Can Libra deliver in the fight against financial crime?
Neepa Patel, Chief Compliance Officer at blockchain firm R3, tells FinTech Magzine that the Libra debate deserves more attention than it is currently receiving because many don't fully understand or appreciate the potential blockchain has in fighting money laundering.
The cost of anti-money laundering (AML) to businesses globally is no secret, with institutions across the world dedicating time and money to fight financial crime.
Even the world’s most upstanding economies have not been able to escape the blight of money laundering. Canada’s own problem has become known as “snow washing” – a reference to the country’s positive image tarnished by suspect transactions.
Despite this, money laundering remains big business, representing around 5% of global GDP. That’s larger than the entire economy of Canada.
In its early days, many feared that blockchain technology - and the crypto assets it became synonymous with - would provide yet more protection for money launderers, cloaking assets behind a wall of anonymity.
However, with the emergence of new generations of blockchains, like Facebook’s Libra, we may now have an opportunity to build an asset that can prove itself a weapon in the fight against financial crime, rather than a facilitator.
This may come as a surprise to many, given the fiercely divisive debate Libra has spawned since it was announced in June this year.
However, with a quick look at the way that financial institutions currently handle financial crime, it quickly becomes clear that blockchain-led solutions such as Libra present a much-needed solution to this growing epidemic.
The way banks currently approach money laundering is largely reactive, relying on electronic monitoring to identify suspicious activity such as excessively large cash deposits, for example.
The problem is that information is often kept across multiple systems, giving neither banks nor regulators a comprehensive view over the whole network of interconnected payments, deposits and money transfers.
The nature of blockchain, as a single connected ecosystem, means that information can be shared across a network, enabling banks to develop a more coherent and comprehensive view of activity. This means that AML analytics can build up a much more subtle picture, joining together activities which might not on their own seem suspicious but taken as a whole indicate nefarious activity.
So, if blockchain can actually enhance AML measures, why is Libra – not to mention cryptocurrency more broadly – seen as such bad news in the fight against financial crime?
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The key is to understand the difference between a permissioned blockchain – which requires users to be verified before they can join the network – and permissionless blockchain, which offers none of the same protection.
Permissioned blockchains are by far the most effective way for the technology to deliver on its AML requirements. By creating an ecosystem that ensures participants have valid legal identities and where confidential data is safeguarded, this kind of network has the ability to deliver privacy and security at scale.
The trouble is that cryptocurrencies – and blockchain more broadly – has become a victim of this little known and lesser understood distinction between permissionless and permissioned networks.
With Libra facing intense regulatory scrutiny, Facebook now has a unique opportunity to deliver on its ambition to advance AML enforcement in the digital currency industry. If built on a secure foundation of permissioned blockchain, the asset could can set an example for future coin issuers and in doing so create new industry standards. Can Libra deliver? Only time will tell.
For more information on all topics for FinTech, please take a look at the latest edition of FinTech magazine.
BIS and MAS publish blueprint for cross-border payment idea
The Bank for International Settlements and the Monetary Authority of Singapore (MAS) has published a proposed blueprint for the multilateral linking of domestic real-time payment systems across borders.
The blueprint, titled Project Nexus, outlines how countries can fully integrate their retail payment systems onto a single cross-border network, allowing customers to make cross-border transfers instantly and securely via their mobile phones or internet devices.
The Nexus blueprint was developed through consultation with multiple central banks and financial institutions across the globe. It builds on the bilateral linkage between Singapore's PayNow and Thailand's PromptPay, launched in April 2021, and benefits from the experience of the National Payments Corporation of India's (NPCI) development and operation of the Unified Payments Interface (UPI) system.
The Nexus blueprint comprises two main elements:
- Nexus Gateways, to be developed and implemented by the operators of participating countries' national payment systems, will serve to coordinate compliance, foreign exchange conversion, message translation and the sequencing of payments among all participants. These gateways will be predicated on a common set of technical standards, functionalities and operational guidelines set out within the proposal.
- An overarching Nexus Scheme that sets out the governance framework and rulebook for participating retail payment systems, banks and payment service providers to coordinate and effect cross-border payments through the network.
“To achieve significant cost-reduction in cross-border payment transfers, enhancements must be made on two fronts: direct connectivity between domestic faster payment systems, and frictionless foreign exchange on shared common wholesale settlement infrastructures. The BIS Innovation Hub Singapore Centre is working on both. The Nexus project maps out a much-needed set of standards to achieve seamless cross-border payment systems connectivity.” said Sopnendu Mohanty, Chief FinTech Officer, MAS.
How do cross-border payments work?
Cross-border payments are currency transactions between people or businesses that are in different countries. The sender will choose a front-end provider, such as a bank or a money transfer operator (e.g. Transferwise), to initiate the payment. The receiver then receives the payment via the medium specified by the sender. Traditionally, cross-border payments flow via the correspondent banking network (CBN) which most front-end providers use to settle the payment. But, in recent years, new back-end networks emerged to optimise cross-border payments and enable interoperability between payment methods and provide senders with more possibilities to reach the receiver.
The increased international mobility of goods, services, capital, and people have contributed to the growing economic importance of cross-border payments. The value of cross-border payments is estimated to increase from almost $150 trillion in 2017 to over $250 trillion by 2027, equating to a rise of over $100 trillion in just 10 years.