Digital Currencies Will Make BSA Compliance Easier

October 4, 2019 at 12:07 pm Leave a comment

In yet another sign that Facebook has grown too large for Mark Zuckerberg’s skill set, the Wall Street Journal reported Tuesday that Facebook’s ambition to create a cyber currency called Libra, in association with a group of large banks and payment processors is losing momentum. The paper reports that would-be investors are backing away from the project in the face of stiff opposition from regulators. For those of you who just don’t like Mark Zuckerberg, or who fear that a cryptocurrency is yet another on the ever-growing list of putatively existential threats facing the industry, this is good news. For those of us who believe that the reactionary rejection of Facebook’s idea is based more on ignorance than legitimate regulatory concerns, this is too bad.

What really got me fired up was this paragraph in the WSJ article: “government officials and central bankers were quick to criticize the project, citing concerns about how the network would protect users’ privacy and prevent criminals from using it to launder money.” In fact, a well-functioning digital currency system will greatly reduce money laundering. Here’s why.

Labor and bitcoin technology are based on distributed ledger technology. With apologies to IT people who will probably cringe at this explanation, the basic idea of distributed ledgers is that software converts each new digital transaction into a unique digital block which is added to a block chain produced by previous transactions. The technology has the ability to simplify everything from contracts to land title searches by creating a single chain of evidence that can be accessed from multiple computers. For example, let’s say that contract you are entering into requires a wet signature. If you could enter into that same contract using block chain technology, both parties to the agreement would have instantaneous and unequivocal proof that the contract has been signed and agreed to. Legislation has even been introduced that would preempt state laws seeking to prohibit the use of block chain technology in commercial transactions.

Nevertheless, regulators continue to argue that block chain technology raises dangerous Bank Secrecy Act concerns. In fairness to the regulators, the technology could be abused. After all, bitcoin is a favorite tool of money launderers, extortionists, and black market entrepreneurs. The bitcoin’s appeal, however, is that it enables the bad guys to exchange electronic currencies without meeting each other or exchanging identifying information, such as an account number. So long as both parties can confirm that a new link in the block chain has been created, they can process transactions in virtual anonymity.

However, this problem can be easily addressed, which is why we are seeing the growing use of this technology. Regulators can mandate that legally sanctioned cryptocurrencies come with electronically identifying marks that make it clear which parties are engaging in a transaction. Furthermore, this electronic confirmation can be more secure than existing BSA compliance, which at the end of the day remains reliant on documents that can be doctored as well as staff people who are, after all, only human. Let’s also keep in mind that nothing is better suited for money laundering than paper currency payable on demand, no questions asked. Furthermore, digital currency is worthless unless a business accepts it. There will still be a need for banks and credit unions that are willing and able to convert digital currencies into cold, hard cash.

So, if you want to dislike Libra, go ahead. But let’s not let regulators throw obstacles in the way of digital innovation that don’t need to be there. The quicker we get to the widespread use of cryptocurrency, the quicker we will have more efficient and safer payment systems.

Entry filed under: Compliance, Economy, Technology. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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