US senator: Reactive opposition to Facebook Libra “not healthy” for innovation
How much of the world's underbanking can be directly attributed to anti-money laundering compliance costs?
Facebook's Libra cryptocurrency project has received a chilly reception from politicians around the world.
Earlier this week, senators Sherrod Brown and Brian Schatz sent ominous letters to prospective members of the Libra Association, including Visa and Mastercard, essentially promising that if they joined Libra, there would be expensive consequences in the form of extra regulatory scrutiny on their core businesses.
"It is profoundly disappointing that my colleagues chose to address your peers in such an ominous tone, which I fear may put a chill on innovation in the long run," he wrote.
"Other parts of the world are... dwarfing American innovation in payments technology," he says. "With the payments industry still in its infancy in our country relative to the rest of the world, it puzzles me that my colleagues would react with such hostility to the creation of Libra."
"Numerous companies who are active in the cryptocurrency space have told me that due to the archaic and inflexible nature of our regulatory and legal system, it is far easier for them to operate and even incorporate overseas."
Rounds also nods to Libra's efforts to address some of the risks of digital currency.
"I share concerns about the dangers posed by digital currencies when it comes to money laundering, criminal activity and financing of terrorism, and I appreciate your acknowledgment of these risks. I also agree with the need for innovators in the digital currency space to comply with anti-money laundering rules," he wrote.
"Your early efforts to construct an anti-money laundering plan in the absence of the government's jurisdictional clarifications deserve commendation."
Opinion: The uncomfortable truth
One of the recurring themes which comes up every time someone appears before a US political committee to discuss technology, whether it's Mark Zuckerberg explaining that Facebook is not yet able to read minds or Libra lead David Marcus just being flagellated, is that different US politicians have very different levels of technological understanding.
As such, contrarian letters such as the one sent by senator Rounds could be quite important as a way of ensuring that misconceptions don't end up running the show.
As he said:
"By no means would I advocate for members of the Libra Association to get a shortcut or free pass around any of those rules. At the same time, the demands of a few of my colleagues should not be viewed as defining federal policy. That is not healthy for innovation, and fundamentally, is not how our republic should work."
One common misconception, which may now be tainting dialogue around Libra, is the idea that cryptocurrencies like Bitcoin are completely anonymous when in fact many of them are perfectly transparent and very traceable. Bitcoin lays down a perfect trail of payments wherever it goes, and there are many examples of this payment trail being invaluable to law enforcement. Libra will work the same way.
Libra is pseudonymous, but also perfectly traceable and transparent, and Facebook will require users of its Calibra wallet to pass KYC checks.
Of course, you can't easily require all other Libra wallet developers to require KYC. Unfortunately, "let's cross that bridge when we come to it" doesn't qualify as a suitable anti-money laundering plan, at least not in the world of digital currency.
Prepaid gift cards – the criminal's currency of choice even in a cryptocurrency world – can be bought and used with complete anonymity, have no paper trail and can even be anonymously sent overseas in a fashion by spending them online, or passing the serial numbers on to someone else.
If gift cards were held to the same standards as Libra they would be outright banned, as would cash itself, and a truly uncomfortable number of banks.
The painful fact is that money laundering makes up about 5% of the global GDP, and if we held all payment mechanisms to the same standards as are being expected of Libra, the entire global economy would grind to a halt.
And the hard truth is that, while everyone can agree that money laundering is a bad thing, there's no escaping the fact that anti-money laundering efforts are the enemy of financial inclusion. Bank de-risking and rising compliance costs are directly responsible for a large proportion of the world's unbanked and underbanked population, and many inefficiencies in the current payment system.
Fighting crime isn't free. It comes at an economic cost, a human cost and an innovation cost. There are no perfect answers or magic bullets. All we can hope for is to try to find a good balance of cost and returns, and aim for a better deal further down the line in the form of better crime prevention at a lower economic and human cost.
Technology is key to this, and better payment technologies, such as transparent digital blockchain-based digital currencies like Libra, give us a better bargaining position, so to speak.
Fighting payments innovation under a well-intentioned notion of preventing crime is ultimately one of the most short-sighted and misguided things we can do right now.
Disclosure: The author holds BNB, BTC at the time of writing.