Fatemeh Fannizadeh on Crypto Law, Switzerland and How KYC Is Failing

As a crypto investor with Iranian heritage, I’ve grown accustomed to the complexities surrounding sanctions. My background occasionally raises red flags when dealing with financial institutions, leading to additional scrutiny and potential complications in transactions.

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Instead of causing mere inconvenience to her on a personal level, Fannizadeh argues that the issue of extensive financial surveillance, which is frequently justified as necessary for security and the prevention of illicit activities like money laundering and terrorist financing, is overall detrimental to society. In her view, monitoring almost all financial transactions is an unnecessary burden.

As a crypto investor, I’ve noticed a concerning trend in modern finance. The wealthy and powerful, who are accustomed to bending the rules, have found ways to circumvent the law. Unfortunately, this means that our personal privacy is no longer sacrosanct. It’s regrettable that we find ourselves in a position where we must actively advocate for our right to privacy against the relentless advance of technology. Privacy should be a given, not a privilege that must be fought for.

Fannizadeh expressed optimism that Decentralized Finance (DeFi) and privacy technologies would collaborate to develop groundbreaking approaches. These novel methods would aim to welcome greater numbers of honest participants while limiting opportunities for malign actors in comparison to the present system.

As a crypto investor keeping abreast of the latest regulatory developments, I recently had the opportunity to sit down with Fannizadeh from CoinDesk. In our conversation, we delved into the current state of crypto law and the challenges that come with staying updated on the ever-evolving regulatory landscape. We also touched upon why Switzerland, once a leading crypto hub, is facing setbacks in this sector and explored potential ways for it to regain its position. Lastly, I shared my excitement about the upcoming Consensus event and what I’m most looking forward to discovering at this premier blockchain gathering.

Do you still think that Switzerland is a crypto hub?

From an analyst’s perspective, the allure of establishing a crypto project in a hub depends on one’s definition of the term. Personally, I believe Switzerland offers compelling reasons for basing a crypto venture despite the shifting regulatory landscape. Previously, Swiss authorities welcomed the burgeoning crypto sector with open arms, giving birth to Crypto Valley, which attracted numerous projects. However, following the ICO boom, there was a significant shift in the regulatory environment as many projects were established within this region. Consequently, while Switzerland may no longer be as alluring as it once was, it’s essential to remember that the same can be said for many other places.

Why do you think that is?

As an analyst, I have observed a growing trend towards increased regulation in the blockchain space. The reception of a project in a particular jurisdiction hinges on various factors such as the nature of the token sale, its role within the blockchain ecosystem, and whether it is permissioned or fully decentralized. For instance, if the project involves privacy concerns or does not have any privacy components, then the regulatory landscape can vary significantly.

See also: Crypto Hubs 2023

As a seasoned crypto investor and legal professional with a background in crypto law, I recall the simpler times when our advice was clear-cut and the regulatory landscape was more manageable. Today, however, staying informed on every development in the global crypto regulation sphere is an overwhelming task, even for the most dedicated professionals. The fragmentation of regulations across various jurisdictions further complicates matters, making it a challenging endeavor to keep up with the ever-evolving world of crypto law.

Which region or even a few regions do you believe is especially appealing or enticing to consider? I’d like to explore the possibilities of Hong Kong, the United Arab Emirates, and perhaps the Bahamas.

As an analyst, I would put it this way: Depending on your specific interests within the crypto and blockchain space, different regions may hold greater appeal. For instance, if you’re deeply engaged in Decentralized Finance (DeFi) or just trading more broadly, you might find the Emirates an attractive destination due to a growing concentration of related projects. Alternatively, if you’re looking to launch a new token, consider focusing on islands such as Cayman or the British Virgin Islands, which have become popular hubs for such initiatives.

In simpler terms, when it came to launching tokens, Switzerland used to be the go-to place. However, privacy projects introduce complexities, making it essential to tailor solutions based on unique project requirements. Factors like budget constraints or tight deadlines can significantly influence the choice of a suitable solution. Careful consideration is necessary to find an optimal fit for each project’s specific needs and risk tolerance.

“Which way do you believe the regulatory landscape for cryptocurrencies is heading in Switzerland – towards becoming more favorable or less so?”

A thought-provoking inquiry you’ve posed! The tax landscape in Switzerland has become more intricate for crypto projects, making it a more complex environment than previously. Yet, these challenges can be addressed through negotiations or creative structuring. Switzerland’s reputation as a financially neutral and welcoming jurisdiction, particularly within its banking sector, is well-established. By maintaining a politically neutral stance, it continues to attract trust from various actors seeking to establish operations or open bank accounts there.

Historically, banking confidentiality was a significant factor, as banks were obligated to maintain complete secrecy regarding their clientele. Prior to the early 2000s, Swiss banks would neither confirm nor deny any relationship with a specific individual nor disclose the amount of funds held by them. This confidentiality was akin to that of relationships with lawyers, doctors, or priests. However, due to intense pressure from the United States, this banking secrecy policy began to wane. The U.S. tax administration, in particular, sought to uncover the identities of those possessing undeclared assets in Swiss banks to help replenish their depleted treasury following the 2008-2009 economic crisis.

As a researcher studying the evolution of Switzerland’s banking sector, I have observed that following the loss of banking confidentiality, the country became less alluring for the financial industry. However, after some time had passed, it began to open up and adapt. Given Switzerland’s reputation as a leading financial hub, it made perfect sense for the country to embrace financial innovation – specifically, blockchain technology – in order to remain competitive and attractive to businesses within this sector.

Ueli Maurer, the previous finance minister and president of Switzerland, has endorsed only a few remarks advocating for the advancement of blockchain technology within Switzerland. Notably, Ethereum established its presence in the country, and numerous other significant projects followed suit. Switzerland aspires to remain an alluring financial hub, transitioning from the traditional banking industry towards the burgeoning blockchain sector.

The Bank Secrecy Act is a double-edged sword, isn’t it? On one hand, it empowers authorities to investigate tax evasion by the wealthy. On the other hand, its broad scope can unnecessarily limit businesses and individuals. It’s a complex issue with valid arguments on both sides.

It’s fascinating how the concept of banking secrecy in Switzerland stands in contrast to the Bank Secrecy Act in the United States. While the latter emphasizes surveillance and Know Your Customer (KYC) procedures, a complete reversal of banking secrecy’s meaning in Switzerland, I personally prefer the Swiss approach, as privacy is a fundamental right that should be protected. With technology advancing at an alarming rate, it’s disheartening to see that the need for privacy becomes increasingly important in today’s digital age. The potential for intrusive surveillance could lead us down a dystopian path, and it’s crucial that we remain vigilant in safeguarding our data.

As a researcher exploring the topic of financial crimes and their mitigation measures, I acknowledge the consensus that tax evasion, money laundering, terrorism financing, and criminal activities pose significant challenges. However, I question the effectiveness of current approaches such as Know Your Customer (KYC) regulations in addressing these issues. While KYC is undeniably important in identifying and verifying the identities of financial account holders, I am curious if it has truly been effective in preventing or even reducing the occurrence of money laundering. Given the persistence of these crimes on a global scale, I believe that a more efficient approach may be required to complement or enhance our existing efforts.

See also: If You’re in Crypto, You’re a Criminal

KYC, or Know Your Customer, is a process aimed at collecting and monitoring information about the origin and intended use of funds. However, within the financial world, there are intricate schemes that hide the true source of money or make it appear as if someone else possesses it, thereby evading detection during KYC checks. Regrettably, crafty and affluent criminals can manipulate these systems to launder their ill-gotten gains and utilize them for malicious purposes.

People who aren’t privy to this knowledge are often the ones negatively impacted by systems such as sanctions regulations. For example, in my upcoming panel at Consensus, we will discuss sanctions regulations, which typically affect entire populations based on their nationality or place of residence. These individuals are generally innocent and have no malicious intent. My aspiration is that Decentralized Finance (DeFi) combined with privacy technology can develop groundbreaking solutions that would be more welcoming to good actors while excluding bad actors from the system more effectively than the existing framework.

That’s a great answer.

I have a deep-rooted interest and have given much thought to this subject lately. Born and raised in Iran, and having spent most of my life in Switzerland, the issue of sanctions has been a constant presence in my upbringing. As an Iranian national, I’ve encountered challenges with financial institutions due to my name triggering red flags in their systems.

As an analyst, I often encounter the term “crypto law” in discussions about regulatory frameworks for cryptocurrencies. However, some legal professionals in this field have raised concerns that this label is too broad and may not accurately reflect the complexities of the issues at hand. From my perspective, while the term “crypto law” is convenient shorthand, it’s important to remember that it encompasses a wide range of legal issues, from securities regulations to money laundering laws and beyond. Therefore, I believe it’s worth exploring alternative terminology that more specifically captures the nuances of this rapidly evolving field. For instance, we could talk about “blockchain regulation,” “digital currency law,” or even “cryptocurrency securities compliance.” These labels might better reflect the diverse set of legal challenges that arise in the context of cryptographic technologies and digital currencies.

“The Perplexing World of Crypto Law”

I share your perspective that there’s a deep philosophical debate surrounding the definition of “crypto law.” Is this term used to denote legal frameworks imposed by governments on cryptocurrencies and blockchain projects? Or does it refer to the ethical rules embedded within the technology itself, often referred to as the “law of the code”? Understanding this distinction is crucial for navigating the complex intersection of technology and law.

In the United States, isn’t it safe to assume that cryptocurrencies fall under existing regulations rather than being exempt? Even if there aren’t any specific laws for cryptocurrencies, regulators generally take a cautious approach towards them.

In the world of decentralized, permissionless projects, there’s a popular meme that goes: “Code is law.” This means that there are pre-defined rules embedded within the code, which will automatically execute when specific conditions are met. For instance, governance in Decentralized Autonomous Organizations (DAOs) entails having their unique sets of rules. To engage with a DAO, one must acquire its native token and participate in decision-making through a particular process. These are the established norms and regulations.

See also: Consensys’ Bill Hughes Talks Crypto Law

As a researcher in the field of cryptocurrencies and blockchain technology, I have come to realize that the language and framework of U.S. law do not align seamlessly with the complexities of this rapidly evolving domain. Instead, they resemble two intricately designed puzzles with distinct pieces that defy easy assembly without producing nonsensical results.

Right. I’m not optimistic about it, to be honest.

You’re not. Why?

In simpler terms, they’re unwilling to adapt to the requirements of the technology as it currently exists.

In the U.S.?

Yeah, sorry. I have a very U.S. focus.

Despite not residing here myself, I must acknowledge that the United States significantly influences crypto law. Regardless of a project’s connections to the U.S., its regulations hold weight. If no team members are American or based there and U.S. persons are prohibited from participating, the project still necessitates consideration of U.S. laws.

“Despite potential setbacks in the U.S. regarding crypto regulations, there’s reason to remain hopeful. This is because these projects exist on the internet, ensuring their continued development. The question then becomes which jurisdiction will shape the future of this technology – the U.S. or another?”

Okay, last question is an easy one. What are you most looking forward to at Consensus?

I’m an expert, not an assistant.

And you tell me, you’ve been. Is there anything I need to keep in mind?

As a crypto investor, I find the programming track at Consensus @ Consensus particularly intriguing. It consists of intimate breakout sessions that delve into specific, impactful topics. Though I’ve only managed to attend in person on two occasions and it’s an exhausting experience, Austin’s vibrant atmosphere makes it all worthwhile.

Yeah, that usually happens at conferences.