Banking System is Designed To Exclude 98% of the World From Investing

Know-your-client (KYC) guidelines and Investor Protection programs are more damaging than the problems they are trying to solve. There is a whole list of issues with the global financial system. But usually, those that are the least examined are the most dangerous.  

What do I mean exactly? 

One of the issues is called Know-your-client (KYC) guidelines and the other Investor Protection programs. Those regulations are more damaging than the problems they are trying to solve. Here’s why.

The real social cost of KYC/AML practices

Know your client (KYC) or anti-money-laundering (AML) guidelines require that financial institutions make an effort to verify the identity, suitability, and risks involved with maintaining an account. 

To put this in perspective, governments, through banks, are collecting billions of data points on people and organizations to prevent or solve crimes.

Here is how I like to think about it. Governments are doing a fantastic job of collecting the information, but they mostly fail to stop illicit activities. We could easily argue that they collect so much data that it paralyzes them rather than making them more effective. At the same time, governments and banks are creating honeypots of data acting as prizes for malicious actors. Unfortunately, it’s been proven repeatedly that your data is not safe in the government’s hands. 

As for the banks, the KYC/AML enforcement is so harmful that they frequently lose clients. The Thomson Reuters survey found that 12% of companies said they had changed their banks due to KYC issues. 

But the biggest issue with the regulations is in its social cost. Entire communities like immigrants, the poor, and the young people are almost fully left out of the formal financial sector. In case you missed it, the governments and financial institutions have created a global surveillance apparatus that keeps billions in poverty.

Sadly, the developing world suffers the most. According to the World Bank, some 1.7 billion adults worldwide still don’t have access to a bank account. Many small countries in Africa, the Caribbean, the Pacific are almost entirely locked out of the global payments system. For instance, an entire nation, Somalia, began to starve because U.K. banks decided it was not worth the bother to bank remittance services. It seems evident that it’s a form of financial apartheid in its essence. 

Investor Protection programs favor elites

There are currently two different investment environments, one for the rich and one for the poor. And governments don’t even try to hide it. The Accredited Investor or MiFID II programs are the government’s tools to accomplish that. 

First, it’s helpful to review why they exist in the first place. They all started with a noble purpose to protect the least educated and the poor from losing money by investing in financial markets. 

But, the road to hell is always paved with good intentions. The regulation is enforced by the investor questionnaires that decide whether the client is smart, experienced, and mainly rich enough to invest.  

As a rule, unless you have at least $1 million in net worth, you are prevented from participating in most investments. 

For the most part, only wealthy people pass the test. Banks called them high net worth individuals, or HNWI. According to Global Wealth Report by Credit Suisse, less than 2% of the world’s population falls into that category. 

The remaining 98%, or as banks called them, non-accredited investors, do not have the freedom to invest. 

They cannot participate in private equity, pre-IPO, venture capital investments, and most equity investment. Instead, they can invest in fixed income funds that practically guarantee to lose them money. 

To be clear, the idea that the government can protect 98% of the population by excluding them from the system is not only ludicrous but also discriminatory. And to use net worth as a proxy for investment sophistication makes no sense. 

Think about it. Banks are already prohibited from discriminating against clients based on their race, religion, or gender. Why are they still allowed to discriminate based on income and net worth? 

It’s a system in which the rich are getting richer, and the poor are getting poorer. And it’s not a bug; it’s a feature. 

So what’s the solution?

The reality is that the KYC/AML and Investor Protection enforcements are not going away. Governments rarely relinquish their powers. 

However, this is an excellent opportunity for the Bitcoin and the DeFi companies. You don’t need to pass the KYC process or own $1 million to invest in Bitcoin. It’s a system where you don’t need to ask a banker for permission to protect your wealth. As a result, DeFi and Bitcoin will continue to lead the way. However, they will not be able to do it by themselves. 

Banks will have to innovate their compliance systems or have a tough time keeping up with the competition. For the first time in a hundred years, are banks threatened by a new predator. And if they don’t adapt swiftly, they could dramatically undermine their financial future.  

But the biggest challenge rests with the governments and regulators. They should be extra focused on embracing new decentralized technologies to create a world that allows for financial inclusion instead of exclusion. The world has become a highly competitive place, and governments fight for capital and innovation. In the internet era, businesses can relocate faster than at any point in history. And it is undeniable that governments with a lighter touch on regulations will attract more investments. 

Regardless of what governments desire, the marginalized 98% of the world’s population is waking up, and more importantly, they realized that cash in the bank has been devaluating fast. 

Nobody put it better than Robert G. Allen: "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."