Facebook’s launch of its global digital currency, Libra, is a clear indication that virtual or crypto currencies are entering the mainstream of global finance.
Ultimately, cryptocurrency is just another rail for moving money and creating greater financial inclusion. However, it also needs to be subjected to anti-money laundering and countering financing of terrorism (AML/CFT) regulations, including Know Your Customer (KYC), like any other provider in the traditional payments industry.
Facebook has the user base (2.4 billion active accounts) and technology foundation to create a cryptocurrency, but it must overcome its own challenges of trust, security and privacy with consumers, and strict AML/CFT compliance considerations with regulators from around the world.
For instance, the Financial Action Task Force (FATF) has identified key AML/CFT risks, including the potential anonymity of virtual currencies, their global reach, and the segmentation of services through a complex infrastructure of multiple entities spread across the globe, including in jurisdictions with weak AML/CFT frameworks. FATF’s concerns are that virtual currency exchanges represent a gateway to the regulated financial system, making them an attractive option for money launderers.
Therefore, part of the regulatory response is to require those gateways to implement AML/CFT compliance frameworks. FATF elaborated on this in its June 2019 ‘Guidance for a Risk-Based Approach – Virtual Assets & Virtual Assets Service Providers.’
From what we know of the Libra project, it will be very different from the other established virtual assets, such as Bitcoin or Ethereum. Arguably, Libra is just a digitalised form of fiat currency, whereas Bitcoin’s inherent value lies solely in a user’s trust.
However, Libra shares some characteristics with other crypto currencies, such as its global reach, which expose it to the same financial crime risks. Given the global dimension of Libra’s project, Facebook and the 27 founding members (or “nodes”) in the Libra Association will have to face the challenge of implementing an AML/CFT compliance framework that accounts for different regions that have vastly different jurisdictions, stricter regulatory compliance, and rules without opening themselves up to unnecessary risk.
Considering the global scope and the type of transactions allowed, such as person-to-person payments, Libra’s activities can be assumed to carry high financial crime risks. As a result, the compliance framework implemented will need to be proportionate to these risks.
For instance, within the Libra project, wallet companies (Calibra and potentially other Libra-accredited wallet providers) will oversee the onboarding ramps to the payment rail. They will need to conduct due diligence, assess each customer’s AML/CFT risk and ultimately make unilateral decisions about which customers can participate and which cannot.
This creates a double-edged sword. If a sanctioned individual with a forged identity is allowed onto the system, the wallet companies will take on 100% of the responsibility. This makes it even more important that Facebook implements strong KYC processes and financial crime screening for Libra transactions and customers to help identify unusual patterns of activity.
The primary requirements from a financial crime compliance perspective will be:
- Due diligence on Libra’s users: their real identification information (not simply their Facebook account name); their financial profile; their purposes for using Libra.
- Risk assessment of the users: considering their identification features, but also through screening of sanctions lists and other lists of higher risks (politically exposed persons and reputationally exposed persons lists). Considering the global dimension of the service, and the local dimension of sanctions measures, sanctions screening will likely be complex.
- Monitoring of the user’s transactions with an ability to quickly flag and/or block suspicious or banned transactions.
- Processes & resources to analyse the suspicious patterns of activity detected as well as reporting mechanisms to the competent financial authorities.
The bottom line? The Libra project is promising for fostering better financial inclusion and can drive a better customer experience with cheaper and faster options. However, financial crime compliance will be a non-negotiable condition for Libra to thrive in the global financial landscape.
Just as is required from traditional banks, it is vital Libra acts as a strict gatekeeper in the fight against financial crime.
We will continue to watch this space closely and provide our feedback.