn't be one company, because this is not just one company that collects all the passports. Now it collects your entire trail of bread crumbs that you leave across your entire life that you want to amass into a viable proof.

It should instead be the user using commonly available transparent open source tools and amazing new privacy preserving technologies can amass these credentials and voluntarily themselves generate probably variously differently calibrated risk scores that might be calibrated by third parties, but third parties don't hold the underlying data.

The underlying data, all the attestations that the person wants to make with their credentials are things that they control in a wallet that they have. So very much like the alternative to Google sign on being like sign on with Meta mask or sign on with some sort of like key pair that you control. But that would need to be that there's a lot of building left

to do there, obviously. I mean, you say that that entity shouldn't exist, but kind of like, if you look at what Google plausibly knows about you, Peter, I mean that that entity exists, right? And multiple of them actually exist. I mean, they shouldn't exist. I think this is yeah. But right now they're not identified in law as the as the entity that should be doing anti money laundering verifications they'd probably be really good at. It they would be accident at it.

Yeah, if you started, if you passed a law that said banks don't need to do KYC anymore, they just need to ask Google if somebody's evil or not. And Google can't be evil. So that would that would probably be much more efficient as far as like stopping a lot of money laundering and crime, but it would also be a disaster from a civil liberties standpoint.

So ideally we need to identify in law something else that could be equivalently superior to the existing AML regime, but doesn't hand all the power to one big tech corporation or big bank. And the stuff in our space is the stuff that can build those systems, though it will be a very difficult thing because we're competing against much more efficient technology companies that don't have the costs of civil liberties, which are spreading data out, decentralization, strong

encryption, things like that. We've we've talked a lot about privacy and identity. Yeah, it kind of just became the privacy identity. I hope you don't mind. No, I think it's a great discussion. This is perfect. Are those the things that you think kind of we need to we need to pay the most attention to right now? Are there are there lesser publicized things where where you think kind of like this is something that is currently overlooked that we absolutely

need to get right? I'm glad you asked the question because, because people who don't know Coin Centre might not be mistaking me for like, like, like the Digital Identity Center. And I'm like, no, that's, that's an initiative that we're just beginning because we realize there's appetite from regulators to try alternative AML methods that could better preserve people's privacy. Coin Center's main day-to-day work, our #1 mission priority is

always to defend the developers of open blockchain networks from inappropriate regulations or unjust prosecutions. And so this goes back to our earlier discussion about, say, the Pereira Bueno case where, you know, you've got people who are validating on chain, obeying the rules of the protocol, and yet the Southern District of New York wants to accuse them of being involved in wire fraud or committing wire fraud. That's not a good legal precedent to set.

And it's it's, it's going to discourage people from participating in these free and open networks as validators. The other big things, the things that we were definitely discussing more say like last year are the Tornado Cash case. First, the sanctions of Tornado Cash, which a big win actually in U.S. policy was Coin Center and others challenged the

legality of those sanctions. And ultimately just this past spring, those core challenges we won and that means that the the administration delisted Tornado Cash. So Americans are now free to use Tornado Cash again. This is actually like a very real. Only Americans or well. Let me yeah, let me be clear. The sanctions only ever applied to Americans. That sanctions law says these are foreign sanctioned entities. Americans are are not allowed to transact with them.

Foreign persons could have maybe secondary liability even though they're not Americans for violations of sanctions law, but that's less clear. But Americans were just banned from using Tornado Cash after the sanctions came out. That was unequivocal, but just. The small tangent here speaking, does that mean that people who had funded funds in Tornado Cash can now take them out and you know the Binance and trade them back for. Bitcoin or whatever, absolutely

really under the law. Under the law, there's the the the sanctions are now null and it is as if they never existed. Got it. So you you are not liable for sanctions violations if you now reclaim your property that left

in the Tornado Cash pool. You should be very careful doing it. And I'll just say this because many of the user interfaces to Tornado Cash, the underlying pools are actually compromised now from what I understand, because they kind of fell into disuse and people started setting up like front ends that actually had back doors that would steal your steal your funds instead of allowing you to

take them. So be careful if you are trying to reclaim property that was left in Tornado Cash from a long time ago, but legally you're safe. But will you ever have a bank account again? Because kind of like even if kind of like you're you're it's no longer on the sanctions list, Will it still be flagged? Will you be de platformed from whatever yeah, traditional rates you have? I mean, not that I had ever used Tornado Cash, but I know people who have.

I have used Tornado Cash. I've used it liberally and for good reason. So kind of it's.

This is a tough one because what you all, what you, what you need to do to address that is to socialize the fact that there there is no legal risk to a financial institution in now accepting Ethereum that came from a tornado cash address, Especially if you know the customer who's bringing it to you, like you know that they're just American who is like getting paid their salary on on Ethereum and wanted privacy over their salary, like one of our Copley tips in our lawsuit.

But how can we socialize that amongst all the compliance departments of all the banks? So if there's if there's a stigma that's still attached, that's something else. My point is that the law has changed. It is now technically legal to reclaim those funds and to use them. Maybe you should run them through railgun first before the taking somewhere else to take off the tornado cash funk on them.

They might get new funk from other from other privacy, which goes back to our discussion about base layer neutrality. Like base layer neutrality, it like no one's going to ultimately end up using these privacy tools if they're still just islands of privacy within a larger transparent chain because you'll always be like hell, the scarlet letter of having gone through this little privacy tool, even if you were doing it

for the right reasons. And we can also watch in real time as bad people use these tools. And that creates headline risk and it creates, you know, risk to the whole technology. So the sanctions are invalided. The other big thing that happened this year, and it's not it's bad news instead of good news, is the developers of Tornado Cash, Roman Storm specifically was found guilty of unlicensed money transmission in his court, in his court case in the Southern District of New York.

That is a very bad outcome. It's maybe not the worst outcome for Roman Storm because he was also charged with money laundering and sanctions evasion but the jury couldn't reach a verdict there. So he could get re prosecuted for that or may not but he was found guilty of unlicensed money transmission and this coin center has done tons of work on

this. It's just ridiculous because Tornado cash never had control over user funds then certainly not the developers of Tornado Cash and also not the torn token holders. No one did. They were in immutable pools on chain and FinCEN, the regulator for who needs to register ISM as a money services business in the US who is doing money transmission at the federal level, has said you're not doing money transmission unless you have total independent control over customer funds.

So you might ask, why is he then guilty in New York of unlicensed money transmission if the regulator said he wasn't ever doing money transmission? And it's because of the Southern District of New York has this sort of wild theory of criminal liability for unlicensed money transmission. That transmission is something broader than what the regulator requires a license for. And they did it. And therefore we can charge them with this.

And what I think what's really happening is it's hard to charge someone with money laundering sanctions evasion, because you have to prove criminal intent, some specific intent to actually hide some specific bad funds. And like, yes, North Korea used Tornado Cash, but that was after they published the software. And So what did they have intent to do? They had intent to publish a privacy tool and then somebody used it for money laundering after. That's not intent to launder money.

That's intent to publish a tool that people will use to do lots of things. It's much easier to charge someone with unlicensed money transmission because there's no intent requirement. All you have to ask the jury is were they doing money transmission? And we will tell you jury that we legally define money transmission broadly. And did they knowingly transport criminal funds while doing money transmission?

And I guess you could argue like they watched it as it happened with their software did it. So it's a, it's a much lower bar. There's no, there's no need to show the jury that they intended for this to happen or wanted this to happen or directly facilitated it happening. You just say did you have a license? Or not. So it's saying that they watch them watch their software do it and did nothing about it.

It's like insane because like watch, it's like, it's like having a gun store and have someone buying the gun and then watching that guy mow down a crowd of people as he walks out your store, right? And, and that's why we we would not usually subject people to a strict liability regime for things that are not ongoing conduct. We subject money transmitters to a strict liability regime because they're always in control of the conduct on their

platform. And so maybe the reasonable liability rule is if you're always in control, you could always stop it. So if anything bad happens, you're automatically responsible. But that only makes sense in the context of a money transmitter. If you're a software developer, having strict liability for all the things that people do with your software for failure to license it is just going to make it impossible to publish software because it's everyone knows most people do good things

with the software. Some people do bad things. If you're responsible for all the bad things people do with your software, you won't publish software anymore. So it's as I said, Roman could have had a worse outcome as far as like jail time if they've been convicted of money laundering and sanctions evasion. But the fact that he was found guilty of unlicensed money transmission is a very bad precedent for the space, because that charge could be brought up against almost anyone in this

space. Because their theory of what is money transmission that requires a license is any facilitation of the movement of tokens on chain, which is something that, like everybody who's involved with cryptocurrency has done in some way. And most of them, unless they're like coins, Coinbase, have not gotten a license to do it. So this is a very bad precedent. It needs to be challenged at the appeal level. So we're hoping that Roman will

appeal his guilty verdict. Coin Center is also supporting a civil litigant, Michael Llewellyn in Fort Worth, TX, who is a developer who wants to release the privacy preserving

crowdfunding tool. He calls it Pharaohs and is willing to sue the Department of Justice for declarative judgment before he publishes that tool to get clarity from a judge that publishing that tool without licensing with Vincent will not be a felony, will not be unlicensed money transmission and coin Center is supporting his lawsuit.

So we have sort of multiple paths to address this particular threat, legal threat to the permission that the the freedom to build these permissionless systems. We also have a legislative effort. There's a bill moving through Congress called the Blockchain Regulatory Certainty Act, which would create a safe harbor for non custodial developers. And I'm actually optimistic it already passed the House. It might pass the Senate.

There's like a good chance we'll actually get a legislative solution to this problem as well. This is the day-to-day work of Coin Center and now we are all increasingly interested in privacy preserving alternatives of KYC, but most of our work is in the trenches in the courts, in the legislature, trying to protect developers from inappropriate liability for other people using the software

to do bad things. So. If you had to make a prediction, one thing that we don't yet see coming, kind of like from the regulatory sphere for the next 12 months, what, what, what would it be? You know, this is actually an interesting one. People might be expecting me to say, like, something scary and

bad. The thing that's surprised me most recently that I think a lot of people haven't grokked yet is that the SEC, which until recently was a very aggressive regulator in this space, interested in going after even people who were potentially good actors, tried to do their best to comply. The SEC has done a 180 and actually in a very good way. Hester Purse commissioner there and the new chairman Paul Atkins They are they are legitimate.

They are they are very genuine when they say they want to tokenize everything which is actually like Paul Atkins gave a speech about this and they are also very genuine.

They talk about financial privacy Commissioner has to purse give an amazing speech in defense of financial privacy where she where she said we should celebrate rather than attack the availability of technologies that will recreate transactions that are like the transactions our forefathers understood when they wrote the 4th amendment that if I pay you in some coins or some some dollars, there's no record of that transaction and that there's no way to surveil that

transaction in a warrantless way. So between tokenizing everything and technologies for financial privacy are important and should actually be celebrated. Rather than attack, the SEC sounds ready to do a lot of proactive things in the space to enable the kind of global and open and fair and liberal financial system that we want to build. And. There's open and liberal financial system and SEC in the same sentence as something that I had on my bingo card, but

it's. And, and lots of people are, are now aware of this, but I think I still talk to people who are like, should I go in and talk to Commissioner Purse about the, the very potentially important tool that I'm building? Or is that scary? Should I find a way to say that like we can still preserve the role of say transfer agents and other intermediaries in the system because they're wary of like going full token tokenized? And I'm like, not necessarily

like everything's on the table. I think there. And like there isn't necessarily right now amongst the commissioners a desire to reintermediate when that reintermediation of securities transactions is inefficient and unnecessary. So I think like just fully tokenized equities are on the table and I think private

transactions are on the table. Now, there is an interesting thing here where obviously we're not going to have a world where, you know, North Korea could steal a bunch of US equities in tokenized form and they're not going to find a way to cancel those shares. So we will still need tools for identity and compliance on these perhaps permissionless new

securities ecosystems. But that's again, part of why I'm interested in finding like privacy preserving alternatives to the ineffective KYC regimes we have today so that we can find ways to like figure out what the issuer security issuers liabilities should be or obligation should be vis A vis the wrong person getting a hold of the US equities that they

issued. But there's ways to address that in a tokenized environment that aren't like just rebuild a transfer agent who's a person who's just like got a list of names of shareholders and is like, well, we can't send that to him, you know, like something better than them. So so. Tell people working, learn more about Coin Center and support your work. So I think it's very important work, so. All of our work is publicly available at coincenter.org.

This report that I mentioned on digital identity is one of the more recent things we published. And also I think more people should take a look at that amicus brief we filed in the Pereira Bueno case about Mev boost.

Whether you're interested in minor extractable value or not, it's it is it sort of helps tee up why there is this existential threat to neutrality of the base layer, in part because of the transparency of the transactions on it and the inevitability of regulators or prosecutors inferring legal duties on the validators and then arresting them for failure to obey those duties. So that amicus is also up on our site right now, yeah. Super cool.

Thanks a lot. Thank you for taking the time to. Speak with us. It was a pleasure. Yeah.