At the Bitcoin conference in Nashville in July of 2024, then-candidate Donald Trump made a campaign promise to end the war against the use and development of cryptocurrencies. This war was coined “Operation Chokepoint 2.0” and led by Senator Elizabeth Warren, former Chair of the Securities and Exchange Commission Gary Gensler, and the Biden Administration. Despite Trump’s obvious relatively relaxed stance on “crypto”, the Biden-era “Chokepoint 2.0” lingers on: the CEO of Bitcoin “mixer” Samourai Wallet sentenced to five years in prison by the Southern District of New York on November 6. (So-called “mixers” allow users of cryptocurrencies to obtain a level of privacy not normally possible on public blockchains).
While the charge that ultimately stuck against Samourai Wallet CEO Keonne Rodriguez was conspiracy to operate an unlicensed money-transmitting business, repeated accusations of money laundering were used to build the case against him.
In a similar case in August 2024, a jury found Ethereum developer Roman Storm guilty of operating an unlicensed money transmitting business. In this case also, Storm was also charged with conspiracy to commit money laundering, because the privacy tool that he developed was alleged to have been used by nefarious actors. In the end, the jury’s lack of unanimous agreement meant the money laundering charge did not stick.
In the respective cases against both Rodriguez and Storm, prosecutors decided that money laundering (or conspiracy to launder) was a charge worth stacking against them to make the overall activities they were involved with appear to be of greater severity. And in both cases again, the charge that they were ultimately found guilty of (unlicensed money transmitting) doesn’t pass any reasonable smell test given that both Samourai Wallet and Tornado Cash were “non-custodial.” Neither service ever took custody of the coins to begin with, so they could not have “transmitted” funds, legally or otherwise. This was also the conclusion of lawyers at the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
Why Anti–Money Laundering Now Touches Everything
Money laundering is a topic that often comes up in financial matters of all kinds. Over recent years, especially since the birth and growth of Bitcoin and other cryptocurrencies, anti-money laundering (AML) efforts have expanded substantially by governments, central and commercial banks, and by intergovernmental organizations such as the OECD’s Financial Action Task Force (FATF). In fact, under the present climate, law-abiding individuals can hardly interact with a financial institution of any kind anywhere in the world without having to answer questions about source of funds, take repeated selfies from various angles, and upload photos of government-issued documents, and more — even when dealing with small amounts of money.
As a result of AML, financial institutions across the internet find that they hold treasure troves of sensitive user data that serves as a high value target for hackers to be exploited and sold on Darknet marketplaces.
In short, regulators have built a giant industry that imposes high costs onto private sector actors and taxpayers without much discussion of costs versus benefits. As such, the subject matter of AML efforts demands a revisit.
Blind Spots and Perverse Incentives
The term ‘money laundering’ was coined after the Watergate scandal of the 1970s, yet it was not formalized into law with any federal offense until the Money Laundering Control Act of 1986.
These days, law enforcement and regulatory agencies such as the Financial Crimes Enforcement Network (FinCEN) and Financial Action Task Force (FATF) typically use the term alongside other terms that imply an obvious victim needing protection: ‘terrorist financing’, ‘human trafficking’. This is meant to provoke a strong reaction against money laundering as a practice. One problem with the association of money laundering with these other terms that obviously justify a strong response to prevent them is that money laundering does not, in itself, always have a clear victim. As such (at least from a classically liberal point of view), it is not clear that money laundering’s illegality is justified — at least not in every case.
To understand this, consider that the Money Laundering Control Act of 1986 emphasizes that money laundering involves the transacting with and concealing of criminally derived property. While this may seem reasonable on the face of it, it should be stressed that nearly everyone can think of something that is illegal that (from their own moral code) should not be.
So, for example, libertarians typically criticize America’s Drug War, arguing that recreational drug use is generally a victimless crime. If someone sells a small amount of marijuana for a $50 banknote, then pretends that it was derived from the sale of ice cream, that could be considered money laundering – even though there is no victim. Both buyer and seller are happy. Whether law enforcement would typically charge someone of money laundering in a minor case like this or whether it would hold up in court is besides the point. Money laundering can – at least in some cases – be a victimless crime and even be said to protect life and property, despite its illegality.
No sensible person wants to live in a world in which a Leviathan state is omniscient and omnipotent, capable of cracking down on every minor infraction. (It is noteworthy that Switzerland became a global hub for financial privacy because persecuted Calvinists there knew very well the importance of that privacy to their freedom and safety).
Next, it is important to consider some problems with the AML machine, as it is in practice. Four points made by authors Norbert Michel and David Burton at the Heritage Foundation are worth noting.
First, the vast majority of money laundering investigations, indictments, and convictions on the federal level in the United States are by the IRS, not the FBI. This strongly suggests that its primary use case is to maximize tax revenues, not to protect victims (as repeatedly mentioning money laundering alongside terrorist financing and human trafficking suggests that it does).
Second, it is impossible to demonstrate any effectiveness of anti-money laundering efforts as a tool to crack down on more serious crimes since law enforcement typically charges alleged offenders with money laundering and non-money-laundering crimes simultaneously. Michel and Burton write that this practice “[makes] it difficult to tell whether law enforcement discovered a drug crime because of money laundering or vice versa.”
Third, no matter how you splice the numbers, the cost to taxpayers to convict a person for money laundering is several million dollars each, and sometimes in the hundreds of millions – and none of this even includes the hundreds of billions of dollars in compliance costs to the private sector every year.
And fourth, tax evasion is often cited as a justification for AML. But as Burton and Michel argue, crimes in one country are often not considered crimes in other countries and therefore do not justify data sharing between governments (as AML legislation requires) under the principle of dual criminality. Tax evasion is, in some countries, a civil violation (not a criminal one). So to use tax evasion as a justification for AML data sharing is about as misguided as using “speaking out against one’s government, peaceful political or labor organizing, gambling, [or] homosexual behavior.”
Consider just one example that demonstrates how AML has run amok outside the United States. In New Zealand, like in many parts of the world, someone accused of a crime maintains the legal right to attorney-client privilege. That privilege does not apply, however, in cases of suspected money laundering. So, if you commit a series of violent murders in New Zealand, you have full right to a proper legal defense, but if your attorney suspects you may be involved with money laundering, he is required to submit a Suspicious Activity Report (SAR) about you – and thereby do exactly the opposite of what attorneys exist to do in the first place. This reveals backwards governance priorities of policymakers.
And lastly, the elephant in the room. While AML efforts globally impose enormous costs onto taxpayers, private businesses, and the economy more broadly, it should be noted that the primary offenders are some of the world’s largest banks. Add to that, many activities conducted by government agencies themselves or by private actors on behalf of these agencies certainly rhyme with money laundering.
To cite just one example, recent discoveries of Jeffrey Epstein’s activities from 1979 onwards reveal that while he worked for Bear Stearns, he was responsible for concealing the true sources of funds for illegal arms deals on behalf of intelligence agencies of various governments. So while the AML regime is promoted as one that hinders crime, it seems ineffective at hindering crimes committed by the politically powerful.
AML is a Regulatory Attempt to Erode Privacy and Property Rights
The first “Crypto Wars” of the 1990s established the legal precedent that computer source code is protected speech under the First Amendment. What remains of the ongoing Biden-era Operation Chokepoint 2.0 lawfare threatens that precedent. Additionally, the privacy protections intended by the Fourth Amendment are under fire nearly everywhere in the world when it comes to financial privacy. In the United States, the chief enemies to it are the Bank Secrecy Act, the Foreign Account Tax Compliance Act (FATCA), PATRIOT Act, the Money Laundering Control Act, and Chokepoint 2.0 — all regulatory attempts at weakening property rights in one way or another.
There are ways in which anti-money laundering laws can be rationally justified from different perspectives. But given that AML creates a new class of victims for exposure to frequent data breaches, given that it is not clear just how effective AML is at revealing more serious (non-money-laundering) crimes, given the enormous cost to taxpayers and to the private sector, given that money laundering can be a victimless crime, and given that it is a tool of choice for prosecutors to shut down founders and developers who provide much-desired financial privacy to cryptocurrency users, it is time to call AML out for what it is: an enormously wasteful scheme and abuse of power.
