Digital asset ‘body’ makes a fuss about sensible US policy on financial crime mitigation

Why are these nobodies attempting to lobby the US and UK authorities? The last thing needed is another Silk Road, or for electronic trading to become associated with unbacked and non existent virtual currencies as a vehicle for duping customers. Here is a full analysis

The bellyaching has started again, this time from a self-appointed and little known organization which purports to perform the role of a lobby group for digital assets.

Ever since the bow tie-wearing, waistcoat-toting mavericks began to parade their anarchistic attempts to circumvent the established financial markets system by introducing various hairbrained digital currency schemes, there has been one catastrophe after another, ranging from fake exchanges stealing from depositors to illicit marketplaces being closed down by the US Department of Justice.

Ten years is a very long time, and certainly long enough for the general public to understand that a non-existent currency traded on a non-existent exchange is the equivalent to snake oil, only with massive self-imposed volatility and leverage, making the inevitable losses more significant than simple, old fashioned snake oil.

It took a very long time. Long enough for some retail brokers to get themselves involved in trading cryptocurrency CFDs which in some cases cost them tens of millions of dollars in a short time. FinanceFeeds is privy to inside information that showed losses at two firms of $17 million and $40 million respectively within one week at the end of 2017, one of which was a publicly listed entity which hid this unfortunate scenario by reporting the entire year in one quarter, presumably to avoid shareholder furore.

Then came all the ICO fraud, and inability to withdraw from various ‘exchanges’ that the proponents who all came out of nowhere with no industry expertise and were uttering the word ‘crypto’ at every opportunity with almost foaming-at-the-mouth obsession, all of which are now either under sanctions, in jail or on the run.

Following in the very laudable footsteps of the UK’s Financial Conduct Authority (FCA), the United States Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve have proposed to amend the Travel Rule threshold for funds transfer that begin or end outside the United States from $3,000 to $250 for virtual currencies.

A very good decision, however for little known yet extremely vocal digital currency lobbying body with its self-appointed talking heads which operates under the moniker of Global Digital Finance (GDF), this is a reason to complain and attempt to lobby the authorities.

GDF says that the sensible move by the US authorities could negatively impact financial inclusion, increase compliance costs needlessly, and be counter-productive, and that there has been a lack of rigorous cost benefit analysis around the potential change, particularly in relation to virtual currencies.

Lawrence Wintermeyer, Executive Co-Chair GDF said: “We propose that implementation of the proposed rule be suspended until a full cost benefit analysis can be undertaken, taking into account the likely impact on financial inclusion as well as the consequences thereof, and a more comprehensive estimate of the costs of complying with the proposed rule.”

Lowering the Travel Rule threshold will negatively impact financial inclusion, says GDF.

GDF argues the proposed rule change will increase the record-keeping burden for financial institutions and money services businesses that serve low-income individuals who tend to transfer amounts in a range between the proposed and current thresholds. GDF says this will impact millions who would find it increasingly difficult to comply with customer information provisions and the related record-keeping provisions attendant to the Travel Rule and increase the burden and friction faced by individuals reliant on safe, secure and formal remittance channels.

GDF says the potential negative impact of the proposed rule on the convertible virtual currency (CVC) sector is of particular concern. CVCs present a transformative

opportunity to expand financial inclusion by providing a viable alternative to payment products and services that are currently inaccessible or unreasonably costly to access for large segments of society.

It says remittances (and international payments more broadly) are increasingly being facilitated via these channels given the cost and time efficiencies afforded to many who are challenged to do so through traditional money services business / money transfer operator (MSB/MTO), existing banking/payment rails and alternative fiat-based payments channels.

GDF also asserts that lowering the Travel Rule threshold could be counter-productive

GDF says that in addition to the negative social impact of reduced financial inclusion, there is a risk that affected individuals will seek out alternative, unregulated remittance channels, thus bolstering the viability of unregulated money services businesses and decreasing the transparency of remittances and payments made at low value thresholds, which would ultimately reduce the overall effectiveness of the AML/CFT regime.

Lowering the Travel Rule Threshold will increase compliance cost, says GDF. Yes, it may well do, but what price safety?

GDF says the proposed rule change will inevitably lead to an increase in compliance costs for affected businesses. In particular, the obligation imposed by the Travel Rule to verify that the sender information is correct, seems likely to result in a significant increase in the proportion of customers that money services businesses will be required to introduce. The resultant increase in costs could cause some money services businesses to cease offering cross-border remittances, reducing competition and potentially further raising the barriers for consumers to access these services, and driving more consumers towards unregulated remittance channels.

According to analysis published by blockchain analytics firm Ciphertrace, lowering the Travel Rule threshold to $250 will drastically increase (by at least 250%) the number of CVC transactions that are subject to the Travel Rule, potentially triggering more than one million compliance events.

Additionally, there are a number of CVC business models (e.g. a VASP processing CVC payments for merchants) where the typical transaction value is below $3,000 and, therefore, do not trigger the Travel Rule requirements.

Reducing the threshold will result in a steep change in the cost of compliance incurred by these VASPs, likely changing the economics of such business models.

GDF accuses US authorities of a lack of rigorous cost benefit analysis, particularly in relation to virtual currencies, which is preposterous, however GDF argues it appears that the data analysis performed regarding the potential Travel Rule change relates solely to transfers and transmittals of funds other than virtual currencies and it failed to consider any data specific to virtual currencies. It says a more comprehensive assessment of the impact of the change needs to be conducted.

Jeff Bandman, GDF Board Member and the Founding Director of LabCFTC said “What concerns me most is the complete lack of data analysis to support moving the threshold to $250 for virtual currencies. There is none. Zero. Cost-benefit analysis should be evidence-based. They didn’t use any data specific to virtual currencies to justify this.”

Amit Sharma, GDF AML Working Group Co-Chair and CEO FinClusive said “A fundamental concern is that this proposed change will have significant negative impacts for the millions who rely on small-dollar remittances and are increasingly looking to VASP channels. The consequences to financial exclusion must be considered before changes like these are imposed to this growing sector.”

Malcolm Wright, GDF Member Advisory Council Chair said: “In the past 18 months since the FATF Recommendations for Virtual Asset Service Providers were released, we have seen an unprecedented level of cooperation between the FATF, national regulators, and the virtual asset industry that has strengthened understanding on all sides. We would urge the US administration to consider continuing this positive dialogue on how to ensure a right-fit approach to any proposed travel rule threshold changes and so prevent undesired unintended consequences as a result of hastily introduced changes.”

Jack Gavigan, GDF AML Working Group Co-Chair and Head of Regulatory Relations, Electric Coin Co. said: “Virtual assets have the potential to bring huge benefits, transforming the way we conduct digital business, expanding access to financial services to millions of people who are underserved by the current financial system. Effective regulation will help realize these benefits by supporting mainstream adoption. However, new technology requires new approaches to regulation, or we risk stifling innovation. Doubling down on old approaches that don’t work isn’t the right path forward. We need regulators to work with those of us who are building these new technologies to come up with solutions that will minimize the risk of illicit usage while enabling the innovation that will unleash the huge benefits this technology can provide.”

Who are these people? Where is their provenance in the bona fide electronic trading, platform development or career leading the development of interbank trading systems or algorithmic solutions for prop shops?

Surely by now, with the penny finally dropping at the FCA last month and now the US Federal Reserve and Financial Crime authorities, the world would finally begin to understand that any digital currency is a fraud.

There is to be no technology revolution, no bitcoin-fueled empowerment of the masses and no removal of the properly established banks and non-bank trading entities in the name of non-existent, unbacked garbage peddled under the false premise of distributed blockchain ‘fintech’.

Surprisingly, these self-elected industry bodies do not give up so easily, today’s example being GDF’s odd response to US sensibility, and last month’s equally questionable dissent at the FCA’s quite justifiable ban.

GDF  calls itself an industry membership body that promotes the adoption of best practices for cryptoassets and digital finance technologies, whatever that means other than the advocating of allowing members of the public to be defrauded.

Last month, this body of ne’erdowells claimed that the Financial Conduct Authority’s (FCA) recent decision to ban the sale of derivatives and exchange traded notes (ETNs) linked to cryptoassets to retail customers is a huge setback for the UK in maintaining its dominant position as a global fintech hub.

Seriously? Surely they mean that it is quite the opposite, and represents a welcome and long overdue step toward protecting the entire electronic trading and financial services sector in the United Kingdom along with its clients from crypto villains.

Global Digital Finance bizarrely asserted that the FCA’s decision has left many in the crypto asset sector questioning the regulator’s willingness to collaborate with them and listen to the views of key market participants.   Other key points raised by GDF at that time included:

  • It questions the FCA’s decision to ban these products when no similar steps have been taken in Europe, the U.S. or Asia.
  • It is critical of the regulator for ignoring its own research findings and the overwhelming majority of responses to its consultation on the cryptoasset investment sector.  A survey conducted by the FCA, published this year noted that ‘the majority of cryptoasset owners are generally knowledgeable about the product, are aware of the lack of regulatory protection afforded and understand the risk of price volatility’.
  • GDF points out that recently Germany’s regulator BaFin approved a bitcoin exchange traded fund (ETF). BTCetc Bitcoin ETP (Ticker: BTCE) is an exchange traded cryptocurrency (ETC) that tracks the price of bitcoin. It is 100 percent physically backed by bitcoin, and for every unit of BTCE, there is bitcoin stored in regulated, institutional-grade custody. BTCE was the first cryptocurrency ETP admitted to Xetra to be cleared centrally
  • Other regulators, notably the U.S. CFTC, has been safely overseeing regulated crypto derivatives markets for nearly three years with products that offer a reliable basis for valuation. These markets are accessible to retail as well as professional investors. Given the strong ties and coordination among global agencies, it is surprising a forward-looking regulator such as the FCA did not find itself able to adapt these safeguards to the U.K. market.

This is rather odd, and tenuous. It would be very likely that an approach by any retail investor in cryptocurrency related assets would be met with a cold shoulder by the CFTC in the United States, and the CFTC has been one of the leading forces in banning the majority of crypto scams, including sending FBI agents to arrest perpetrators in countries outside the United States and repatriating them for trial.

When the FCA launched its consultation it said it believed that retail consumers cannot reliably assess the value and risks of derivatives (contracts for difference, futures and options) and exchange traded notes (ETNs) that reference certain cryptoassets. This is due to the:

  • inherent nature of the underlying assets, which have no reliable basis for valuation;
  • prevalence of market abuse and financial crime (including cyberthefts from cryptoasset platforms) in the secondary market for cryptoassets;
  • extreme volatility in cryptoasset prices movements;
  • inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them.

The regulator said back then it estimates a ban could reduce harm by £75m to £234.3m a year for retail investors.

Any ‘industry body’ that calls this into question perhaps should call its own existence into question.

Lawrence Wintermeyer, executive co-chair of Global Digital Finance stuck to his guns by saying “Some may wish to argue the moot point that the FCA’s ban is good for retail customers, good for the financial services market, and good for the U.K. We would most certainly disagree with this. What is unarguable is that digital is global, and that digital finance is global. The effectiveness of jurisdictional bans of this nature is questionable in a world where customers can find the products and services they choose on the internet, wherever these products and services come from, and this choice often drives customers offshore.”

It is FinanceFeeds opinion that the FCA took the absolute right decision.

The hyperbole two months ago in the advent of the ban went along the lines of that taking into account the growing trend of blockchain integration into a broad spectrum of industries, it is becoming obvious that the financial industry will be leading the adoption charge. The advantages offered by blockchain as a financial off-ramp and a processing infrastructure that surpasses the capabilities of traditional systems are making the technology a prime candidate for investments by major payment processors. It will take the giants some time to embrace the power of blockchain in full, but it is obvious that the time is nigh.

You have as much chance of this as you have of seeing Shergar.

Given the FCA’s quite justified disdain for anything relating to digital assets, the banning of CFD trading with crypto assets today was unsurprising, but rather late, given the UK’s firm stance on such fraudulent schemes.

The trend of partnerships between traditional financial entities and blockchain platforms to issue cryptocurrency debit cards is still not on the rise. Rather oddly, earlier this year Visa partnered with FinCEN-registered crypto exchange CoinZoom and decentralised finance platform Eidoo.

Who uses these? That’s right. Nobody. It is likely that any broker that went down this route would find that their bank would terminate its relationship with them on grounds of anti money laundering rules.

It should be noted that Visa’s role in the cryptocurrency industry is not limited to partnerships with promising projects. In May 2020, the USPTO (the United States Patent and Trademark Office) announced that Visa Corporation had applied to develop a digital currency using blockchain technology. The currency is said to include assets such as the US dollar, euro, pound and yen. This technology will use a centralised computer that receives requests with a serial number and physical currency denomination, according to the USPTO.

Yes, the FCA has finally banned crypto CFDs. The question is, when will its payments arm ban crypto payments and put all of this hot air to rest where it belongs?

The NFA a few years ago outlawed the use of credit cards and other online payment methods for depositing client money into trading accounts among US brokerages. The only way is via bank transfer. Now the US is limiting the fiat equivalent amount that can be transferred overseas using digital assets, in the quest to address its use for financial crime, and the US authorities know all about this, with a litany of disasters such as the Silk Road market place and its illicit products and services sold on the dark web using Bitcoin a few years ago which resulted in the seizure of the website and the incarceration of its orchestrator.

There have been several more since. Without US intervention, it would be of interest to see how many of these dodgy transfers in an untraceable and unbacked false currency end up in Colombia to buy ‘shipments’, or in Venezuela with citizens attempting to move their money out of the way of Maduro’s draconian communist regime, or even worse, in Iran.

Anti money laundering rules, anti terrorism funding rules and

It was stated by those with a vested interest that Visa became one of the first international corporations to invest in the crypto industry, becoming the first company to hire blockchain developers back in 2018. Today, the company is continuing to expand the department of specialists working with digital technologies. It has become clear that large financial companies are starting to take blockchain more seriously.

In May 2020, the USPTO announced that Visa Corporation had applied to develop a digital currency using blockchain technology.

The first cryptocurrency debit cards began to appear in the same year. Striking examples are the Visa MCO Cards by and the Flexible Crypterium Card. But not everything is as smooth as it may seem, as the customer needs cryptocurrencies to buy a cryptocurrency-powered card. More specifically, from 50 to 50,000 MCO tokens are required in order to order such a card. The given crypto debit card is said to be very useful for users, as they are able to receive cashback and take advantage of special bonuses.

Those attempting to get a last ditch attempt at convincing brokers that they need to use cryptocurrency as a method of transacting client funds via Visa, PayPal or Mastercard may well have seen the tenuous attempt by Crypterium last week to demonstrate that the future of payments for online services is via digital assets. Well, it is definitely not.

It is likely that other regulated regions will go the same route and rightly so.

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