Posts tagged ‘crypto currency’

Digital Currencies Will Make BSA Compliance Easier

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.

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

Why Facebook’s Currency Is a Good Idea

The most interesting and potentially consequential thing that happened over the holiday week was that the House Financial Services Committee sent a letter to Facebook’s CEO formally requesting that he put the brakes on their plans to introduce libra, a cyber currency which Facebook plans to administer along with 24 other companies including PayPal and MasterCard.

According to the Luddites, I mean Congressmen, the proposed new currency and digital wallet which Facebook plans to start offering the middle of next year. Facebook’s proposal involves massive “risks” on an unprecedented scale. In addition, the crypto currency could provide an “under regulated platform for elicited activity and money laundering.” Hearings will follow shortly.

It’s time for everyone to take a deep breath and come back down to Earth. The plans of Facebook and its partners are the logical inevitable evolution of currency. In addition, in the short to medium term this has very little to do with creating a revolutionary new currency and almost everything to do with capturing a larger portion of payment transactions. This is a big deal but hardly revolutionary.

First, the only reason we use paper currency today is because crypto currency wasn’t around thousands of years ago when we started seeing a large scale need for the secure exchange of credit that businesses and consumers could rely on. Currency is nothing more or less than a contract, albeit one backed by the full faith and credit of governments, that the paper you have in your pocket will be accepted and honored by the total stranger down the street.

In many ways it has become grossly inefficient. In his book “The Curse of Cash” Professor Kenneth S. Rogoff points out that contrary to popular belief “demand for most advanced country currency paper notes has been rising steadily for more than two decades” precisely during the time period you would expect debit cards to be making money obsolete. According to Kenneth S. Rogoff, by the end of 2015 1.34 Trillion worth of US currency was being held outside US banks. Furthermore, the bulk of this cash is in denominations of $100 or more. This is not an abstract problem. India’s Prime Minister was so concerned by the use of high denomination currencies to facilitate illegal activity that he literally took large denominations out of circulation.

And let’s all stay calm. Facebook’s “currency” is only going to be valued to the extent that it can be converted into common currency. What is so telling to me about Facebook’s announcement isn’t that Facebook wants to create a crypto currency but that its founding members include MasterCard, PayPal and Visa, companies that specialize in facilitating transactions. What really is going on here is not some idealistic quest to create a world without cash but rather an aggressive and smart business move to take a larger chunk of the money to be made off facilitating business transactions. This isn’t something to be feared, it is the free market at its best. If they succeed we will have a better, safer system and if they don’t, all the armchair reactionaries can say I told you so.

Does this represent a threat to your credit union? Yes it does. But the threat is no different than any other multitude of other challenges confronted by the industry as technology once again revolutionizes the way banking is done.

Which brings me back to the Luddites. I would have a lot more sympathy for regulators and our elected representatives if they didn’t insist on moving so slowly in updating our payment system. What Facebook is doing is commonsensical to anyone with a smartphone. I can now go weeks without going to an ATM secure in the knowledge that so long as my smartphone is charged up I can just about pay for anything I need. In fact, Sweden   has already gone a long way towards  phasing out cash. If anything, Facebook’s innovation is, if anything, long overdue.

July 8, 2019 at 9:04 am Leave a comment

Facebook Has A New Pen Pal: The Senate Banks Committee

On Friday, the Chairman and Ranking Member of the Senate Banks Committee sent a politely worded letter to Facebook inquiring about its plans to move aggressively into the payments market by offering its users the opportunity to buy products directly from merchants using a Facebook backed coin or cryptocurrency depending on how nefarious you want to make its plans sound.

Why is this a big deal? Well how much money do you make off credit and debit card transactions issued by your credit union? If Facebook successfully integrates the coin payment platform into its infrastructure this would mean that 1/3 of the world’s population could start using Facebook to facilitate purchases, making Facebook an overnight threat to Visa and MasterCard.

In their letter to Facebook, following an article describing Facebook’s plans in the Wall Street Journal, the Senators explain that in addition to Facebook’s cryptocurrency ambitions, “privacy experts have raised questions about Facebook’s extensive data collection practices and whether any of the data collected by Facebook is being used for purposes that do or should subject Facebook to the Fair Credit Reporting Act.”

As with so many other aspects of its growth Facebook is somewhat clumsily taking aim at the financial sector. In addition to questions about its cyber currency ambitions, it is currently being sued by HUD over claims that it violates its advertising platform allows lenders to effectively engage in digital redlining by choosing such finely tuned demographic target audiences in such a way that lenders can avoid offering financial products and services to minorities.

Assembly To Hold Municipal Deposit Hearing Next Monday

In case you haven’t heard, the Assembly Banks and Local Governments committee will be holding a hearing on municipal deposits next Monday. An assortment of credit union, bank and local government organizations have been invited to testify. This is a key opportunity for credit unions to respond to banker municipal deposit myths and finally allow public tax dollars to be placed in those financial institutions where they will most benefit taxpayers.

Department of Treasury Issues OFAC Guidance

I’ve been analyzing this guidance for a couple weeks now trying to figure out how significant it is and why it was issued in the first place. It seems to me that nothing in this release should be a surprise to anyone who has tried to comply with OFAC which I’m assuming almost all of my faithful readers have. Nevertheless, any time the Department of Treasury comes out with guidance on this issue you should read it and compare your practices with those expected by the regulator.

May 13, 2019 at 8:45 am Leave a comment

Are We Getting Closer To Legalizing Cannabis Banking?

Image result for marijuana bankingA dogs and cat coalition with supporters on both ends of the political spectrum may be coalescing around a proposal that would provide a framework for credit unions and banks to provide marijuana banking service without fear of violating federal law.

Under a proposal put forward by Senator Cory Booker of New Jersey and Elizabeth Warren of Massachusetts ‘‘Strengthening the Tenth Amendment Through Entrusting States Act’’ or the ‘‘STATES Act’’. it would be legal as a matter of federal law to sell, possess and distribute marijuana in states where it is legal to do so. This would presumably provide both banks and credit unions the green light to provide banking services to marijuana businesses. It would also presumably eliminate the opposition of at least some Federal Reserve banks to processing transactions for banks and credit unions offering these services.

There are few things that New York Governor Andrew Cuomo and President Trump agree on these days but in separate statements they have both indicated that they support the legislation. Specifically Governor Cuomo signed onto a joint letter with several Governors which complained in part that “current federal law precludes banks from engaging with legal entities that are complying with state laws. As a result, these companies are forced to become cash-only businesses, creating unnecessary burdens and risks.” This is a big development coming from a Governor who has taken a very cautious approach to the legalization of marijuana.

As for President Trump, before heading to Canada to see how many erstwhile American allies he could antagonize prior to  embracing North Korea’s dictator, he told reporters that he would “Probably end up supporting” the Booker/Warren proposal.

Wells Bans Credit Card Purchases of Crypto Currency

This one is getting a lot of attention this morning. $2 trillion asset Wells Fargo became the latest of the behemoths to ban their credit card holders from using their credit cards to make transactions at crypto currency exchanges and brokerage firms. Wells explained that it is making the decision in part “due to the multiple risks associated with this volatile investment.” JP Morgan Chase, Bank of America and Citi Group have already made similar announcements.

June 12, 2018 at 8:36 am Leave a comment


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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