Libra’s design may actually be more suitable for complying with
regulations than people think
By: Neepa Patel Founder and CEO of Themis
The estimated annual amount of money laundered globally is jaw-dropping- representing between 2% and 5% of global GDP. On the high end, this is larger than the entire economies of all but nine countries. This is despite the efforts of banks who spend billions on systems to scrub accounts for possible money laundering schemes. Current anti-money laundering (AML) detection rules are action-based, targeting suspicious behaviors like excessive cash deposits, pre-payments, structured transactions intended to avoid record-keeping thresholds, and rapid money movement through banks.
This sad state of affairs can improve. Although not a silver-bullet, blockchain technologies provide greater transparency to trace transactions from end to end, and have been widely touted as providing financial institutions the potential for enhanced enforcement. Blockchains allows companies to use the
same underlying technology for transactions and with the right analytical tools, can provide a holistic view of customer transactions to better detect money laundering techniques or fraudulent patterns of customer spends. Currently, financial institutions use a siloed approach to monitor customer activity within firewalls.
Can Libra deliver?
Libra; a permissioned blockchain is the most effective way for the technology to stand up to regulatory requirements. By creating an ecosystem that ensures participants have valid legal identities, where confidential data is safeguarded by not broadcasting data over the entire network, Libra, has the ability to drive virtues of privacy and security to scale.
As entertaining as it has been to poke holes in Libra and chide Facebook, one must admit Libra does in fact have the potential to truly deliver on its ambition to advance AML enforcement in the digital currency industry. Its potential scale- by reaching Facebook’s billions of users- means that it will have the resources and critical mass to deploy technology on top of its blockchain in a way that gives it power to enhance AML enforcement.
Furthermore, Libra may provide an avenue for compliance with the hotly debated Travel Rule (also known as the “Funds Transfer Rule” in the EU). Intended to help law enforcement agencies probe financial crimes, the Travel Rule requires preserving some identity information on funds transfers.
Currently, most wallet providers may only be able to capture wallet addresses, but not the identity information of the receiver which is required by the regulation. If Libra deploys its blockchain at scale alongside advancements in self-sovereign identity, IoT and AI, it has the potential to address the intention of the Rule by enabling a broad picture of customer activity to emerge across its platform with a more robust audit trail tied to an encrypted identity, but not requiring human readable identity information attached to every transaction.
Libra was quick to point out that Facebook will be one of many wallets competing to hold customers’ Libra. While promising Novi, the Facebook wallet, will subject itself to the highest standards of regulation, Facebook indicates other Libra wallets will be responsible for complying with their own jurisdictional regulation.
This is not unexpected. It reflects the reality of most wallet-providers who comply with authorities based on their locations and those of their customers. If structured with AML in mind, the Libra Association could nudge wallet providers toward a higher standard and combat money laundering more effectively than the traditional financial industry.
As Libra Association members will have their own reputations to protect — they surely cannot rely on Facebook’s- they themselves should incorporate heightened digital asset requirements requiring wallet providers to demonstrate robust and innovative controls around KYC / AML, disaster recovery, and safeguarding assets into their compliance programs. After all, they will be understandably keen to avoid being sucked into the same riptide of legislative and regulatory scrutiny Facebook has experienced of late.