Social Media Crypto Projects Can’t Ignore Money Laundering Risk

FinCEN deputy director Jamal El-Hindi made his remarks during a speech at the Securities Industry and Financial Markets Association 20th Anti-Money Laundering (AML) and Financial Crimes Conference in New York City on Feb. 6.

The deputy director of the United States Financial Crimes Enforcement Network (FinCEN) says the cryptocurrency sector must not abet a “slide backward” in money laundering prevention.

El-Hindi opened his speech noting the particular complexity of the securities and futures industry, which comprises a dense web of transactions and interactions between inter-related parties.

FinCEN won’t allow AML oversight to “slide backward”

This “amazingly complex” landscape includes but is not limited to primary brokerages, futures commission merchants, executing dealers, transfer agents, clearing firms and mutual funds, he observed.

This complexity, he suggested, presents a challenge to the transparency – the information collection and due diligence processes – needed to tackle money laundering and prevent financial crimes.

In many cases, information sharing and Know Your Customer processes may be discouraged due to the highly competitive nature of the industry – just 14% of all entities in the securities sector that are eligible to register for one of the key business-to-business information sharing mechanisms choose to do so, he noted.

Within this highly challenging climate, El-Hindi warned that new technologies may further exacerbate the situation.

Cryptocurrency-curious social media and messaging platforms – the most high-profile of which is Facebook’s Libra project – must meet the same compliance responsibilities as traditional financial sector actors, he stressed:

“Social media and messaging platforms and others now focusing on the establishment of cryptocurrencies cannot turn a blind eye to illicit transactions that they may be fostering.”

The influence of these private sector actors, and the new technology heralded by cryptocurrencies, carries these same responsibilities back into traditional finance:

“To the extent that the financial sector chooses to move forward with … these emerging systems … we are not going to allow it to slide backward on the protections and appropriate transparency that we have collectively worked so hard to weave into the financial system.”

Steps forward

In early December, FinCEN’s director, Kenneth A. Blanco, claimed that the cryptocurrency industry has increasingly begun to fall in line with the agency’s regulations on money transmission services.

In particular, he pointed to FinCEN’s May 2019 guidance as having a marked and positive impact on the agency’s oversight of the crypto space

Fed Governor Brainard Identifies Libra Threat, Says Regulatory Hurdles Abound

Federal Reserve governor Lael Brainard delivered a sharp critique of Libra on Wednesday, stating the Facebook-led project would need to resolve a number of regulatory hurdles before going live.

In a transcript of speech delivered on Wednesday at The Future of Money in the Digital Age forum in Washington, D.C., Brainard outlined how global stablecoin projects raised complex regulatory issues that at best could delay Libra’s anticipated 2020 launch, and, if left unresolved, place consumers and the international banking order at heightened risk.

The problem? Stablecoins could be too successful – perhaps even rivaling central bank-issued cash.

“If a large share of domestic households and businesses come to rely on a global stablecoin not only as a means of payment but also as a store of value”, it could impact central banks’ balance sheets, Brainard said.

Libra is in a unique position to accomplish this, with direct access to Facebook’s gargantuan user base – “a third of the global population”, she noted; and perhaps more, given that Libra plans to be available to individuals off the social network, too.

But for all those potential users, Brainard cast doubt that regulatory answers were there.

Those consumers might not understand their digital wallet rights, she said. And neither do the regulators who have built a firewall of consumer protections around traditional bank accounts, from insuring deposits to holding financial institutions liable for fraud.

“Not only is it not clear whether comparable protections will be in place with Libra, or what recourse consumers will have, but it is not even clear how much price risk consumers will face since they do not appear to have rights to the stablecoin’s underlying assets.”

Libra’s plans to be “opaquely tied to a basket of sovereign currencies” further complicate matters because it is unclear what right users and holders would have to those underlying assets, if any.

In conclusion, she said:

“It should be no surprise that Facebook’s Libra is attracting a high level of scrutiny from lawmakers and authorities.”

Debating the Digital Dollar

Her speech also touched on what an ‘active’ debate within the Federal Reserve: the merits of the U.S. issuing a “Central Bank Digital Currency” – a digital dollar.

Brainard, who has downplayed the need for U.S.-backed crypto in the past, continued to argue for that side, and on a number of levels: its implications on monetary policy, operational security risks, threat to financial stability. Even its ramifications on user privacy.

“If a digital dollar is designed to be financially transparent and provide safeguards against illicit activity, a central bank digital currency for consumer use could conceivably require the central bank to keep a running record of all payment data using the digital currency-a stark difference from cash, for instance.”

But she said that Fed would continue to consider a digital dollar’s pros and cons. Fifteen-hundred miles southwest of the capitol, another central banker, Federal Reserve Bank of Dallas President Rob Kaplan on Wednesday said the same.

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