Last year a financial institution with which I had been a long-time customer asked me to re-verify my identity by providing two forms of ID. I uploaded a copy of my passport and my driver’s license. After “several business days” of processing, my passport was accepted. As for my driver’s license, on the other hand, the institution deemed it invalid. True, my license had recently expired, which technically meant that I no longer had the right to drive a motor vehicle. However, as a human being I had not expired. In fact, the photo on my driver’s license was even more recent than the photo on my passport.

As a fifth-generation born Californian, I suppose that it could be argued that the right to drive is inextricably coupled with a person’s identity… “I drive, therefore I am,” perhaps could be the motto in The Golden State. At least, this is exactly what the financial institution was arguing. According to their logic, once my right to drive a motor vehicle expired, my driver’s license no longer identified the same person. One day I was “Driving Mark.” The next day I was “Not Driving Mark.” Two distinctly different individuals. As Driving Mark, the bank knew me. As Not Driving Mark, I had suddenly become a persona ignotus, and threatened to become a persona non grata if I didn’t renew my driver’s license.

I would venture to guess that most of you reading this article have suffered similarly mind-numbing experiences. We grit our teeth, swallow our frustrations, and laugh at the absurdity of it all, but usually in the end we resign ourselves to jump through these hoops, mainly because we are pragmatic beings and simply want to get on with our lives.

Financial institutions conduct this farce under the guise of KYC, Know Your Customer policies. But let’s face it, perhaps a better acronym would be CYA. Much like the security theatre of removing shoes at airports, authorities must be seen doing something, in order to maintain plausible justification of a duty of care when an unfortunate exploit eventually occurs.

In his excellent piece entitled, Crypto Should Disrupt Current Anti-Money Laundering Practices, Not Adopt Them, Boaz Sobrado compares current KYC/AML procedures to medical blood-letting practices of the 1900s. He argues that the U.S. policy experiment initiated in 1970 via former President Nixon’s Bank Secrecy Act — requiring financial institutions to monitor transactions exceeding $10k (which represents over $70k in today’s dollars) — has largely failed to stop criminal money laundering. Applying these arcane and empirically ineffective surveillance rules to crypto would be even more absurd. “Why would criminals use the relatively small cryptocurrency market to launder funds on a public record, when they can easily launder billions through the conventional financial system without a trace?” Sobrado contends. On the contrary, using cryptographic tools like zero-knowledge proofs can enhance transparency while protecting privacy.

Furthermore, excessive KYC procedures as currently applied facilitate identity fraud. I experienced this first-hand several years ago. A collections agency began chasing me for an overdue financing payment on a Lexus LS-500 that I had allegedly purchased in Tennessee. Not only have I never set foot in Tennessee (no disrespect to The Volunteer State), but do I look like a guy who would drive a Lexus ?!

While it’s impossible to know for certain, a customer records hack of one of my banks as well as the infamous Equifax data breach in the prior year are my top two suspected culprits. Superfluous KYC requests multiply the data honeypots for incidents like these. I was fortunate enough to possess the time and financial wherewithal to repair this mess. Thinking of the suffering of those who do not enjoy my privilege is probably what ticks me off the most. As Sobrado articulates it, “The bureaucratic rules designed to keep criminals out disenfranchise millions of legitimate customers. More often than not, these are often marginalized groups.”
 
For any regulators reading this post, please let me clarify that I am not an anti-KYC crusader. On the contrary, I believe that regulation which protects citizens and society is necessary, and that illicit conduct like tax evasion, terrorist financing, or money-laundering should be prevented. However, let’s dispense with the CYA hypocrisy and improve the controls to accomplish the ostensibly announced objectives here.