tag:blogger.com,1999:blog-105607952024-02-19T10:49:27.876+01:00Simon's blog on Payments and Moneyin the Netherlands - Europe (SEPA) - the World...Unknownnoreply@blogger.comBlogger1608125tag:blogger.com,1999:blog-10560795.post-34112882617579101692023-10-12T23:28:00.006+02:002023-10-12T23:47:19.446+02:00Long story short: Dutch judge finds DNB (Dutch AML-supervisor for crypto) did overstep its mandate in registration verifications and invalidates parts of AML law<p>Over the past five years, we have seen a debate unfold in the Netherlands where the Dutch central bank forced the Ministry of Finance to adopt rules that go beyond the AMLD5 directive. And finally, the judge brings clarity: regulators and supervisor overstepped their mandate. </p><p><i>Registration or licensing of crypto players here in Netherlands?</i></p><p>Where the AMLD5 directive says: you must register crypto companies with a check on management capability and UBO reputation, the Dutch central bank went way beyond that. It wrote a letter to the Ministry of Finance that it wanted a license regime and kept on asking for all components of a license regime. And they got it in the end with the Ministry of Finance denying to press and parliament thay they upgraded the law. This was well beyond the advice of the Council of State, which outlined the impossibility of doing this, well in advance. </p><p>I wrote a range of articles about that (<a href="https://finhstamsterdam.medium.com/overview-and-update-on-amld-5-implementation-in-the-netherlands-november-8-2019-2d5e102dd773">this one</a>), was the driving force in the law suit on the improper verification requirements asked to be allowed to register and helped out prepare the next law suit on illegal acts of the supervisor, meaning that all the cost borne for those illegal acts cannot be charged to companies. </p><p>One and a half year ago I penned <a href="https://moneyandpayments.simonl.org/2021/09/crypto-episode-as-part-of-dutch.html" target="_blank">the experience down in this blog</a> when I started out a sabbatical. For me, there is no use in doing compliance work if supervisors don't stick to the law themselves. So I wanted to reflect on that and meanwhile the law suit against DNB was being prepared and unfolded. </p><p>Now finally after 5 years of banging the drum on the topic, the Rotterdam Court fully agreed and acknowledged that the Dutch supervisor, DNB, has acted illegally by imposing and requiring more information than necessary for the prescribed registration regime under AMLD5. It effectively turned it into a licensing regime and that was not the idea/intention. </p><p><u>Court judgment: Dutch law declared invalid where it turns registration into licensing regime</u></p><p>Their verdict translated (h/t Chat GPT) tells it loud and clear. All parts of the Wwft and lower level rules that are in conflict with the registration regime as defined in AMLD5 are declared invalid as being in violation of higher EU-law. </p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px; white-space-collapse: preserve;">3.6 While the processing of registration requests in this manner by DNB involves a task assigned to it by or under the Wwft, and the resulting activities, there is no basis for this in the AMLD5. As noted by the Advisory Division of the Council of State in its advice of June 3, 2019 (no. W06.19.0080/III and TK, 2018-2019, 35245, no. 4) on the Implementation Law amending the fourth anti-money laundering directive, the directive does not allow the prescribed registration obligation to be structured as an (additional) licensing obligation, where a prior assessment takes place to determine whether an institution can comply with its Wwft obligations. However, the legally prescribed method of processing registration requests has given the registration obligation that form. For example, in the case of a registration request under Article 3, paragraph 1, subparagraph n, of the Implementation Regulation, data must be provided on the organization of business operations with regard to the integrity and controlled business conduct referred to in Article 23j of the Wwft, which provision aims to ensure that a provider of services related to virtual currency organizes its business operations in such a way that it can comply with the requirements set by the Wwft (EK, 2019-2020, 35245, C, p. 8). The explanation on the registration form used by DNB indicates that DNB wishes to obtain detailed data from the submitter of a registration request, indicating a thorough prior assessment of whether this provider can meet its Wwft obligations.</p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px; white-space-collapse: preserve;">3.7.
The conclusion is that Article 23d, paragraph 1, of the Wwft and Article 23c, paragraph 1, of the Wwft, read in conjunction with Article 1a of the Implementation Decree and Article 3 of the Implementation Regulation, to the extent that these articles go beyond obtaining and assessing the data needed to register a provider under Article 23f of the Wwft in the public register of providers and to test the suitability and reliability of the policymaker(s) and ultimate beneficial owner(s) of the provider, are invalid due to conflict with the scope of the registration obligation laid down in Article 47 of the AMLD5.</p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px 0px; white-space-collapse: preserve;">3.8.
This invalidity means that the way in which DNB assesses registration requests cannot be partially seen as falling under a task assigned to it by or under the Wwft and the resulting activities."</p><p><u>What's next?</u></p><p>1. DNB will have to refund the invoices for supervision over 2021 as a result of the fact that a large part of the cost pertained to activities without legal mandate which cannot be recovered. So the Ministry of Finance will have to pay this as it doesn't make sense to charge any private entity for the legal wrongdoings and supervisors overstepping their mandate.</p><p>2. DNB will have to revise the registration regime and make it a true registration regime. They can no longer apply the 10step approach (copy paste licensing) and extensive list of questions and must remain with a small list. Effectively the main focus of registrations will have to be on evaluating quality of management and reputation of UBO. Registrations must be done in 2 months instead of the current 6-12 months evaluation period.</p><p>3. If DNB wants to add specific demands and requests it will have to send out specific request immediately after registration and should do so on the basis of a prior risk assessment as to nature of company and businss positioning/management (they will have sufficient information on that as a result of the management evaluation procedure in the registration).</p><p>4. DNB needs to ask an independent accountant to separate the forbidden registration costs which included checking wallet verification requirements, doing extensive study of documentation from the practical application process prescribed under AMLD5. This will mean that 75% of the costs of crypto supervision in 2021, 2022 and 2023 will have to be dropped. </p><p>5. DNB will most likely also appeal against the verdict although ideally they would make excuses for having gone beyond their mandate both as a supervisor and in their role as 'advisor' of the Ministry of Finance. This excuse can be made without cost given that it is DNBs vision that even when they make a fault they are not legally liable for it. This is also in Dutch law (a good from post financial crisis). </p><p><u>A 'told you so' with mixed feelings</u></p><p>Well. I told you so. For 5 years I've been telling regulators and DNB that their policy decision to do more than the EU directive was at odds with our institutional frameworks. But hey, who listens to crypto players: those casino's, those money launderers. It was fairly easy for the central bank and ministry of Finance to frame their way out of the debate. They also misrepresented the facts.</p><p>Appeals to higher ethics and the institutional boundaries did not work. Not formally, not informally. And I've really pushed every button I could find. Because you don't want to end up resolving things in court. And if you do, you want to prove that you tried your best to prevent coming there. Which means the stuff had to go to couurt. The powers that be thought they were right and they could ignore the EU rules and the advice/knowledge of State of Council of incompatibility of their plans with those rules. </p><p>Usually that works, by the way. Because companies and industry organisation usually aren't that well documented and don't come prepared. But this time was different. DNB and Ministry of Finance had just pulled an identical trick in the payment sector, so this was a second time around for the legal and compliance industry involved. And that made a difference. The supporting legal industry did not fall for the easy crypto-money laundering frame. The legal industry recognised the DNB-overstepping-mandate reality.</p><p>Still this is all mixed feelings. Why don't we just respect EU rules, whether in government or in companies. That would have made our life a fair bit more pleasant. Why did we have to go at lenght to do this batlle? Do we really need to go on and start a third law suit now (when DNB doesn't come round to acknowledging their errors of judgment)? </p><p>So yes, this is a told you so moment. But I mostly hope this legal verdict is were things will change so that there is no need to write about a third told you so moment in the future. </p>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-53500094596659485282023-08-14T14:26:00.006+02:002023-08-20T13:28:47.514+02:00Annulment procedure for the EU version of the FATF Travel rule: Q&A<h3 class="post-title entry-title" itemprop="name" style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 22px; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variation-settings: normal; font-weight: normal; line-height: normal; margin: 0.75em 0px 0px; position: relative;"><br /></h3><div class="post-header" style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 10.8px; line-height: 1.6; margin: 0px 0px 1.5em;"><div class="post-header-line-1"></div></div><div class="post-body entry-content" id="post-body-5489449562815906949" itemprop="description articleBody" style="background-color: white; line-height: 1.4; position: relative; width: 570px;"><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">Ok, so you may have been reading a complex thread on <a href="https://threadreaderapp.com/thread/1687433705340407808.html" style="color: #2288bb; text-decoration-line: none;" target="_blank">social media</a> about the European travel rule for crypto companies and the impact it has on fundamental rights to privacy and freedom to provide services. And you may be wondering. What is it? What's happening. How can I contribute? </div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><br /></div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">Well, it's a long story with quite some history (see this blog <a href="https://moneyandpayments.simonl.org/2019/06/g20-and-fatf-should-not-infringe-on.html" style="color: #2288bb; text-decoration-line: none;" target="_blank">here</a>, <a href="https://moneyandpayments.simonl.org/2019/05/fatf-and-eu-need-to-fundamentally.html" rel="nofollow" style="color: #2288bb; text-decoration-line: none;" target="_blank">here </a>and <a href="https://moneyandpayments.simonl.org/2019/06/fatf-as-in-facebook-as-foe-of-facebook_14.html" rel="nofollow" style="color: #2288bb; text-decoration-line: none;" target="_blank">here</a>) but I will try to summarize the situation as of mid August 2023. Blog may be adapted over time by the way.</div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><u><br /></u></div><div><u><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #222222;"><span style="font-size: 13.2px;">What is this annulment procedure all about?</span></span><br /></u><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #222222;"><span style="font-size: 13.2px;">Simply put, the European legislator decided upon promulgating a </span></span><a href="https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32023R1113#d1e746-1-1" style="color: #2288bb; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; text-decoration-line: none;" target="_blank">regulation</a><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #222222;"><span style="font-size: 13.2px;"> that obliges future virtual asset providers to broadcast personal data for all transactions along in the international value chain for reasons of preventing money laundering and terrorist finance. </span></span></div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><br /></div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">This is in spite of abundant repetitive <a href="https://curia.europa.eu/juris/document/document.jsf;jsessionid=C0D8F6192ED69B8FAFD815456733D219?text=&docid=264843&pageIndex=0&doclang=NL&mode=req&dir=&occ=first&part=1&cid=876117" style="color: #2288bb; text-decoration-line: none;" target="_blank">case verdicts</a> of the Court of Justice that annuls Directives and amends legislation which violates the proportionality principles and forgets the test of strict necessity of such measures (see also a <a href="https://research.rug.nl/en/publications/privacy-and-identity-issues-in-financial-transactions-the-proport" style="color: #2288bb; text-decoration-line: none;" target="_blank">detailed analysis in the dissertation of Carolin Kaiser</a>, outlining incompatibility of AML-rules with Court of Justice rulings and EU Treaty rules on human rights). </div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><br /></div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><u>Where can I find the disputed requirement(s) in the EU regulation?</u></div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">You will find it in the articles 14-23 of the regulation which outline a bunch of information to be added to crypto-asset transfers (or being sent along via separate communication channel). Senders should add the information, receivers should check whether it is there and notify/remind the sender when it is incomplete. All in all it is an elaborate set of instructions for all crypto asset players.</div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><br /></div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><u style="background-color: transparent;">What personal data is involved?</u></p>Well, first of all, the fact that you as a customer (or receiver) own virtual assets (a fact that, see the <a href="https://cointelegraph.com/news/ledger-data-leak-a-simple-mistake-exposed-270k-crypto-wallet-buyers" target="_blank">ledger hack</a>, has proven to be very private and sensitive information). It regards the following information about the sender/originator: <blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p><i>(a) the name of the originator;</i></p><p><i>(b) the originator’s distributed ledger address, in cases where a transfer of crypto-assets is registered on a network using DLT or similar technology, and the crypto-asset account number of the originator, where such an account exists and is used to process the transaction;</i></p><p><i>(c) the originator’s crypto-asset account number, in cases where a transfer of crypto-assets is not registered on a network using DLT or similar technology;</i></p><p><i>(d) the originator’s address, including the name of the country, official personal document number and customer identification number, or, alternatively, the originator’s date and place of birth; and</i></p><p><i>(e) subject to the existence of the necessary field in the relevant message format, and where provided by the originator to its crypto-asset service provider, the current LEI or, in its absence, any other available equivalent official identifier of the originator.</i></p></blockquote><p>And it also covers data of the person/entity that you are sending information to:</p></div><blockquote style="border: none; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 0px 0px 0px 40px; padding: 0px;"><div><p><i>(a) the name of the beneficiary, </i></p></div><div><p><i>(b) the beneficiary’s distributed ledger address, in cases where a transfer of crypto-assets is registered on a network using DLT or similar technology, and the beneficiary’s crypto-asset account number, where such an account exists and is used to process the transaction;</i></p></div><div><p><i>(c) the beneficiary’s crypto-asset account number, in cases where a transfer of crypto-assets is not registered on a network using DLT or similar technology; and</i></p></div><div><p><i>(d) subject to the existence of the necessary field in the relevant message format, and where provided by the originator to its crypto-asset service provider, the current LEI or, in its absence, any other available equivalent official identifier of the beneficiary.</i></p></div></blockquote><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><u>Why is the requirement challenged as disproportional?<br /></u></div><div style="color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">Article 24 of the same regulation says that, when police show their badge, all relevant information of suspected customers must be handed over without delay. So law enforcement and governments can get all the info when they want it, as long as they demonstrate authority. This will mean due process is guaranteed and only individual customer data is handed over when an actual suspicion or involvement for money laundering and terrorist finance is at stake. </div><blockquote style="border: none; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 0px 0px 0px 40px; padding: 0px;"><div style="box-sizing: border-box; margin: 8px 0px 0px; text-align: justify;"><i><u>Article 24</u></i></div><div style="box-sizing: border-box; margin: 8px 0px 0px; text-align: justify;"><i><u>Provision of information</u></i></div><div style="box-sizing: border-box; margin: 8px 0px 0px; text-align: justify;"><i>Payment service providers and crypto-asset service providers shall respond fully and without delay, including by means of a central contact point in accordance with Article 45(9) of Directive (EU) 2015/849, where such a contact point has been appointed, and in accordance with the procedural requirements laid down in the national law of the Member State in which they are established or have their registered office, as applicable, to enquiries exclusively from the authorities responsible for preventing and combating money laundering or terrorist financing of that Member State concerning the information required under this Regulation.</i></div></blockquote><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><span style="background-color: transparent;">So this begs the question. If local and European police/law enforcement can get all the information they need at their fingertips for all cases related to money laundering and terrorist finance, why would we broadcast full transaction details to all the players in the value chain around the world? </span></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><span style="background-color: transparent;"><b>The practical, and constitutional question under the EU treaties on fundamental rights is: is it truly strictly necessary, proportional and in line with the risk based nature of anti money laundering regulation to send out and broadcast/disseminate all data for all transactions/originators/beneficiaries of all crypto asset transfers (of which the high majority have nothing to do with money laundering or terrorist finance) to all other virtual asset players in the world, including those in non-EU territories? </b></span></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><span style="background-color: transparent;"><u>What are the timelines for the anullment action ?</u></span></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;">As the regulation was published on June 9, 2023, there is until August 23, 2023 to file <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=LEGISSUM:ai0038" style="color: #2288bb; text-decoration-line: none;" target="_blank">an annulment action under the rules of procedure of the EU</a>. This is a request to the General Court to strike out a regulation or parts of a regulation which are deemed unconstitutional and where claimants have a direct interest to have the regulation being annulled.</div><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #222222;"><span style="font-size: 13.2px;">Who will be filing the annulment action?</span></span></u></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;">Right now the process of finding funders is well underway. There is a clear perspective on funding but the other challenge is to find the proper claimants and legal angle for this action. At present, <a href="https://simonl.org/nl/" rel="nofollow" style="color: #2288bb; text-decoration-line: none;" target="_blank">Simon Lelieveldt</a> is coordinating and executing the efforts to create the right setting for this annulment action. </div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;">The main idea, at present, is to use the information, experiences and <a href="https://finhstamsterdam.medium.com/dutch-judge-slaps-dnb-dutch-central-bank-on-the-wrist-in-court-case-of-crypto-pioneer-bitonic-on-b9ca5d9c145" style="color: #2288bb; text-decoration-line: none;" target="_blank">court case findings of the Dutch crypto community</a> to align the claimants with a direct interest. These will be primarily virtual asset providers, their industry organisation and possibly individual clients who find their privacy violated/breached. </div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;">The legal/compliance experts doing the action will be myself and the litigation law firm with whom we have previously been successful in litigating against the abuse of premature non risk based prescription of FATF-recommendations as a part of the registration process for crypto providers. </div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u>What would motivate claimants, what are the interests at stake?</u></div><div style="box-sizing: border-box; margin: 8px 0px 0px;">As a basic principle it should not be up to individual providers of crypto services to be forced to litigate to resolve the conflict of laws that are inherently present in the current ruleset's on anti money laundering and fundamental rights of privacy and freedom of services delivery. The EU regulator should assure compatibility with fundamental rights beforehand, but has failed to do so in this case.</div><div style="box-sizing: border-box; margin: 8px 0px 0px;">The direct consequence is that providers individually and as a sector will be faced with high operational costs, disproportionate burdens and the risk of fines for transgressing fundamental rights of their customers. This risk is not hypothetical: it has already taken place in the Netherlands (see <a href="https://uitspraken.rechtspraak.nl/#!/details?id=ECLI:NL:RBROT:2021:2968" style="color: #2288bb; text-decoration-line: none;" target="_blank">case law</a>) and cost a lot of money. </div></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u>What are the chances of succes?</u></div><div style="box-sizing: border-box; margin: 8px 0px 0px;">While to the outsider it is evident that virtual asset providers and their industry organisation as well as NGOs such as Privacy First have a legitimate concern, the technical details of EU court proceedings may be more complex. So there are some hurdles and the challenge is to present the case with the proper angles/arguments as well.</div><div style="box-sizing: border-box; margin: 8px 0px 0px;">In practice, the range of legal arguments is a bit wider than outlined above and it should be possible to find the right legal angle. The current first phase of the action is however still to validate the approach, risks and chances of success. If these appear too slim, the action may not start. </div><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u>How can I contribute?</u></div><div style="box-sizing: border-box; margin: 8px 0px 0px;">No crypto funding is possible. This will trigger a range of detailed questions and such as well as possible blocking of my bank account under the current policies of my bank. Unfortunately my bank is doing this but that is another regulatory topic (and perhaps a later case in court). </div><div style="box-sizing: border-box; margin: 8px 0px 0px;">So, should you wish to support the annulment action you can donate only in fiat, using the following details: S. Lelieveldt at KNAB Bank, international bank account number: NL86 KNAB 0615 8954 92 (BIC: KNABNLH2, Amsterdam, the Netherlands). International payments need to be done via intermediary bank ABN AMRO (BIC: ABNANL2A, Amsterdam, the Netherlands). </div><div style="box-sizing: border-box; margin: 8px 0px 0px;">Legal disclaimer: please understand that this is not a service agreement of some form but a donation allowing me to direct my energy/time or the resources towards achieving this goal in any way I see fit. This could be setting up a foundation, contributing to other relevant regulatory consultations or helping out other initiatives with achieving the same objective.</div></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><br /></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;">=====================</div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><u><b>Further QenA's and backgroud.</b></u></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><u><b><br /></b></u></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u>So are the articles 14-23 in the regulation proportional ?</u></div><div style="box-sizing: border-box; margin: 8px 0px 0px;">Previously the European Data Protection Board already advised strongly to limit anti money laundering regulations to stuff that is strictly necessary. See their <a href="https://edpb.europa.eu/sites/default/files/files/file1/edpb_guidelines_202006_psd2_afterpublicconsultation_en.pdf" style="color: #2288bb; text-decoration-line: none;" target="_blank">letter of April 2021</a>:</div></span></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><i style="background-color: transparent;">Pursuant to Article 52 of the Charter, any limitation on the exercise of the rights and freedoms recognised by this Charter must be provided for by law and respect the essence of those rights and freedoms. Subject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others7 . This means that legislative measures that limit the right to privacy and data protection have to be specific in order to correspond to objectives of general interest pursued and <u><b>should not constitute disproportionate and unreasonable interference undermining the substance of those rights</b></u>.</i></div></span></div></blockquote><div style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;"><div style="box-sizing: border-box; margin: 8px 0px 0px;">Now. Let's do our own research.</div><div style="box-sizing: border-box; margin: 8px 0px 0px;">If a well targeted article 24 for a limited set of citizens involved with money laundering and terrorist finance is in place, don't the articles 14-23, that apply to all citizens, all transactions regardless of their involvement in money laundering and terrorist finance appear to be somewhat excessive ? </div><div style="box-sizing: border-box; margin: 8px 0px 0px;">Implementing the systems and changing them is very costly to implement. It does not add any informational value but rather significantly increases the risk of data breaches for parties to the transactions. It is a disproportionate nice-to-have requirement for government which violates the main principles of data minimization. </div><div style="box-sizing: border-box; margin: 8px 0px 0px;">As such individual virtual asset providers may be fined by data protection authorities, sued by their customers or beneficiaries for infringing their fundamental rights or for damages due to data breaches. All these risks do not exist when only article 24 is in place as the formal legal nature/context of the policy request creates further safeguards.</div></span></div></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><p><u>Hey, is that also third party privacy issue popping up?</u></p><p>Yes indeed. This regulation is not only an infringement to customers of VASPs, but to all receivers of virtual asset transfers from the European Union. Those recipients will be unable to know where and which data on them has been submitted, stored and retained by the sending VASP as they have no legal relation with that entity. Yet the sending VASP processes their personal information and distributes it regardless of the existence of any provable relation to money laundering or terrorist finance. </p><p>The consequence of this construct is similar as that for the Second Payment Services Directive and the European Data Protection Board has in 2020 stipulated in its <a href="https://edpb.europa.eu/sites/default/files/files/file1/edpb_guidelines_202006_psd2_afterpublicconsultation_en.pdf" style="color: #2288bb; text-decoration-line: none;" target="_blank">guideline </a>that for these uninvolved third party data, called 'silent party' data, controllers need to take serious precautions. </p><p><i>In this respect, the controller (AISP or PISP) has to establish the necessary safeguards for the processing in order to protect the rights of data subjects. This includes technical measures to ensure that silent party data are not processed for a purpose other than the purpose for which the personal data were originally collected by PISPs and AISPs. If feasible, also encryption or other techniques should be applied to achieve an appropriate level of security and data minimisation.</i></p><p>Also the EDPB outlines that no other processing of data is allowed outside the scope of the regulation: </p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p><i>With regard to further processing of silent party data on the basis of legitimate interest, the EDPB is of the opinion that these data cannot be used for a purpose other than that for which the personal data have been collected, other on the basis of EU or Member State law. </i></p></blockquote><p><u>How about the international data transfer and privacy issues?</u></p><p>Yes, good point. The regulation is a one size fits all for crypto-transfers, whereas for fiat-transactions differences are made between in EU and EU/non-EU countries. This leads to the question how non EU countries deal with data that EU companies are forced to distribute all over the world.</p><p>In the immediate post 9/11 political discussion in Europe it became clear that European citizens and politicians were being cheated upon by the US government (that was harvesting EU data immediately after the 9/11 attack). A range of measures, discussions etc followed after the illegal snooping of the US on EU customer data was found out. This is also described by Mara Wesseling. In today's terms we can see a repeat of the topic during the Max Schrems discussions on Facebook data, which also has a serious bearing on financial transactions and financial transaction information exchange.</p><p>In essence, those discussions on legitimacy and data protection for international data transfer have not really been resolved. And the current EU regulation does not change it, as it obliges companies to distribute data to entities without proper assurance that the receiving companies/countries protect the data of customers sufficiently. Which means that all VASPs that fully follow this regulation can be held liable by data protection supervisors or citizens that face damages from data breaches and insufficient data protection measures of those VASPs. </p><p><u>So why still this requirement, does it work in practice?</u></p></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;">Well, all law enforcers/governments in essence just land grab each tool in the toolbox to claim it is useful. And for this regulation they say: 'this is an obligation for banks too, so crypto must follow'. However, the bank regulation is in operation for almost 2 decades now and no formal evaluations of the effectivity and usefulness have been done. </span></p><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;">The fact that other players have the same obligation does not mean it is therefore suddenly proportional. Rather, it is disproportional to the other players as well, but those are unwilling to challenge the rule as over the years they are being fined into submission.</span></p><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><u style="background-color: transparent;">Where does this idea/requirement come from?</u></p><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;">Way back from 1995 onwards, the world was less digital and we had little big data floating all around the world. Intelligence and law enforcement community were however keen to introduce far reaching KYC and data transfer requirements. The first efforts in the US were unsuccessful but the 9/11 attacks completely changed the momentum, as documented by Mara Wesseling in </span><a href="https://pure.uva.nl/ws/files/1737805/126131_thesis.pdf" style="background-color: transparent; color: #2288bb; text-decoration-line: none;" target="_blank">her dissertation</a><span style="background-color: transparent;">:</span></p><p></p><blockquote><i>The attacks of 11 September 2001 substantially changed the urgency and importance assigned to these different debates. The relative insignificance of the amounts of money involved in terrorism, the burden on the financial sector, the civil liberties implications of strengthened regulation, and the doubts about the use of UN economic sanctions, all became subordinate to the increased urgency of terrorism (p.90-91).</i></blockquote><p></p><p>The story for financial institutions after 9/11/2001 was simple. A whole bunch of intrusive regulations were forced upon them with the following explanation: "If we need to get to a terrorist, we need to be aware of their transactions fast en early and the current structure of paperwork and international law enforcement is too complex and timely. So rather than file proper paperwork based on due diligence we request financial institutions to broadcast the data all over the world so any local police officer can investigate the two legs of a financial transaction by requesting access to the transaction data at the local end."</p><p>Politically banks couldn't resist cooperating for fear of being branded cooperative with terrorists. And mind you, the terrorist approach was in essence an upgrade of previous efforts to get banks on board to do KYC to prevent money laundering. But that political frame got a bit outdated so the 9/11 attacks were a welcome present to the law enforcement/intelligence community as a momentum to change the scenery in a fundamental way.</p><p><u>What is the risk of this regulation?</u></p><p>In essence, the broadcasting requirement as it was implemented after 9/11 in banking, was a shortcut for local law enforcement (or other national security offices) that would provide easy access to EU data in the US for example. And make no mistake: local governments weren't waiting for the law to be in place, they just got what they wanted and started downloading swift transactions within 2 weeks of the 9/11 attack. This became known only five years later, Wesseling explains:</p><p><a href="https://blogger.googleusercontent.com/img/a/AVvXsEid6rdvwTJPskZ4nD4xhQNQqDqVmZ2kYRvzyxhApx024rvL6u5SZeyw2uQK1CcUdlMQAnU5OiivURXoozGuSe_xolryHlO17DRNDR0B5JPUGFwz-cxvQ_vCOi6y03bmqpLixvvQ_UuLBZXscUyr8I3lxP57PV149OBiCGybhZuf8Ci86QKccuEjpw" style="color: #2288bb; margin-left: 1em; margin-right: 1em; text-align: center; text-decoration-line: none;"><img data-original-height="407" data-original-width="715" height="268" src="https://blogger.googleusercontent.com/img/a/AVvXsEid6rdvwTJPskZ4nD4xhQNQqDqVmZ2kYRvzyxhApx024rvL6u5SZeyw2uQK1CcUdlMQAnU5OiivURXoozGuSe_xolryHlO17DRNDR0B5JPUGFwz-cxvQ_vCOi6y03bmqpLixvvQ_UuLBZXscUyr8I3lxP57PV149OBiCGybhZuf8Ci86QKccuEjpw=w470-h268" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 1px solid rgb(238, 238, 238); box-shadow: rgba(0, 0, 0, 0.1) 1px 1px 5px; padding: 5px; position: relative;" width="470" /></a></p><p>The main risk involved in this data harvesting/broadcasting regulation is that it is used for other purposes in a way that is not specifically and officially set out in law. The application of the rule would then lead to data processing of citizens data without legal title. And it is exactly this challenge that one Dutch VASP, Bitonic, faced in 2020. Either violate the AVG or AML-laws. </p><p>Bitonic succeeded in challenging supervisors requirements related to this rule and then deleted all <a href="https://bitonic.nl/news/233/bitonic-destroys-wallet-screenshots-that-were-unduly-required-by-its-supervisor" style="color: #2288bb; text-decoration-line: none;" target="_blank">customer data that were unduly harvested/collected</a>. But in order to remain in business and keep their license to operate they were first of all forced by financial supervisors to consciously violate the AVG. But close readers of the regulation will now understand what is meant with the article 23. Supervisors will use this regulation to force p<span style="font-size: 16px; text-align: justify;">ayment service providers and crypto-asset service providers to restrict transfers of assets that are not to the liking of the supervisor and that are beyond the scope of the regulation itself.</span></p></div><blockquote style="border: none; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 0px 0px 0px 40px; padding: 0px;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><p><span style="font-size: 16px; text-align: justify;"><i>23. Payment service providers and crypto-asset service providers shall have in place internal policies, procedures and controls to ensure the implementation of Union and national restrictive measures when performing transfers of funds and crypto-assets under this Regulation.</i></span></p></div></blockquote><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><div class="separator" style="clear: both;"><u>Wasn't the constitutionality of this rule checked in the impact assessment of the EU?</u></div><div class="separator" style="clear: both;">Brief answer: Hardly. The political dynamics are: we copied the idea from the bank regulation and it's an obligation of the FATF and we're going to implement it. And then there is a page or three with a bunch of lip service to Data Protection Framework and privacy. Yes, we should limit to what is necessary and we will consult the European Data Protection Supervisor and perhaps also the European Data Protection Board. </div><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;"></span></p><div class="separator" style="clear: both;">Have a look yourself. The <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021SC0190" style="color: #2288bb; text-decoration-line: none;" target="_blank">impact assessment for this regulation</a> lists the implementation of the requirement as one of several measures and does not evaluate possible alternate operational methods or proportionality. It does not contain the strictly necessary test for the requirements. It simply says: the Financial Action Task Force tells us to do it, and we expand the existing regulation towards crypto. Hence, the existing illegitimacy and disproportionality of banking rules on this topic are copied onto the crypto world. </div></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;"><u>What would motivate claimants coming from the Dutch sector?</u></div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;">As a basic principle it should not be up to individual providers of crypto services to be forced to litigate to resolve the conflict of laws that are inherently present in the current ruleset's on anti money laundering and fundamental rights of privacy and freedom of services delivery. The EU regulator should assure compatibility with fundamental rights beforehand, but has failed to do so in this case.</div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;">The direct consequence is that providers individually and as a sector will be faced with high operational costs, disproportionate burdens and the risk of transgressing fundamental rights of their customers. This risk is not hypothetical: it has already taken place in the Netherlands and the assumption that a financial supervisor will operate within the boundaries and limitations of case verdicts of the Court of Justice on privacy is theoretic. </div><div style="box-sizing: border-box; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; margin: 8px 0px 0px;">See the <a href="https://moneyandpayments.simonl.org/2021/09/crypto-episode-as-part-of-dutch.html" style="color: #2288bb; text-decoration-line: none;" target="_blank">blog here:</a> when registering for their registration as virtual asset service providers, the Dutch central bank forced providers to violate the GDPR by imposing an unconstitutional and unlawful requirement, based on the FATF-requirements. This has resulted in very considerable additional cost to the business and violations of the privacy of customers. Virtual asset providers were facing the choice to either violate the GDPR or the AML-rules, with a solution only coming via the intervention of a judge. This turned out to be very costly and - in hindsight - unnecessary. </div></div><p><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: #222222; font-size: 13.2px;">Rather than waiting for these constitutional accidents to happen again during the licensing process for Mica-r, the market players may wish to address them in advance to ensure legal clarity and compatibility with fundamental rights.</span> </p>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-54894495628159069492023-08-09T06:50:00.030+02:002023-08-20T13:58:14.392+02:00Annulment procedure for the EU version of the FATF Travel rule<div style="text-align: left;">Ok, so you may have been reading a complex thread on <a href="https://threadreaderapp.com/thread/1687433705340407808.html" target="_blank">social media</a> about the European travel rule for crypto companies and the impact it has on fundamental rights to privacy and freedom to provide services. And you may be wondering. What is it? What's happening. How can I contribute? </div><div style="text-align: left;"><br /></div><div style="text-align: left;">Well, it's a long story with quite some history (see this blog <a href="https://moneyandpayments.simonl.org/2019/06/g20-and-fatf-should-not-infringe-on.html" target="_blank">here</a>, <a href="https://moneyandpayments.simonl.org/2019/05/fatf-and-eu-need-to-fundamentally.html" rel="nofollow" target="_blank">here </a>and <a href="https://moneyandpayments.simonl.org/2019/06/fatf-as-in-facebook-as-foe-of-facebook_14.html" rel="nofollow" target="_blank">here</a>) but I will try to summarize the situation as of mid August 2023. Blog may be adapted over time by the way.</div><div style="text-align: left;"><u><br /></u></div><div style="text-align: left;"><u>What is this anullment procedure all about?<br /></u>Simply put, the European legislator decided upon promulgating a <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32023R1113#d1e746-1-1" target="_blank">regulation</a> that obliges future virtual asset providers to broadcast personal data for all transactions along in the international value chain for reasons of preventing money laundering and terrorist finance (while simultanoeusly requiring it to be handed over without undue delay if a policy officer asks for it). </div><div style="text-align: left;"><br /></div><div style="text-align: left;">This broadcasting requirement is in spite of abundant repetitive <a href="https://curia.europa.eu/juris/document/document.jsf;jsessionid=C0D8F6192ED69B8FAFD815456733D219?text=&docid=264843&pageIndex=0&doclang=NL&mode=req&dir=&occ=first&part=1&cid=876117" target="_blank">case verdicts</a> of the Court of Justice that anulls Directives and amends legislation which violates the proportionality principles and forgets the test of strict necessity of such measures (see also a <a href="https://research.rug.nl/en/publications/privacy-and-identity-issues-in-financial-transactions-the-proport" target="_blank">detailed analysis in the dissertation of Carolin Kaiser</a>, outlining incompatibility of AML-rules with Court of Justice rulings and EU Treaty rules on human rights). </div><div style="text-align: left;"><br /></div><div style="text-align: left;"><u>Where can I find the disputed requirement(s) in the EU regulation?</u></div><div style="text-align: left;">You will find it in the articles 14-23 of the regulation which outline a bunch of information to be added to crypto-asset transfers (or being sent along via separate communication channel). Senders should add the information, receivers should check whether it is there and notify/remind the sender when it is incomplete. All in all it is an elaborate set of instructions for all crypto asset players.</div><div style="text-align: left;"><br /></div><div style="text-align: left;"><p class="oj-normal" style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px;"><u style="background-color: transparent;">What personal data is involved?</u></p>Well, first of all, the fact that you as a customer (or receiver) own virtual assets (a fact that, see the ledger hack, has proven to be very private and sensitive information). It regards the following information about the sender/originator: <blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p><i>(a) the name of the originator;</i></p><p><i>(b) the originator’s distributed ledger address, in cases where a transfer of crypto-assets is registered on a network using DLT or similar technology, and the crypto-asset account number of the originator, where such an account exists and is used to process the transaction;</i></p><p><i>(c) the originator’s crypto-asset account number, in cases where a transfer of crypto-assets is not registered on a network using DLT or similar technology;</i></p><p><i>(d) the originator’s address, including the name of the country, official personal document number and customer identification number, or, alternatively, the originator’s date and place of birth; and</i></p><p><i>(e) subject to the existence of the necessary field in the relevant message format, and where provided by the originator to its crypto-asset service provider, the current LEI or, in its absence, any other available equivalent official identifier of the originator.</i></p></blockquote><p>And it also covers data of the person/entity that you are sending information to:</p></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><div style="text-align: left;"><p><i>(a) the name of the beneficiary, </i></p></div><div style="text-align: left;"><p><i>(b) the beneficiary’s distributed ledger address, in cases where a transfer of crypto-assets is registered on a network using DLT or similar technology, and the beneficiary’s crypto-asset account number, where such an account exists and is used to process the transaction;</i></p></div><div style="text-align: left;"><p><i>(c) the beneficiary’s crypto-asset account number, in cases where a transfer of crypto-assets is not registered on a network using DLT or similar technology; and</i></p></div><div style="text-align: left;"><p><i>(d) subject to the existence of the necessary field in the relevant message format, and where provided by the originator to its crypto-asset service provider, the current LEI or, in its absence, any other available equivalent official identifier of the beneficiary.</i></p></div></blockquote><div style="text-align: left;"><u>Why is the requirement challenged as disproportional?<br /></u></div><div style="text-align: left;">Article 24 of the same regulation says that, when police show their badge, all relevant information of suspected customers must be handed over without delay. So law enforcement and governments can get all the info when they want it, as long as they demonstrate authority. This will mean due process is guarantueed and only individual customer data is handed over when an actual suspicion or involvement for money laundering and terrorist finance is at stake. </div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: justify;"><i><u>Article 24</u></i></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: justify;"><i><u>Provision of information</u></i></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: justify;"><i>Payment service providers and crypto-asset service providers shall respond fully and without delay, including by means of a central contact point in accordance with Article 45(9) of Directive (EU) 2015/849, where such a contact point has been appointed, and in accordance with the procedural requirements laid down in the national law of the Member State in which they are established or have their registered office, as applicable, to enquiries exclusively from the authorities responsible for preventing and combating money laundering or terrorist financing of that Member State concerning the information required under this Regulation.</i></div></blockquote><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><span style="background-color: transparent;"><span style="background-color: transparent;">So this begs the question. If local and European police/law enforcement can get all the information they need at their fingertips for all cases related to money laundering and terrorist finance, why would we broadcast full transaction details to all the players in the value chain around the world? </span></span></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><span style="background-color: transparent;"><b>The practical, and constitutional question under the EU treaties on fundamental rights is: is it truly strictly necessary, proportional and in line with the risk based nature of anti money laundering regulation to send out and broadcast/disseminate all data for all transactions/originators/beneficiaries of all crypto asset transfers (of which the high majority have nothing to do with money laundering or terrorist finance) to all other virtual asset players in the world, including those in non-EU territories? </b></span></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><span style="background-color: transparent;"><u>What are the timelines for the anullment action ?</u></span></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">As the regulation was published on June 9, 2023, there is until August 23, 2023 to file <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=LEGISSUM:ai0038" target="_blank">an anullment action under the rules of procedure of the EU</a>. This is a request to the General Court to strike out a regulation or parts of a regulation which are deemed unconstitutional and where claimants have a direct interest to have the regulation being anulled.</div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><u>Who will be filing the anullment action?</u></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">Right now the process of finding funders is well underway. There is a clear perspective on funding but the other challenge is to find the proper claimants and legal angle for this action. At present, <a href="https://simonl.org/nl/" rel="nofollow" target="_blank">Simon Lelieveldt</a> is coordinating and executing the efforts to create the right setting for this anullment action. </div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">The main idea, at present, is to use the information, experiences and <a href="https://finhstamsterdam.medium.com/dutch-judge-slaps-dnb-dutch-central-bank-on-the-wrist-in-court-case-of-crypto-pioneer-bitonic-on-b9ca5d9c145" target="_blank">court case findings of the Dutch crypto community</a> to align the claimants with a direct interest. These will be primarily virtual asset providers, their branche organisation and possibly individual clients who find their privacy breached. </div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">The legal/compliance experts doing the action will be myself and the litigation law firm with whom we have previously been successful in litigating against the abuse of premature non risk based prescription of FATF-recommendations as a part of the registration process for crypto providers. </div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u>What would motivate claimants, what are the interests at stake?</u></div><div style="box-sizing: border-box; margin: 8px 0px 0px;">As a basic principle it should not be up to individual providers of crypto services to be forced to litigate to resolve the conflict of laws that are inherently present in the current rulesets on anti money laundering and fundamental rights of privacy and freedom of services delivery. The EU regulator should assure compatibility with fundamental rights beforehand, but has failed to do so in this case.</div><div style="box-sizing: border-box; margin: 8px 0px 0px;">The direct consequence is that providers individually and as a sector will be faced with high operational costs, disproportionate burdens and the risk of fines for transgressing fundamental rights of their customers. This risk is not hypothetical: it has already taken place in the Netherlands (see <a href="https://uitspraken.rechtspraak.nl/#!/details?id=ECLI:NL:RBROT:2021:2968" target="_blank">case law</a>) and cost a lot of money. </div></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u>What are the chances of succes?</u></div><div style="box-sizing: border-box; margin: 8px 0px 0px;">While to the outsider it is evident that virtual asset providers and their branche organisation as well as NGOs such as Privacy First have a legitimate concern, the technical details of EU court proceedings may be more complex. So there are some hurdles and the challenge is to present the case with the proper angles/arguments as well.</div><div style="box-sizing: border-box; margin: 8px 0px 0px;">In practice, the range of legal arguments is a bit wider than outlined above and it should be possible to find the right legal angle. The current first fase of the action is however still to validate the approach, risks and chances of success. If these appear too slim, the action may not start. </div><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u>How can I contribute?</u></div><div style="box-sizing: border-box; margin: 8px 0px 0px;">No crypto funding is possible. This will trigger a range of detailed questions and such as well as possible blocking of my bank account under the current policies of my bank. Unfortunately my bank is doing this but that is another regulatory topic (and perhaps a later case in court). </div><div style="box-sizing: border-box; margin: 8px 0px 0px;">So, should you wish to support the anullment action you can fund only in fiat, using the following details: S. Lelieveldt at KNAB Bank, international bank account number: NL86 KNAB 0615 8954 92 (BIC: KNABNLH2, Amsterdam, the Netherlands). International payments need to be done via intermediairy bank ABN AMRO (BIC: ABNANL2A, Amsterdam, the Netherlands).</div><div style="box-sizing: border-box; margin: 8px 0px 0px;">Legal clarification: please understand that this is not a service agreement of some form but a donation allowing me to direct my energy/time or the resources towards achieving this goal in any way I see fit. This could be setting up a foundation, contributing to other relevant regulatory consultations or helping out other initiatives with achieving the same objective.</div></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><br /></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">=====================</div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><u><b>Further QenA's and backgroud.</b></u></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><u><b><br /></b></u></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><u>So are the articles 14-23 in the regulation proportional ?</u></div><div style="box-sizing: border-box; margin: 8px 0px 0px;">Previously the European Data Protection Board already advised strongly to limit anti money laundering regulations to stuff that is strictly necessary. See their <a href="https://edpb.europa.eu/sites/default/files/files/file1/edpb_guidelines_202006_psd2_afterpublicconsultation_en.pdf" target="_blank">letter of April 2021</a>:</div></span></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;"><div style="box-sizing: border-box; margin: 8px 0px 0px;"><i style="background-color: transparent;">Pursuant to Article 52 of the Charter, any limitation on the exercise of the rights and freedoms recognised by this Charter must be provided for by law and respect the essence of those rights and freedoms. Subject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others7 . This means that legislative measures that limit the right to privacy and data protection have to be specific in order to correspond to objectives of general interest pursued and <u><b>should not constitute disproportionate and unreasonable interference undermining the substance of those rights</b></u>.</i></div></span></div></blockquote><div style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;"><div style="box-sizing: border-box; margin: 8px 0px 0px;">Now. Let's do our own reserch.</div><div style="box-sizing: border-box; margin: 8px 0px 0px;">If a well targeted article 24 for a limited set of citizens involved with money laundering and terrorist finance is in place, don't the articles 14-23, that apply to all citizens, all transactions regardless of their involvement in money laundering and terrorist finance appear to be somewhat excessive ? </div><div style="box-sizing: border-box; margin: 8px 0px 0px;">Implementing the systems and changing them is very costly to implement. It does not add any informational value but rather significantly increases the risk of data breaches for parties to the transactions. It is a disproportionate nice-to-have requirement for government which violates the main principles of data minimisation. </div><div style="box-sizing: border-box; margin: 8px 0px 0px;">As such individual virtual asset providers may be fined by data protection authorities, sued by their customers or beneficiaries for infringing their fundamental rights or for damages due to data breaches. All these risks do not exist when only article 24 is in place as the formal legal nature/context of the policy request creates further safeguards.</div></span></div></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><p><u>Hey, is that also third party privacy issue popping up?</u></p><p>Yes indeed. This regulation is not only an infringement to customers of VASPs, but to all receivers of virtual asset transfers from the European Union. Those recipients will be unable to know where and which data on them has been submitted, stored and retained by the sending VASP as they have no legal relation with that entity. Yet the sending VASP processes their personal information and distributes it regardless of the existence of any provable relation to money laundering or terrorist finance. </p><p>The consequence of this construct is similar as that for the Second Payment Services Directive and the European Data Protection Board has in 2020 stipulated in its <a href="https://edpb.europa.eu/sites/default/files/files/file1/edpb_guidelines_202006_psd2_afterpublicconsultation_en.pdf" target="_blank">guideline </a>that for these uninvolved third party data, called 'silent party' data, controllers need to take serious precautions. </p><p><i>In this respect, the controller (AISP or PISP) has to establish the necessary safeguards for the processing in order to protect the rights of data subjects. This includes technical measures to ensure that silent party data are not processed for a purpose other than the purpose for which the personal data were originally collected by PISPs and AISPs. If feasible, also encryption or other techniques should be applied to achieve an appropriate level of security and data minimisation.</i></p><p>Also the EDPB outlines that no other processing of data is allowed outside the scope of the regulation: </p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p><i>With regard to further processing of silent party data on the basis of legitimate interest, the EDPB is of the opinion that these data cannot be used for a purpose other than that for which the personal data have been collected, other on the basis of EU or Member State law. </i></p></blockquote><p><u>How about the international data transfer and privacy issues?</u></p><p>Yes, good point. The regulation is a one size fits all for crypto-transfers, whereas for fiat-transactions differences are made between in EU and EU/non-EU countries. This leads to the question how non EU countries deal with data that EU companies are forced to distribute all over the world.</p><p>In the immediate post 9/11 political discussion in Europe it became clear that European citizens and politicians were being cheated upon by the US government (that was harvesting EU data immediately after the 9/11 attack). A range of measures, discussions etc followed after the illegal snooping of the US on EU customer data was found out. This is also described by Mara Wesseling. In todays terms we can see a repeat of the topic during the Max Schrems discussions on Facebook data, which also has a serious bearing on financial transactions and financial transaction information exchange.</p><p>In essence, those discussions on legitimacy and data protection for international data transfer have not really been resolved. And the current EU regulation does not change it, as it obliges companies to distribute data to entities without proper assurance that the receiving companies/countries protect the data of customers sufficiently. Which means that all VASPs that fully follow this regulation can be held liable by data protection supervisors or citizens that face damages from data breaches and insufficient data protection measures of those VASPs. </p><p><u>So why still this requirement, does it work in practice?</u></p></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;">Well, all law enforcers/governments in essence just land grab each tool in the toolbox to claim it is useful. And for this regulation they say: 'this is an obligation for banks too, so crypto must follow'. However, the bank regulation is in operation for almost 2 decades now and no formal evaluations of the effectivity and usefulness have been done. </span></p><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;">The fact that other players have the same obligation does not mean it is therefore suddenly proportional. Rather, it is disproportional to the other players as well, but those are unwilling to challenge the rule as over the years they are being fined into submission.</span></p><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><u style="background-color: transparent;">Where does this idea/requirement come from?</u></p><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;">Way back from 1995 onwards, the world was less digital and we had little big data floating all around the world. Intelligence and law enforcement community were however keen to introduce far reachting KYC and data transfer requirements. The first efforts in the US were unsuccesfull but the 9/11 attacks completely changed the momentum, as documented by Mara Wesseling in </span><a href="https://pure.uva.nl/ws/files/1737805/126131_thesis.pdf" style="background-color: transparent;" target="_blank">her dissertation</a><span style="background-color: transparent;">:</span></p><p></p><blockquote><i>The attacks of 11 September 2001 substantially changed the urgency and importance assigned to these different debates. The relative insignificance of the amounts of money involved in terrorism, the burden on the financial sector, the civil liberties implications of strengthened regulation, and the doubts about the use of UN economic sanctions, all became subordinate to the increased urgency of terrorism (p.90-91).</i></blockquote><p></p><p>The story for financial institutions after 9/11/2001 was simple. A whole bunch of intrusive regulations were forced upon them with the following explanation: "If we need to get to a terrorist, we need to be aware of their transactions fast en early and the current structure of paperwork and international law enforcement is too complex and timely. So rather than file proper paperwork based on due diligence we request financial institutions to broadcast the data all over the world so any local police officer can investigate the two legs of a financial transaction by requesting access to the transaction data at the local end."</p><p>Politically banks couldn't resist cooperating for fear of being branded cooperative with terrorists. And mind you, the terrorist approach was in essence an upgrade of previous efforts to get banks on board to do KYC to prevent money laundering. But that political frame got a bit outdated so the 9/11 attacks were a welcome present to the law enforcement/intelligence community as a momentum to change the scenery in a fundamental way.</p><p><u>What is the risk of this regulation?</u></p><p>In essence, the broadcasting requirement as it was implemented after 9/11 in banking, was a shortcut for local law enforcement (or other national security offices) that would provide easy access to EU data in the US for example. And make no misstake: local governments weren't waiting for the law to be in place, they just got what they wanted and started downloading swift transactions within 2 weeks of the 9/11 attack. This became known only five years later, Wesseling explains:</p><p><a href="https://blogger.googleusercontent.com/img/a/AVvXsEid6rdvwTJPskZ4nD4xhQNQqDqVmZ2kYRvzyxhApx024rvL6u5SZeyw2uQK1CcUdlMQAnU5OiivURXoozGuSe_xolryHlO17DRNDR0B5JPUGFwz-cxvQ_vCOi6y03bmqpLixvvQ_UuLBZXscUyr8I3lxP57PV149OBiCGybhZuf8Ci86QKccuEjpw" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img data-original-height="407" data-original-width="715" height="268" src="https://blogger.googleusercontent.com/img/a/AVvXsEid6rdvwTJPskZ4nD4xhQNQqDqVmZ2kYRvzyxhApx024rvL6u5SZeyw2uQK1CcUdlMQAnU5OiivURXoozGuSe_xolryHlO17DRNDR0B5JPUGFwz-cxvQ_vCOi6y03bmqpLixvvQ_UuLBZXscUyr8I3lxP57PV149OBiCGybhZuf8Ci86QKccuEjpw=w470-h268" width="470" /></a></p><p>The main risk involved in this data harvesting/broadcasting regulation is that it is used for other purposes in a way that is not specifically and officiely set out in law. The application of the rule would then lead to data processing of citizens data without legal title. And it is exactly this challenge that one Dutch VASP, Bitonic, faced in 2020. Either violate the AVG or AML-laws. </p><p>Bitonic succeeded in challenging supervisors requirements related to this rule and then deleted all <a href="https://bitonic.nl/news/233/bitonic-destroys-wallet-screenshots-that-were-unduly-required-by-its-supervisor" target="_blank">customer data that were unduly harvested/collected</a>. But in order to remain in business and keep their license to operate they were first of all forced by financial supervisors to consciously violate the AVG. But close readers of the regulation will now understand what is meant with the article 23. Supervisors will use this regulation to force p<span style="font-size: 16px; text-align: justify;">ayment service providers and crypto-asset service providers to restrict transfers of assets that are not to the liking of the supervisor and that are beyond the scope of the regulation itself.</span></p></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><p style="text-align: left;"><span style="font-size: 16px; text-align: justify;"><i>23. Payment service providers and crypto-asset service providers shall have in place internal policies, procedures and controls to ensure the implementation of Union and national restrictive measures when performing transfers of funds and crypto-assets under this Regulation.</i></span></p></div></blockquote><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><div class="separator" style="clear: both;"><u>Wasn't the constitutionality of this rule checked in the impact assessment of the EU?</u></div><div class="separator" style="clear: both;">Brief answer: Hardly. The political dynamics are: we copied the idea from the bank regulation and it's an obligation of the FATF and we're going to implement it. And then there is a page or three with a bunch of lip service to Data Protection Framework and privacy. Yes, we should limit to what is necessary and we will consult the European Data Protection Supervisor and perhaps also the European Data Protection Board. </div><p class="oj-normal" style="box-sizing: border-box; margin: 8px 0px 0px;"><span style="background-color: transparent;"></span></p><div class="separator" style="clear: both;">Have a look yourself. The <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021SC0190" target="_blank">impact assessment for this regulation</a> lists the implementation of the requirement as one of several measures and does not evaluate possible alternate operational methods or proportionality. It does not contain the strictly necessary test for the requirements. It simply says: the Financial Action Task Force tells us to do it, and we expand the existing regulation towards crypto. Hence, the existing illegitimacy and disproportionality of banking rules on this topic are copied onto the crypto world. </div></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><u>What would motivate claimants coming from the Dutch sector?</u></div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">As a basic principle it should not be up to individual providers of crypto services to be forced to litigate to resolve the conflict of laws that are inherently present in the current rulesets on anti money laundering and fundamental rights of privacy and freedom of services delivery. The EU regulator should assure compatibility with fundamental rights beforehand, but has failed to do so in this case.</div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">The direct consequence is that providers individually and as a sector will be faced with high operational costs, disproportionate burdens and the risk of transgressing fundamental rights of their customers. This risk is not hypothetical: it has already taken place in the Netherlands and the assumption that a financial supervisor will operate within the boudaries and limitations of case verdicts of the Court of Justice on privacy is theoretic. </div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">See the <a href="https://moneyandpayments.simonl.org/2021/09/crypto-episode-as-part-of-dutch.html" target="_blank">blog here:</a> when registering for their registration as virtual asset service providers, the Dutch central bank forced providers to violate the GDPR by imposing an inconsitutional and unlawful requirement, based on the FATF-requirements. This has resulted in very considerable additional cost to the business and violations of the privacy of customers. Virtual asset providers were facing the choice to either violate the GDPR or the AML-rules, with a solution only coming via the intervention of a judge. This turned out to be very costly and - in hindsight - unnecessary. </div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;">Rather than waiting for these constitutional accidents to happen again during the licensing process for Mica-r, the market players may wish to address them in advance to ensure legal clarity and compatibility with fundamental rights.</div><div style="background-color: white; box-sizing: border-box; margin: 8px 0px 0px; text-align: left;"><br /></div><div class="separator" style="clear: both; text-align: center;"><br /></div>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-42160347841041130922022-06-22T08:20:00.003+02:002022-06-22T08:20:34.496+02:00Open Letter to European regulators on the migration path to a future EU crypto-market with licensed and trustworthy companies<p>In this blog post, I will share the letter below, which I just sent off to a EU Commission Official from FISMA. I hope the letter speaks for itself as I don't have the time to elaborate/explain. Do note that I did redact the letter slightly by the way, to make the blog post better readable. </p><p>=== </p><p>It has been a while since we had contact on <a href="https://moneyandpayments.simonl.org/2021/09/crypto-episode-as-part-of-dutch.html" target="_blank">the infringement of the Dutch government with respect to the AMLD5</a>. I would like to notify you
that, based on the evaluation after two years as well as the outcome of
a number of legislative procedures and consultations, it seems to me
that the infringement complaint might deserve some new attention.</p><p><u>New infringement complaint due to recent legal developments</u></p><p>In particular the human rights/privacy infringement that the current AMLD might already constitute ay not have been sufficiently paid attention to, which I view as a omission, given that
we know the <a href="https://curia.europa.eu/jcms/upload/docs/application/pdf/2014-04/cp140054en.pdf" target="_blank">EU Court of Justice position with respect to the Data Retention Directive (2014)</a> and most recently, <a href="https://curia.europa.eu/jcms/jcms/nbo1_147688/en/?text=UBO&mode=all&rech_dans_tout=*&searchedFields=&searchedAllFields=true&searchInFiles=true&replaceFileDoc=true&dateSince=&dateSince_user=&dateSince_unit=86400000&cids=&catMode=or&jsp=plugins%2FCuriaPlugin%2Fjsp%2Fquery.jsp">with respect to the PNR Directive</a>
(verdict of this week).</p>
In addition the European Data Protection Board <a href="https://edpb.europa.eu/our-work-tools/our-documents/letters/edpb-letters-european-institutions-protection-personal-data_en" target="_blank">has made its concerns on the legitimacy and proportionality of the AML regulations very clear</a>.
Also, the Dutch Council of State issued an advice on proposed Dutch
legislation, which <a href="https://www.raadvanstate.nl/adviezen/@122774/w06-20-0354-" target="_blank">in essence lays out a no to mass surveillance and transaction monitoring in the financial sector</a>.<br />
<br />
Considering the legal clarity that has now arisen, I may re-iterate my
previous infringement complaint on the Dutch implementation on the
AMLD5. I hope that the recent verdict of the EU Court of Justice as
well as the additional documentation and information on the Dutch
situation will provide a new evidence base which allow the Commission to
asess the complaint with an open mind and considering the new evidence
provided after two years of the law having entered into force here in
the Netherlands.<br />
<br /><u>New local evidence on lack of enforcement in Netherlands</u><div>As new evidence I would like to point out that <a href="https://www.rijksoverheid.nl/binaries/rijksoverheid/documenten/kamerstukken/2022/05/13/kamerbrief-beantwoording-vragen-over-het-gebrek-handhaving-cryptobedrijven-buiten-de-eu/kamerbrief-beantwoording-vragen-over-het-gebrek-handhaving-cryptobedrijven-buiten-de-eu.pdf" target="_blank">formal statements by the Dutch Ministry of Finance clarify</a> that large international players that
should comply with the AMLD5 are not sufficiently being held to the law
by the Dutch Central Bank, despite the sector vehemently requesting the
central bank to do so (as of November 2020) in its role of a supervisor.
As such DNB is bound to ensure a level playing field and fair
competition in the EU, but the failure to supervise/enforce the law
<a href="https://fd.nl/opinie/1440185/dnb-moet-buitenlandse-cryptobeurzen-harder-aanpakken-ivf2cae5nz8y" target="_blank">distorts the market terribly</a>.<br />
<br />
What we can thus now see here in the Netherlands is that large
international players are willingly ducking the national legislation
with the Dutch central bank being unable to enforce the law<a href="https://www.dnb.nl/algemeen-nieuws/2021/waarschuwing-van-dnb-tegen-binance/" target="_blank"> and only issuing a mere warning</a> (which in itself does not constitute enforcement action under the supervision law). It is
pretty clear that some large nonEU players are biding their time until
the MICAR and AMLR arrive and hope to use the EU passport regime while
taking the explicit risk to be fined for past wrongdoings and actively
deciding to steer clear from registration (using all their
means/efforts/lawyers to stall the discussion). <br />
<br /><u>Strategic objective of the EU: don't give away the crypto-market to big tech as you did with the payments market</u><br />
What the European Commission may be facilitating unwillingly,
constitutes the giving away of the EU crypto market to international non
EU players, that can be seen to be succesfull in their strategy (see
the <a href="https://twitter.com/finhstamsterdam/status/1521997516346171393" target="_blank">registration of Binance in France</a>, while under investigation and
enforcement action in the Netherlands, UK and a host of other
countries). We have seen millions consumer fraud shift among non-regulated players in the Netherlands while these companies use opaque
structures to service the Dutch market, channel funds to their systems.
<a href="https://fd.nl/financiele-markten/1441774/buitenlandse-cryptobeurzen-tarten-nederlandse-partijen-door-regels-te-omzeilen-ivf2cae5nz8y" target="_blank">Recent articles in the Dutch Financieele Dagblad reiterate</a> the lack of
enforcement and damage this does to the existing industry. <br />
<br />
Just as the EU regulator gave away the PSD2 market to big tech companies
by allowing them to misuse their monopoly position on the 3rd
authentication factor (biometrics) and platform dominance to force in
the Google/Apple pay type of revenue skimming new payments, the EU
regulator may also unintentionally invite non EU crypto players to take
over the EU market, if the current infringements of governments (that
allow their supervisors to let illegal/unlawful actors to play a waiting
game for EU legislation instead of enforcing those players with a
strict regime) are not addressed properly.<br /><br /><div>It is time for the EU Commission to show its true colours and understand
the geopolitical relevance of having a strong EU bloc of
cryptocompanies rather than an invited and facilitated monopoly of
non-EU big platform players. Even if you decide to lay my fourth
infringement complaint aside, please take note of the strategic damage
that you might be doing if you accept that companies that did not honour
EU laws when they were based on AMLD5, deserve preferential treatment by
taking their applications for license in a first come first serve
order.<br />
<br /><u>A need for clear rules / incentive structure upon the shift to licensing regimes for crypto</u><br />
The EU Commission should be a proponent of a migration regime for new
AML and MICA-r regulations where EU companies and non-EU companies that
have fully implemented all EU regulations of the EU states since AMLD5
get a preferred fast track treatment for their applications. Those that
have not done so should not be able to gain any commercial or legal
advantage based on the standard financial supervisor reasoning: let's
start with the crypto companies first. Such a procedure would constitute
a perverse incentive structure where disobeying EU law pays off.<br />
<br />
Instead, those big international crypto companies that have in one or
more EU states not complied with the current rules can be clearly
considered of insufficient reputation/standing due to this fact. They
should pay off their open non-compliance debt by both paying the fines
applicable to ducking the rules so far and by being the last in line to
receive a license under the new rules. In particular for legislation
that seeks to avoid the risks of money laundering / illicit profit
making, I fail to see why major actors in the market might be condoned
by EU authorities or supervisors for previous, visible transgressions of
EU-based local legislation.<br />
<br />
I hope the Commission appreciates my point of view and its relevance for
a future thriving crypo-market with properly regulated companies of
good standing and willingness to comply with EU rules. <br />
<br />
with kind regards<br />
Simon Lelieveldt</div></div>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-37867271091739282502021-05-29T15:47:00.016+02:002021-09-12T15:54:41.043+02:00Crypto-episode as a part of the Dutch financial history timeline<p>Over the past two years a historic sequence of events unfolded in the Netherlands with respect to the introduction of a crypto registration regime for providers of crypto wallet and crypto exchange services. It is a very interesting episode historically as it bears resemblence with a number of previous/similar episodes where the Dutch central bank hits the breaks and stifles innovation. </p><p>What is happening is that the Dutch central bank (DNB) is pushing very strict rules onto newcomers in the payments/crypto market, without having a proper mandate to do so. There is an age-old example of halting the introduction of the credit-card, as well as a <a href="https://www.11a2.nl/" target="_blank">20-years old intervention with DNB stopping mobile innovators with e-money</a> that I will not flesh out right now. </p><p>What I will do is describe how over the past couple of years new payment institutions were forced into getting a licence instead of a registration as prescribed under the upgraded PSD2 (EU) directive. This is the relevant backdrop against which it is easier to understand why the crypto-industry faced a similar treatment in 2020. </p><p>There was one difference however: this time, one company came prepared and succesfully pushed DNB back (disclosure: I am consulting that company on regulatory/compliance issues). </p><p><u>PSD2-service: access to the account (8) requires a license in NL rather than registration</u></p><p>The brief version of the events that played out in the Netherlands for payment service institutions were the following. The European Commission added 2 new company activities to the list of activities that require further regulation. Service number 7 involved initiating payment transactions on behalf of the customer at another company: this required a full-on registration. Companies offering only acces to the account of customers at other banks or payments companies <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32015L2366&from=EN#d1e3318-35-1">were subject to a less elaborate registration regime, as outlined in article 33 of the PSD2</a>.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9ttIP5Ubum89ZRNt4LUuqKXZPECRLtnKVt7G1Sk2UPsVNy1W_ghZzLcfZKmGEzZzZdvzLtPOAcqxNROviaYTAfs04iIddNdv-nwUfIX4MTRY_9yeYdEN370Y8pNM8fosxr_5n/" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="279" data-original-width="797" height="140" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9ttIP5Ubum89ZRNt4LUuqKXZPECRLtnKVt7G1Sk2UPsVNy1W_ghZzLcfZKmGEzZzZdvzLtPOAcqxNROviaYTAfs04iIddNdv-nwUfIX4MTRY_9yeYdEN370Y8pNM8fosxr_5n/w400-h140/image.png" width="400" /></a></div><p></p><p>However in the Netherlands, despite a policy existing to not do topping up of Brussels rules, the Ministry of Finance and DNB have a tendency to ignore that policy. So the companies that only required a registration for providing access to the account under the PSD2 were made subject to a licensing regime. The consequence was not just an increase in burders but also unlogical duties being appliced to those players, for example the duty to do transaction monitoring themselves (while they did not initiate or execute any transaction). </p><p>In an effort to be the first on the market many companies in the Netherlands tried to convince DNB that the license regime and subsequent market entry rules were illegitimate, but no one dared to take DNB to court. So as we say in the Netherlands, quite some companies had to swallow a melon and make serious extra costs. Still, the episode did quite some harm as to the legitimacy of the DNB supervisor as many legal counsels agreed DNB was evidently overstepping its legal mandate. </p><p>The PSD2 registration process for payment institutions in the Netherlands is therefore to be taken into account on the evaluation of what happend to the crypto-industry. As it may have signalled to DNB itself that it could easily ignore European rules with no one in the market complaining, it signalled to the legal/regulatory market that rationally it could not be assumed that DNB would by definition operate within its legal mandate. </p><p><u>Crypto-services: require a registration in the EU but turned into de facto license regime in NL</u></p><p>By end of 2017 and mid 2018, the Dutch Ministry of Finance and DNB were in agreement that a fast transposition of the AMLD5-directive would be needed to bring crypto-companies under the remit of the appropriate supervisory regime. The EU directive and its previous impact assessment was very clear; a license regime would lead to too much credibility/legitimacy of the cryptocompanies, so only a <u>registration </u>regime was to be implemented, with possible license regimes following in a next stage of EU regulation (known as MICA-r). </p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMFo1ldN6d1k-EPs57iaNYGdHASoH-dtnFTuD15KV83rvLVsq6Kb-UsWNeR8wL2G5oqXUi7eMWxZ0m1e5CKdAKzV5zKDadMIOrkqDeNrCaELDOABe6J61ZQzb7GKcSTUmQ6VJC/" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="147" data-original-width="833" height="70" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMFo1ldN6d1k-EPs57iaNYGdHASoH-dtnFTuD15KV83rvLVsq6Kb-UsWNeR8wL2G5oqXUi7eMWxZ0m1e5CKdAKzV5zKDadMIOrkqDeNrCaELDOABe6J61ZQzb7GKcSTUmQ6VJC/w400-h70/image.png" width="400" /></a></div><p><br /></p><p></p><p>However, on advice otf DNB, the Dutch Ministry of Finance started transposing the directive and consulted a <u>licensing regime</u> with the market in December 2018. As the actual rules of the license still bore resemblance to the registration regime mentioned in the Directive, the industries comments focused on unworkable technicalities and explanations by the Ministry. The formal legal advice of the Council of State however, was quite explicit and it advised against the introduction of the law as long as a supervisory license mechanism and supervisory rules would be part of it. It stated that the transposition of this EU Directive is not the place for such rules.</p><p>In response the Dutch Ministry of Finance changed the law and made a new version. In this new version, the label of the license regime was changed to registration, but the essence became more of a supervisory regime. As a new set of rules the Ministry included further inspections and checks of business plan, organisation, risk management etc originating from the Act on Supervision of the Financial Sector. The actual legal construct includes a detailed evaluation of the company, a revocation of registration when a company is no longer compliant with the rules and a prohibition to operate on the market without a registration. This is a supervisory regime in disguise, which is beyond the necessities of the AMLD5 and goes against the advice of the Council of State.</p><p>For further details on the development of the law you can read <a href="https://finhstamsterdam.medium.com/overview-and-update-on-amld-5-implementation-in-the-netherlands-november-8-2019-2d5e102dd773" target="_blank">this article</a>, then see an update of January 2020 because something interesting happened. By mid-december the government websites by accident displayed this <a href="https://www.simonl.org/reactie-dnb-op-concept-wetsvoorstel-amld5/">letter of the central bank</a> that fully confirmed its intentions to push for a license regime and license access conditions for crypto companies. FTM, the investigative journalists, published a <a href="https://www.ftm.nl/artikelen/woordspel-van-minister-hoekstra-verhult-hoe-ver-zijn-omstreden-cryptowet-gaat?share=McADMdB8sZvO13WyZ%2FwGR2ESpGXImysgMoobLRwA%2FWDTCHr%2Bw3V6zrzl%2BoU%3D">full article on it by end 2019</a> that details the wording games used by regulator and supervisor to hide a license regime behide the wording: 'registration'. An English version of events can be found <a href="https://finhstamsterdam.medium.com/january-10-2020-time-for-the-fifth-eu-anti-money-laundering-directive-but-aa3603070f78" target="_blank">in this article</a>. </p><p>The article raised quite some concerns in the Senate where the Ministry of Finance very explicitly and repeatedly explained: no no, it's not a license regime, but a registration regime. There is a huge difference between the two, a registration is being done while a license is being granted. So with this assurance the market hoped that supervisor DNB would change its course. The market assumed that the supervisor would take note of parliamentary discussions and guidance/explanation of the regulator.</p><p><u>DNB applied de facto license regime/application process leading to court case / market pushback</u></p><p>In practice De Nederlandsche Bank did not alter its previous course or any of its intentions and applied the full on registration procedure for payment institutions to crypto companies. It forgot about its obligation to register companies in 2 months, forced the application of risk frameworks that were used in the trust office market and came up with a self-invented interpretation of the Sanctions law that was beyond the rules. This latter requirement meant that crypto companies, in order to be registered, had to fullfill an ex-ante requirement of asking screenshots/video's of customers software wallets for each transaction to be made.</p><p>Grudgingly the market complied to the illegitimate requirement with one crypto company Bitonic, <a href="https://bitonic.nl/en/news/220/bitonic-files-preliminary-injunction-to-be-relieved-of-wallet-verification-requirement" target="_blank">taking the measure to court</a>. The interesing fact was that they filed a complaint against a positive decision of granting the registration with the request to the judge to kick out the illegitimate registration requirement on those screenshots.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNyzlP9PKJv71e1I3uKnM3Js5AbY02Cy8xt7l9Kx0pVrs3wc_-_6KW4ElVBNHR-Akkz-bQmUhcZfJwDmvMpqCnuEvY6dCzF7Ut8qI-UvFN3nCuPl_kgJ8_BcZ_vpogj87E8vgP/" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="606" data-original-width="810" height="299" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNyzlP9PKJv71e1I3uKnM3Js5AbY02Cy8xt7l9Kx0pVrs3wc_-_6KW4ElVBNHR-Akkz-bQmUhcZfJwDmvMpqCnuEvY6dCzF7Ut8qI-UvFN3nCuPl_kgJ8_BcZ_vpogj87E8vgP/w400-h299/image.png" width="400" /></a></div><p><br />Now to cut a long story short: the court case attracted an online viewing of many thousands and lead to the <a href="https://finhstamsterdam.medium.com/dutch-judge-slaps-dnb-dutch-central-bank-on-the-wrist-in-court-case-of-crypto-pioneer-bitonic-on-b9ca5d9c145" target="_blank">judge ordering DNB to redo its homework</a>. Finding out that it was impossible to explain how a square could have the form of a circle, DNB had to withdraw its requirement but only did so for this single company (although half a year ago, the market is still waiting on clarification whether the requirement will also be lifted for them). </p><p></p><p>What actually happened in the Netherlands is that DNB was already anticipating stringent FATF rules that suggest that product introduction or licensing moments are the moment in time to exert pressure onto crypto-companies to make them do what supervisors want. In this case, the FATF rules are not yet adopted in Europa, so the central bank figured it could use an age-old Sanctions law to the same effect. </p><p>The market however had already witnessed DNB overstepping its boundaries, turning EU registrations into Dutch licenses with undue requirements so Bitonic as one of the players came prepared and called DNB's bluff. And next up will be a discussion on supervisory costs for crypto-companies where the whole market will do so again. </p><p><u>Historic pattern</u></p><p>The historic pattern at play here is the interplay between regulators and market, fuelled by media incidents and publications. When in the 1970s credit cards appeared in the EU market and markets were mainly national, it only took national consensus between market players and central banks to keep one of the players (Visa) out of the market. </p><p>Later on, when EU rules dictated that all cards had to be allowed an fair competition would need to be in place, the central bank mainly stuck to its legal remit. For some time in the 1990s the central bank also assisted in analysing the market and promoting innovation, opening up the closed EFTPOS structure in the Netherlands in the process. Still, when instructed by European powers that be it succumbed to the request to exempt European mobile operators from the application of e-money rules in 2002/2003, to the detriment of small innovators in the market. </p><p>Other than that, the legality regimes were most prominent as the basis for DNBs action (or inaction). Supervision was done so prudently that during crises the central bank didn't act convincingly and fast enough. Under media and political pressure, the course of the central bank became more politically inspired. It had to be seen as interventionist and proactive and whether or not this was fully based on legal rules was a consideration that moved to the background. </p><p>Even the European Banking Authority <a href="https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2020/931093/EBA%20Report%20on%20the%20future%20of%20AML%20CFT%20framework%20in%20the%20EU.pdf" target="_blank">noticed this</a> and very politely didn't name the offendors FINMA and DNB by name, while this remark was directed at them:</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p></p></blockquote><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><i>164. The EBA has since observed that, in the absence of an EU‐wide approach, there are indications that Member States, in anticipation of a forthcoming FATF Mutual Evaluation or to attract VASP business, have adopted their own VASP AML/CFT and wider regulatory regimes. As these regimes are not consistent, this creates confusion for consumers and market participants, undermines the level playing field and may lead to regulatory arbitrage. This exposes the EU’s financial sector to ML/TF risk.</i></blockquote><p>If history is any guide however, it may require more than one law suit to make DNB change course, so keep a close watch on the Netherlands because it appears as if -as in the Muppet lab- the future of tomorrows crypto regulation is being made here today. </p>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-83449475052292926412021-01-05T14:14:00.003+01:002021-01-05T15:59:03.901+01:00Response by Simon Lelieveldt to FINCEN consultation on crypto, travel rules and such<p>This blogpost/longread (below) contains the content of reflections, as sent to the FINCEN as a response to the consultation on travel rule for crypto (<strong class="markup--strong markup--p-strong"><a href="https://public-inspection.federalregister.gov/2020-28437.pdf" target="_blank">Docket No. FINCEN-2020–0020; RIN №1506-AB47</a>)</strong>. It is written from the Dutch and European perspective and what makes it relevant for the US is that the Dutch supervisor has already <a class="markup--anchor markup--p-anchor" data-href="https://bitonic.nl/news/213/additional-verification-measures-due-to-registration-application" href="https://bitonic.nl/news/213/additional-verification-measures-due-to-registration-application" rel="noopener" target="_blank">imposed an even harsher rule</a> (verification of beneficairy wallet holder for self-operated wallets regardless of amounts involved) as an undue (and <a class="markup--anchor markup--p-anchor" data-href="https://bitonic.nl/news/212/bitonic-is-registered-with-the-dutch-central-bank-our-vision" href="https://bitonic.nl/news/212/bitonic-is-registered-with-the-dutch-central-bank-our-vision" rel="noopener" target="_blank">legally disputed)</a> market entrance rule. </p><p class="graf graf--p" name="c7c9">The blog is written from a personal perspective, based on my market and regulatory experience with 25 plus years of banking, e-money, crypto and e-payments. In essence I recommend the FINCEN to steer away from behaviour that qualifies as a <a href="https://www.ohchr.org/en/issues/privacy/sr/pages/srprivacyindex.aspx" target="_blank">human rights treaties violation</a> and not force the private sector to disobey the human rights obligations that they independently have under those treaties. Regulators should align legal requirements into a coherent framework and not place the burden of incompatible requirements at the doorstep of the private sector. </p><p class="graf graf--p" name="0489">Of particular interest in this respect is the recent announcement of the European Data Protection Board (of <a class="markup--anchor markup--p-anchor" data-href="https://edpb.europa.eu/sites/edpb/files/files/file1/edpb_statement_20201215_aml_actionplan_en.pdf" href="https://edpb.europa.eu/sites/edpb/files/files/file1/edpb_statement_20201215_aml_actionplan_en.pdf" rel="noopener" target="_blank">late december 2020</a>) which outlines their committment to step up their game and ensure that no AML/KYC measure infringes on human rights principles of privacy and innocense presumption: </p><p class="graf graf--p" name="0489"></p><blockquote><i>The EDPB considers it as a matter of the utmost importance that the anti-money laundering measures
are compatible with the rights to privacy and data protection enshrined in Articles 7 and 8 of the
Charter of Fundamental Rights of the European Union, the principles of necessity of such measures in
a democratic society and their proportionality, and the case law of the Court of Justice of the European
Union.</i></blockquote><p>The brief version of my comments / summary is provided here, which is then followed by the detailed submission to the FINCEN, with hyperlinks replacing the footnotes of the original document.</p><p>======</p><p style="background-color: white; box-shadow: none !important; color: #262626; font-family: Roboto, sans-serif; font-size: 13px; text-shadow: none !important;"><b style="box-shadow: none !important; color: #4f81bd; text-shadow: none !important;">Agency: </b>Financial Crimes Enforcement Network (FINCEN)<br style="box-shadow: none !important; text-shadow: none !important;" /><b style="box-shadow: none !important; color: #4f81bd; text-shadow: none !important;">Document Type: </b>Rulemaking<br style="box-shadow: none !important; text-shadow: none !important;" /><b style="box-shadow: none !important; color: #4f81bd; text-shadow: none !important;">Title: </b>Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets<br style="box-shadow: none !important; text-shadow: none !important;" /><b style="box-shadow: none !important; color: #4f81bd; text-shadow: none !important;">Document ID: </b>FINCEN-2020-0020-0001</p><p><b style="background-color: white; box-shadow: none !important; color: #4f81bd; font-family: Roboto, sans-serif; font-size: 13px; text-shadow: none !important;">Comment:</b><br style="background-color: white; box-shadow: none !important; color: #262626; font-family: Roboto, sans-serif; font-size: 13px; text-shadow: none !important;" /><span class="basicAttrHeading" style="background-color: white; box-shadow: none !important; color: #262626; display: block; font-family: Roboto, sans-serif; font-size: 13px; padding-right: 4px; text-shadow: none !important;"><b class="breakWord" style="box-shadow: none !important; text-shadow: none !important;"></b><span class="breakWord" style="box-shadow: none !important; display: block; text-shadow: none !important;">Please find my contribution attached. Some highlights.<br style="box-shadow: none !important; text-shadow: none !important;" /><br style="box-shadow: none !important; text-shadow: none !important;" />1. What worries me is that FINCEN are about to try to outdo the <a href="https://www.washingtonpost.com/graphics/2020/world/national-security/cia-crypto-encryption-machines-espionage/" target="_blank">Crypto AG intelligence coup</a> (the technical backdoor behind the scenes) by installing an overly intrusive surveillance front-door for crypto. Although this may seem surveillance business as usual to you, it is certainly not. It is not only a violation of human rights treaties in itself, but you are also forcing this violation upon the private sector, which has an independent duty under the same treaties to respect the human rights. I am therefore copying my response to the UN Special Rapporteur on privacy in a digital age and respectfully suggest you consult and abide with the relevant UN/EU Charters on human rights.<br style="box-shadow: none !important; text-shadow: none !important;" /><br style="box-shadow: none !important; text-shadow: none !important;" />2. Why the FINCEN proposal is not justified: it continues the abuse of deliberate post 9/11 legal design flaws/choices that undermine human rights by misusing administrative law, financial supervision law instead of following penal law procedures which have proper safeguards for human rights.<br style="box-shadow: none !important; text-shadow: none !important;" /><br style="box-shadow: none !important; text-shadow: none !important;" />3. Do also note that the <a href="https://edpb.europa.eu/sites/edpb/files/files/file1/edpb_statement_20201215_aml_actionplan_en.pdf" target="_blank">European Data Protection Board has issued a clear statement </a>outlining the limits of surveillance by states and under administrative law. In this respect do also take note of the dissertation by C. Kaiser of 2018, outlining that the EU KYC rules may be anulled if challenged in European courts. From an analytical perspective this would also hold true for the US rules and their compatibility with the UN charter on human rights.<br style="box-shadow: none !important; text-shadow: none !important;" /><br style="box-shadow: none !important; text-shadow: none !important;" />4. Practically speaking: the FINCEN is being sloppy with data. Data breaches of FINCEN have a huge impact which is not catered for in terms of risk analysis and side effects. These side-effects, when quantified, outweight the benefits to a huge extend and less intrusive solutions will be available. But history shows that you are not seeking less intrusive powers but seek to increase your information position out of an organisational drive to remain in the game and grow bigger.<br style="box-shadow: none !important; text-shadow: none !important;" /><br style="box-shadow: none !important; text-shadow: none !important;" />5. Finally, don't kid yourselves as to the relevance of picking up these bread crumbs on the table. You are punishing the citizens of the world, while leaving all big money launderers unchallenged. Most relevant example is that you have been unable to really do your job properly, How come that a well known money launderer was even able to become president of the US? I think you may want to reflect on your own organisation and functioning first,<br style="box-shadow: none !important; text-shadow: none !important;" /><br style="box-shadow: none !important; text-shadow: none !important;" />I find it quite ironic that the US, that <a href="https://financieelerfgoed.wordpress.com/2020/05/02/contemplating-75-years-of-freedom-a-dark-story-on-three-dutch-lessons-never-learnt/" target="_blank">saved the Dutch population from a dictatorial regime</a>, that taught us about the importance of human rights, true democracies, freedom of speech, privacy and the importance of the presumption of innocence, is now the country that violates the values it has inspired into others.</span></span></p><p style="box-shadow: none !important; text-shadow: none !important;"><b style="box-shadow: none !important; color: #4f81bd; text-shadow: none !important;">Uploaded File(s):</b><br style="box-shadow: none !important; text-shadow: none !important;" /></p><p><span class="basicAttrHeading" style="background-color: white; box-shadow: none !important; color: #262626; display: block; font-family: Roboto, sans-serif; font-size: 13px; padding-right: 4px; text-shadow: none !important;"><span class="breakWord" style="box-shadow: none !important; display: block; text-shadow: none !important;"></span></span></p><ul style="box-shadow: none !important; font-size: 13px !important; font-weight: normal; line-height: 1em !important; text-shadow: none !important;"><li style="box-shadow: none !important; text-shadow: none !important;">FINCEN-response-Lelieveldt-2020-01-04.pdf</li><li style="box-shadow: none !important; text-shadow: none !important;">FINCENFiles-thread-Annex 1.pdf</li><li style="box-shadow: none !important; text-shadow: none !important;">Annex-2-Lelieveldt submission FINCEN.pdf</li></ul><p>=====</p><div class="separator" style="clear: both; text-align: center;"><a href="https://iep.amsterdam" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;" target="_blank"><img border="0" data-original-height="305" data-original-width="411" height="142" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9TLED59SKbN2yzrMpit0Q1ChsEGCFPsLtbN4dFRvMGNLMe-GtnIBZf-DLIDPwBSFN1C5HPZhV-h54hLNNwKlWCXV9Swj7vUfIkTFo4p_BmUZeNQZXYsx28lJk0niUX0_NvAGuqA/w192-h142/Schermafbeelding+2021-01-05+om+13.22.57.png" width="192" /></a></div><br />Policy Division <br />Financial Crimes Enforcement Network <br />PO Box 39 Vienna, VA 22183 <br />United States of America<br /><p><br /></p><p>Dear Secretary Mnuchin, <span> </span><span> </span><span> </span><span> </span><span> </span><span> January 4, 2021</span></p><p><br /></p><p>I would like to share some reflections on Docket Number FINCEN-2020-0020, RIN number 1506-
AB47, and the proposed changes outlined in, FinCEN, Notice of Proposed Rulemaking, “Requirements
for Certain Transactions Involving Convertible Virtual Currency or Digital Assets.” </p><p>Although you limit the timeline of submission to 2 weeks, I am pleased to be able to still contribute
to the debate, as the situation in the Netherlands is even worse. Without advance notice, the Dutch
financial supervisor, DNB, <a href="https://www.coindesk.com/dutch-crypto-exchange-adds-extra-verification-measures-citing-disproportionate-central-bank-requirements" target="_blank">has used its powers as a supervisor</a> of a simple EU registration regime for
crypto players to force upon the industry an even more intrusive obligation for all crypto-players in
the Netherlands to verify beneficiaries of cryptowallets, regardless of the amount. The requirements
imposed during the registration process <a href="https://bitonic.nl/news/212/bitonic-is-registered-with-the-dutch-central-bank-our-vision" target="_blank">will be challenged in court</a> and you may wish to monitor
those developments.</p><p><b>What worries me is that FINCEN are about to try to outdo the Crypto AG intelligence coup (the
technical backdoor behind the scenes) by installing an overly intrusive surveillance front-door for
crypto. Although this may seem surveillance business as usual to you, it is certainly not. It is not
only a violation of human rights treaties in itself, but you are also forcing this violation upon the
private sector, which has an independent duty under the same treaties to respect the human
rights. I am therefore copying my response to the UN Special Rapporteur on privacy in a digital age
and respectfully suggest you consult and abide with the relevant UN/EU Charters on human rights.</b></p><h3 style="text-align: left;">So who is writing this? </h3><p>Now let me introduce myself further. I am writing in my professional/personal capacity and driven by
a personal motivation that is reflected in the seal/logo and motto in the right upper corner: the NOW
is the PAST is the PRESENT is the FUTURE. The moto is imprinted, using an old coin press, upon a
wooden coin, made out of a 130 year old tree that stood on the Amsterdam exchange square. The
tree, an Elm, witnessed time passing by and the development of society and financial markets. It
symbolises the value I attach to cherishing history, learn lessons and use those learnings for todays
developments. I hope you may appreciate my reflections from this perspective and rest assured, I’ll
get to the actualities of FATF and European privacy discussions in due time. </p><p>Professionally, I started out my career In as an industrial engineer in the financial sector by
documenting and publishing a study on electronic payments (EFTPOS) regulation in 1989. In my
research <a href="https://www.simonl.org/wp-content/uploads/ElekbetalenSL1989.pdf" target="_blank">I revealed that the US Intelligence agencies had been pushing DES to become aninternational standard</a>. At the time I did not have the ability however to put this finding into a
broader perspective. However, more recently it became clear from the Crypto AG case that it was
part of a long standing practice in which the US was actively pushing backdoors in technology, to
ensure continued surveillance of all citizens and governments of the world. I think it is fair to say this
is indeed the ‘<a href="https://www.washingtonpost.com/graphics/2020/world/national-security/cia-crypto-encryption-machines-espionage/" target="_blank">Intelligence coup of the century</a>’. </p><p>Since then I embarked on a professional career starting out at ING/Postbank, moving on to become a
policy analist at the central bank, charged with <a href="https://digitalcommons.wcl.american.edu/aulr/vol46/iss4/7/" target="_blank">developing supervisory frameworks for electronicmoney in the 1990s</a>. By the time that I contributed to European legislation and supervision for
electronic money issuers, your organisation, FINCEN <a href="https://www.elibrary.imf.org/abstract/IMF072/01500-9781589065079/01500-9781589065079/ch20.xml?rskey=yuGe9k&result=59" target="_blank">seemed to have made a strategic decision toposition itself as the go-to supervisor for all kind of modern payments and e-money</a>. Although I think
such a move may be analytically unsound and undesirable, I also view this as a <a href="https://www.slideshare.net/SimonLelieveldt/rationality-and-irrationality-in-eu-payments-2014" target="_blank">natural reality ofinstitutional power politics</a>. It is up to citizens, politicians, courts and private sector organisations to
push back and hence my reflections in this letter.</p><p>Next up in my career, I worked extensively in the payments policy department of the Dutch bankers
association. As such I was quite involved in the international rulemaking for banks and actually wrote
the Dutch implementation guideline for the FATF7-rule (the origin of the travel rule). I was also a
close witness to the SWIFT privacy incident and subsequent discussions on the EU privacy shield.
Later on I moved towards a role as head of the department on financial markets and bank
supervision of the Dutch Bankers Association.</p><p>What struck me in those days was the very anecdotal evidence and political framing arguments in
discussions on money laundering and prevention of terrorist financing. It seems that 15 years later
the situation hasn’t changed and I would suggest the FINCEN to disclose and evaluate more precisely
whether its role has been effective and whether this proposed rule actually adds any value when
doing a broad analysis of costs/benefits. I’ll get to that issue later.</p><p>Since 2011 I am active as an independent regulatory consultant and interim compliance manager for
both government agencies and private sector entities. In this work, which mostly covers payment
instritutions, e-money and crypto, I try to reconcile justified regulatory requirements with business
constraints/demands. And yes, the important wording is: <u><b>justified</b></u>. </p><p>Let me try and explain <b>why the
FINCEN proposal is not justified: it continues the abuse of legal design flaws/choices that
undermine human rights by misusing administrative law, financial supervision law instead of
following penal law procedures which have proper safeguards for human rights.</b></p><h3 style="text-align: left;">Sidestep: what use are consultations if you don’t want to listen? </h3><p>The Dutch scientist Dr. M. Wesseling has written an <a href="https://pure.uva.nl/ws/files/1737805/126131_thesis.pdf" target="_blank">extensive and worthwhile dissertation on theinternational and European fight against terrorist financing and money laundering</a>. The dissertation
outlines that the US intelligence agencies have smartly used the momentum of the 9/11 attacks to
get something they wanted: spying possibilities via the front door of financial transactions, bypassing
formal legal and penal law safeguards, by pushing bank regulation and administrative rules. So what
happened before 9/11?</p><p></p><blockquote><i>A third important discourse concerned civil liberties. In 1999, the US Treasury proposed
strengthened Know Your Customer (KYC) regulations. These proposals faced stiff opposition in
the US Congress for anti-regulatory reasons, but the main issue at stake was concerns over
privacy (Eckert, 2008, p. 213, Napoleoni, 2004, p. 219). The US Treasury received more than
200,000 negative responses to its proposal from all political backgrounds objecting to the
proposed requirements for banks to obtain extensive private information (Donohue, 2006, p.
359). The KYC proposal was also criticized for being a potential source of mistrust and
resentment of government, particularly among immigrants and minority groups, as well as an
undesirable form of generalized spying and reporting on citizens (Cato Institute, 1999).</i></blockquote><p>What FINCEN has seen in these 2 weeks of consultation will analytically not be very different from
the responses that the US Treasury received more than 20 years ago. I would suggest that you
include a review of those responses into your work, as they will undoubtedly be just as relevant.</p><p>Wesseling outlines how the 9/11 attacks changed the regulatory picture completely with civil
liberties and human rights being:</p><p></p><blockquote><p><i>The attacks of 11 September 2001 substantially changed the urgency and importance
assigned to these different debates. The relative insignificance of the amounts of money
involved in terrorism, the burden on the financial sector, the civil liberties implications of
strengthened regulation, and the doubts about the use of UN economic sanctions, all became
subordinate to the increased urgency of terrorism. </i></p><p><i>Although the 9/11 Commission would estimate in 2004 that the total costs of the attacks was
between $400,000 and 500,000 and concluded that the costs of the attacks were relatively
low compared to the amounts of daily financial transactions worldwide (2004, pp. 186-189), a
radically different conclusion was drawn in the immediate aftermath of the 9/11 attacks. </i></p><p><i>Starving terrorists of their money had become a key objective within global governance.
Likewise, financial regulation, such as Know Your Customer requirements, had been
strengthened with little opposition from politicians, civil society or the financial and banking
sector. Their current scope exceeds by far any previous initiative, making the contentious
proposals of the 1990s look soft. Civil liberties, it was now widely accepted, had to be traded
in if they constituted an opportunity for terrorists to ‘hide’. </i></p></blockquote><p>What I am saying here is that since 9/11 your organization is in a <a href="https://www.rijksoverheid.nl/binaries/rijksoverheid/documenten/kamerstukken/2020/01/14/bijlage-bij-kamerbrief-beleidsmonitor-terrorismefinanciering/bijlage-bij-kamerbrief-beleidsmonitor-terrorismefinanciering.pdf" target="_blank">group think tunnel</a> which has the
effect of a religion or a cult. There is a dangerous liaison between intelligence agencies, tax
authorities and financial supervisors which impose all kinds of intrusive rules under the FATF-umbrella as so-called: recommendations. Instead of revisiting the post 9/11 approach as a regulatory
overshoot, the groupthink has remained intact as it comes in handy.</p><p><b>Or to put it differently. The US have since 2001 moved the angle of their intelligence attack from
hardware based intelligence and surveillance to the informational front door that lies in financial
transaction data. And this move is so useful and successful that US authorities are now even able
to pull it off in broad daylight. </b>Generations of bank personnel have become used to KYC/AML
procedures that infringe on human rights. Now, from this perspective, it is clear that there is no way
FINCEN will actually read or take on board any of the remarks in this consultation. As an institution
the FINCEN has by now also brainwashed itself into believing its approach is valid and legitimate. </p><p>The big design flaw is that instead of penal law, the whole construct of administrative law and bank
supervision law is misused to ensure unbridled and unchecked data flow of innocent citizens to
authorities all around the world. So it is fair to say that the FINCEN has successfully contributed to
maintaining a climate in which a legal design flaw is used in combination with a cultural ideology to
hypnotise/brainwash financial professionals in acting in violation of clear human rights such as
privacy and the right to be viewed as innocent until proven guilty.</p><p>Please see also Annex 1 to this letter (<a href="https://threadreaderapp.com/thread/1309875813806936064.html" target="_blank">threadreader page</a> - <a href="https://twitter.com/finhstamsterdam/status/1309875813806936064" target="_blank">twitter feed</a>) for a further explanation of the idiocy of still using
administrative law when fine penal law structures exist and can be enforced to catch money
launderers and terrorists on a spearfishing pull-request basis without the extensive data
broadcasting and datamining requirements stemming from the pre-platform pre-big data age 2001.
Then again, you could also read the 1999 consultation responses. All answers are in the public
domain already. The real question is: FINCEN, are you listening. Really?</p><h3 style="text-align: left;">FINCEN violates human rights as a business model and should not force companies to join them </h3><p>Under <a href="https://www.right-docs.org/doc/a-hrc-res-28-16/" target="_blank">UN Resolution RESOLUTION 28/16 (the right to privacy in the digital age)</a>, article 8.2 of the
<a href="https://www.echr.coe.int/documents/convention_eng.pdf" target="_blank">European Convention on Human Rights</a> and the EU Court decision on data retention
(<a href="http://curia.europa.eu/juris/document/document.jsf;jsessionid=7D79033D6EC5F0D57FA44EBF5A98D631?text=&docid=186492&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=22072692" target="_blank">ECLI:EU:C:2016:970</a>), the EU understanding on mass surveillance of personal data of innocent
persons is that it may very well constitute a violation of the right to privacy in cases where it is
disproportional and no sufficient safeguards are in place.</p><p>In this respect I can recommend <a href="http://hdl.handle.net/11370/96c768d7-5552-42ab-a1b5-a57ec327dd5a" target="_blank">the dissertation by Dr. Carolin Kaiser from 2018</a>, outlining that –
under todays case law and interpretations - the current EU regulation of KYC/AML may well be
annulled by the EU Court of Justice. I am pretty confident that by analogy the same will hold true for
US KYC/AML legislation when read against the <a href="https://www.un.org/en/sections/what-we-do/protect-human-rights/" target="_blank">UN Charter of Human Rights</a>.
But let us focus on the EU situation more closely. </p><p>Last month the <a href="https://edpb.europa.eu/sites/edpb/files/files/file1/edpb_statement_20201215_aml_actionplan_en.pdf" target="_blank">European Data Protection Board issued an important statement outlining the importance they attach to protecting the human right toprivacy</a> in particular given the intrusive money laundering procedures that have arisen all over the
world.</p><p></p><blockquote><p><i>The EDPB considers it as a matter of the utmost importance that the anti-money laundering
measures are compatible with the rights to privacy and data protection enshrined in Articles 7
and 8 of the Charter of Fundamental Rights of the European Union, the principles of necessity
of such measures in a democratic society and their proportionality, and the case law of the
Court of Justice of the European Union. </i></p><p><i>The EDPB therefore calls on the European Commission to be associated to the drafting
process of any new anti-money laundering legislation in its early stages, with a view to
provide legal advice on some key points from a data protection perspective, without prejudice
to the consultation by the European Commission in line with Article 42 of Regulation
2018/1725 at a later stage. </i></p><p><i>The EDPB is also ready to contribute to discussions within the Council of the EU and the
European Parliament during the legislative process. Going forward, the EDPB stands ready to
be involved and consulted in a timely manner by any European or international regulatory
bodies or standard-setters, such as the Financial Action Task Force, currently chaired by an EU
Member state, before issuance of the revision of their recommendations.</i></p></blockquote><p>Coming back to the details of your proposed regulation. Human right treaties require that intrusive
surveillance requires serious crime under human rights charters. <b>It can hardly be argued that just
the sheer use of unhosted wallets for higher amounts is a demonstration of this serious crime. The
suspicion should come from formal police officers doing their job, not from private sector players
which are obliged to snitch upon their customers and broadcast their data into all kinds of
databases without reasonable suspicion being present.</b></p><p>Next up, you are also overlooking the fact that businesses are by themselves obliged to honour the
human rights under the "<a href="https://www.ohchr.org/documents/publications/guidingprinciplesbusinesshr_en.pdf" target="_blank">Guiding Principles on Business and Human Rights: Implementing theUnited Nations ‘Protect, Respect and Remedy’ Framework</a>", which were developed by the Special
Representative of the Secretary-General on the issue of human rights and transnational corporations
and other business enterprises. The Human Rights Council endorsed the Guiding Principles in its
resolution 17/4 of 16 June 2011.</p><p><u><b>It should not be up to companies to reconcile conflicting legislative objectives. It is up to regulators to
steer clear from conflicts of law and not impose undue human rights violations onto companies.</b></u></p><h3 style="text-align: left;">FATF: continuation of the ill-footed surveillance model</h3><div>FINCEN is engaged in a regulatory experiment that has been agreed upon by the FATF in the summer
of 2019 or 2020. Confronted with the new blockchain / virtual asset technology, the choice has been
made to push the travel rule into the blockchain world. The US has used its leadership position of the
FATF to push this agenda item through. Which essentially sums up 20 years of anti-money laundering
policies worldwide. </div><div><br /></div><div>In Annex 2 I have listed the <a href="http://moneyandpayments.simonl.org/2019/06/g20-and-fatf-should-not-infringe-on.html" target="_blank">blogpost with which I tried to warn the FATF/public</a> in spring 2019 on the
fact that pushing through a travel rule for crypto is just as useless as it was for banks back in the days.
There is no sufficient quantitative evidence that any of those rules has really benefited finding
criminals and preventing terrorist attacks (see the <a href="https://pure.uva.nl/ws/files/1737805/126131_thesis.pdf" target="_blank">dissertation of M. Wesseling</a>). It is a cost burden to
all professionals in the financial sector and the resources spent could be better allocated directly to
police forces or Ministries of Justice instead, as this warrants better protection of suspect individuals.</div><div><br /></div><div>The <a href="http://www.fatf-gafi.org/publications/fatfrecommendations/documents/12-month-review-virtual-assets-vasps.html" target="_blank">recent evaluation of the FATF virtual asset travel rule</a> clearly outlines the 2-step approach that is
being taken. First force the travel rule upon registered/licensed players, then as phase 2 force them
to verify the beneficiary of wallet transactions. This is a requirement which even goes beyond the
R15 and R16 regulations for banks !!</div><div><br /></div><div>If I read the FATF document correctly the FATF-members have agreed to not follow a similar policy
line but to use the year 2020/2021 as an experimentation year. The 12-month review of the revised
fatf standards on virtual assets and virtual asset service providers is clear that there is no real risk
present:</div><div><blockquote><i>53. However, jurisdictions did not consider that there was sufficient evidence to warrant
changing the revised FATF Standards at this point at time. There was insufficient evidence
demonstrating that the number and value of anonymous peerto-peer transactions has
changed enough since June 2019 to present a materially different ML/TF risk. Further
research could be undertaken with the VASP sector, academics and software experts and
engineers to better understand the scope of the unregulated peer-to-peer sector. </i></blockquote><p>Yet, the document also gives a path to further experimentation per jurisdiction. If government
authorities put the risk levels on high, they may start to experiment with additional regulations:</p><p></p><blockquote><i>54. The launch of new virtual assets however could materially change the ML/TF risks,
particularly if there is mass-adoption of a virtual asset that enables anonymous peer-to-peer
transactions. There are a range of tools that are available at a national level to mitigate, to
some extent, the risks posed by anonymous peer-to-peer transactions if national authorities
consider the ML/TF risk to be unacceptably high. <u>This includes banning or denying licensing of
platforms if they allow unhosted wallet transfers, introducing transactional or volume limits
on peer-to-peer transactions or mandating that transactions occur with the use of a VASP or
financial institutions. </u>As of yet, no common practises or consistent international approach
have emerged regarding the use of these different tools. Accordingly, there should be further
work undertaken on the extent to which anonymous peer-to-peer transactions via unhosted
wallets is occurring, the approach jurisdictions can take to mitigate the ML/TF risks, the
extent to which the revised Standards enable jurisdictions to mitigate these risks and to
continue to improve international co-operation and coordination.</i></blockquote><p></p><p>Right now we have seen the <a href="https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/4dokumentation/finma-aufsichtsmitteilungen/20190826-finma-aufsichtsmitteilung-02-2019.pdf?la=en" target="_blank">FINMA issuing regulations beyond the informational travel rule</a>, coming
down to verifying the beneficiary of transactions. And the <a href="https://www.toezicht.dnb.nl/en/2/50-238362.jsp" target="_blank">Dutch Central bank has also made thisrequirement a (disputed) prerequisite in their registration process for crypto companies</a>. I view the
FINCEN rules as a part of the same process.</p><p>What FINCEN is thus doing as a regulator/contributor to FATF discussion is something which could be
called agile regulation. Where usually companies may seek to roll out products in not yet definitive
form, I would qualify the current world wide regulatory approach on crypto assets and the travel rule
as an agile form of experimentation, at the cost of the private sector.</p><p>Government agencies do not only have a duty to not write or impose conflicting requirements upon
their constituents but also to ensure their actions are coordinated. But as the FATF intermediary
paper says: <i>As of yet, no common practises or consistent international approach have emerged
regarding the use of these different tools. </i></p><p>What you are proposing as FINCEN (and will be rolling out, as I fail to see any true intention of finding
an optimal regulatory solutions) is an uncoordinated regulatory measure which will lead to increased
cost in a number of different jurisdictions for an industry that is worldwide by nature. </p><p>The side effects of the approach is that FINCEN and other regulators are making sure that only larger
well capitalised companies in the crypto space can survive (as they are faced with different costs in
different jurisdictions). Both by nature and their effect, the proposed rule impedes innovation and
leads to undesirable market structures.</p><h3 style="text-align: left;">FINCEN operational risk and failures </h3><p>Now let’s turn to the track record of FINCEN itself. I will be blunt in a Dutch way here. You fail to keep
your records safe. For this rule it means that basically we can envisage that at some point in time
hackers will have the possession of names/address of owners of bitcoin addresses. This is an impact
beyond the Ledger hack (which was already scary). It is the equivalent of throwing all peoples bank
account statements in the streets. Which cannot be undone and I don’t see any appreciation of the
operational/privacy risks that you create in this way. </p><p>The FINCEN-files leak shows that you will be unable to prevent this data from being safe. It also
shows that FINCEN is unable to do its job properly. You are going after the crumbs on the table and
leave the big money laundering industries and players untouched. Case in point: at present the US
still has a President that may better be labelled the money launderer in chief. No FINCEN authority,
no AML/KYC rules have been able to prevent this from happening. </p><h3 style="text-align: left;">US from inspiration to dystopian example?</h3><p>Each moment in life encompasses all its previous moments as well as its future moments. That is the
meaning of NOW is the PAST is the PRESENT is the FUTURE. </p><p>The FINCEN proposal is clearly born out
of a tradition of illegitimate government action, spurred by overactive intelligence desires of the US.
It is the second biggest intelligence coup in progress which may deter a whole innovative open
source blockchain technology from maturing into beneficial society solutions. Because with these
rules you are making virtual assets, distributed ledgers and digital tokens into data drones, to be
automatically sent to government. </p><p>I find it quite ironic that the US, <a href="https://financieelerfgoed.wordpress.com/2020/05/02/contemplating-75-years-of-freedom-a-dark-story-on-three-dutch-lessons-never-learnt/" target="_blank">that saved the Dutch population from a dictatorial regime</a>, that
taught us about the importance of human rights, true democracies, freedom of speech, privacy and
the importance of the presumption of innocence, is now the country that violates the values it has
inspired into others. </p><p>Ir. S.L. Lelieveldt, CCP</p></div><p></p><p></p><p></p><p></p>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-21130644524616070102020-09-24T13:37:00.006+02:002020-09-24T13:43:33.805+02:00Facebook: a limited network exemption in the Netherlands?<p>Here is a brief post, to alert professionals in the field to the fact that Facebook Inc has in the Netherlands been registered as an exempt institution out of scope of the payments directive based on the article 3k/3l in the PSD2:</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipxMVpHMK5_hxITCtMRgqvrio3kwbbm5TlN6Hqn0ztdT3i1bGqBfbOzTpdYzeidXFHY-vPoXkXmvOsU8vkd0cS-G4wZNYpMEdQvVzVrZDsrt3pm5YCmwdfhTKDDCUuFT2fXp6zyA/s720/Facebook.JPG" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="537" data-original-width="720" height="321" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipxMVpHMK5_hxITCtMRgqvrio3kwbbm5TlN6Hqn0ztdT3i1bGqBfbOzTpdYzeidXFHY-vPoXkXmvOsU8vkd0cS-G4wZNYpMEdQvVzVrZDsrt3pm5YCmwdfhTKDDCUuFT2fXp6zyA/w430-h321/Facebook.JPG" width="430" /></a></div><br /><p>The filing occured in february 2020 but it is not the only entry in our registers. The same company holds an incoming EU-license, originating from Ireland, to do payments business as a cross-border service. So there is a generic incoming payments license (see the <a href="https://moneyandpayments.simonl.org/2016/11/facebook-obtained-its-e-money-license.html" target="_blank">blog</a> here), the discussion on Libra/Calibra (see <a href="https://moneyandpayments.simonl.org/search?q=libra&max-results=20&by-date=true" target="_blank">here</a>) but also a local exemption.</p><p><u>What is the exemption all about: origins</u></p><p>When we go back to the original legislation we see the <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32015L2366" target="_blank">PSD2 </a>having an exemption for small scale payment methods. </p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5QwD6Kg38cQq9lkgEWVnMVI4WUd5TWjCIooR81wE5Oc8OLkSoqHKeKblVIvndrapVZkRNreCNG60oPg927a27NLe4twgAGn6c4kokoGJgL3eGOx5_aZVe9DS-7LvwxNSFE88XRg/s905/Limitednetwork.JPG" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="435" data-original-width="905" height="245" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5QwD6Kg38cQq9lkgEWVnMVI4WUd5TWjCIooR81wE5Oc8OLkSoqHKeKblVIvndrapVZkRNreCNG60oPg927a27NLe4twgAGn6c4kokoGJgL3eGOx5_aZVe9DS-7LvwxNSFE88XRg/w508-h245/Limitednetwork.JPG" width="508" /></a></p><p>This exemption dates back to the <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32000L0046" target="_blank">e-money directive of 2000</a> which stipulated a waiver for small scale appearances of e-money. </p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgp0suPnhHJTUE840VkJTj7IrsKzLSpwpbyD5fsV5198P-LNrmgA-hmjIWMGpfmOxu8bF-plY_zgma3R8CFuWRFnx6u1xLUa-BLHTGVlopi9dirwG5e2k5oVGYt-i3bGnshXSr6pQ/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="462" data-original-width="764" height="263" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgp0suPnhHJTUE840VkJTj7IrsKzLSpwpbyD5fsV5198P-LNrmgA-hmjIWMGpfmOxu8bF-plY_zgma3R8CFuWRFnx6u1xLUa-BLHTGVlopi9dirwG5e2k5oVGYt-i3bGnshXSr6pQ/w434-h263/image.png" width="434" /></a></div><br />And this waiver was born out of the understanding of supervisors that it would not make sense to go about checking all kinds of sports events, local stadiums or situations where owners of closed loop ecosystems offered digital forms of money on cards. It specifically took out campus-money systems as too irrelevant to be concerned about. Although also those campus systems were bound to rules as to refunding on request, proper contractual arrangements and limits on the devices.<p></p><p><u>Exemption in practice for Facebook: for gaming</u></p><div style="text-align: left;">The register seems to outline in-gaming payments as the focus for the exemption: </div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;"><span face="Verdana, tahoma, arial, helvetica, sans-serif" style="background-color: white; color: #5a657f; font-size: 14px;">Facebook provides an in-gaming payment service which enables Facebook users to purchase digital content within online games.</span></p></blockquote><p>Now, as I don't know the details of the mechanism at play, nor the considerations of the regulator, I do wonder how this works. Does this mean that if Facebook puts in place a closed loop payment environment for games, they steer away from all regulation? Regardless of their worldwide scope?</p><p>I don't think this was really the intention of that exemption, so I am a bit puzzled here. </p><p><u>Or is it a crypto-asset?</u></p><p>The next question is: would it perhaps fall under the definition of crypto-asset of the <a href="https://www.politico.eu/wp-content/uploads/2020/09/CLEAN-COM-Draft-Regulation-Markets-in-Crypto-Assets.pdf" target="_blank">recently proposed EU legislation</a>:"</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;">(b) ‘crypto-asset’ means a digital representation of value or rights, which may be
transferred and stored electronically, using distributed ledger or similar
technology; </p></blockquote><p>Technically I would say yes, because similar technoloy in terms of distributed ledgers is a wide concept, effectively encompassing all ICT-tooling available. But the jury is still out of course.</p><p><br /></p><p><b><u>Where are we heading with Facebook in Europe?</u></b></p><p>While we can fuss about the small print, as above, I think the regulators would be well advised to look at the broader picture. Facebook has a bad track record in terms of supporting proper communication, democracy and being responsible to parliaments. It violates EU privacy laws and is <a href="https://www.ft.com/content/a0335cd5-fcae-42b8-9831-a77e6b5a4347" target="_blank">taking the EU to court</a> to push away that problem.</p><p>Meanwhile all the <a href="https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op247~fe3df92991.en.pdf" target="_blank">stablecoin reports</a> have a huge red bulb flashing: watch out for worldwide bigtech platforms doing their own payment think and destabilising economies. Don't let them move. With the result that Facebook <a href="https://www.cnbc.com/2020/05/26/facebook-novi-is-new-name-for-libra-digital-wallet.html#:~:text=Menu-,Facebook%20renames%20its%20service%20that%20will%20let%20people,digital%20currency%20to%20one%20another&text=Facebook%20announced%20Tuesday%20it's%20renaming,wallet%20to%20Novi%20from%20Calibra." target="_blank">quickly rebranded its Libra initiative into a different name</a> (separating profitable single wallet business from the dead-on-arrival Libra-long term identity play - <a href="https://moneyandpayments.simonl.org/search?q=libra&max-results=20&by-date=true" target="_blank">see 3 blogs here</a>).</p><p>Of course I might be missing something here in the picture. But if anyone can explain why it would make sense to exempt inpayment gaming payments on worldwide Facebook as a limited network, I am open to ideas.</p><p> </p>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-14641712799030014692020-05-02T16:21:00.000+02:002020-05-02T16:21:18.922+02:00Contemplating 75 years of freedom: a dark story on three Dutch lessons never learntFirst of all I must warn all readers. This is not a happy blogpost. It is not funny. It is a dark and sobering tale of lessons that we should have learnt in the Netherlands. A tale about lessons that we never learnt. Lessons that still hold immense value today. Lessons that we owe it to be taken to heart when we reflect on the 75 years of freedom that we will celebrate next week.<br />
<br />
<u>From Rotterdam to Amsterdam: records and track records</u><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7Oq8jZeMCpu5XZ6FUADYlZNipI8tBSm3ZVMWrGtFRs3d5i6vuk0le2Jj3QmmRxQftIV1BQZhQiRkG3JAmSZd9rq19_TYH1hP7jXQ6gocFqRq0oyh3QYQtvFBUYAxc9niUDahv7w/s1600/NL-RtSA_4156_1980-5183-01.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="557" data-original-width="801" height="138" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7Oq8jZeMCpu5XZ6FUADYlZNipI8tBSm3ZVMWrGtFRs3d5i6vuk0le2Jj3QmmRxQftIV1BQZhQiRkG3JAmSZd9rq19_TYH1hP7jXQ6gocFqRq0oyh3QYQtvFBUYAxc9niUDahv7w/s200/NL-RtSA_4156_1980-5183-01.jpg" width="200" /></a></div>
This post connects two cities that I lived in for the longest time in my life. First of all; <u>Rotterdam</u>, the place of my birth. It was bombed to ashes early on in WorldWar 2. Except for one place: the city hall. Reason being? That's where the population records were. Cunning Germans, as <a href="https://financieelerfgoed.wordpress.com/2015/05/03/oude-super8-film-van-dolle-dinsdag-tot-bevrijding-in-rotterdam-hillegersberg/" target="_blank">my dad</a> explained to me. <br />
<br />
Next up is <u>Amsterdam</u>, where the Anne Frank house and her statue form the background against which new children grow up in freedom. Where <a href="http://www.stolpersteine.eu/en/home/" target="_blank">Stolpersteine</a> remind us of those who lived here before us. Where the elder lady with her dog told us what is was like to grow up here. How the Germans were raiding the houses and pushing their bajonets into the ceilings to discover if people were hiding.<br />
<br />
Amsterdam is the city of the 'dot-map'. It is the map that the Amsterdam city administration drew up on request of the occupying Germans, that wanted to know: where do the jewish people live?<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQzDuIzZzJyrUXggMM95jI6xk97C4MxQZ-yjr8criR1Yz4mB0Kg703vrGBZ1mfOo8NSJvkEmvaiwFHOLCedlyJcTpvhJ9c44yYRvm6UQbJe5gC238g3eDRJpFOkZVXOmzS1TSYWA/s1600/stippenkaart_1633+-+kopie.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1456" data-original-width="1122" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQzDuIzZzJyrUXggMM95jI6xk97C4MxQZ-yjr8criR1Yz4mB0Kg703vrGBZ1mfOo8NSJvkEmvaiwFHOLCedlyJcTpvhJ9c44yYRvm6UQbJe5gC238g3eDRJpFOkZVXOmzS1TSYWA/s320/stippenkaart_1633+-+kopie.jpg" width="245" /></a>It sounds like a simple question: an administrative thing, strange request perhaps, but why not just answer it? Let's <strike>cooperate </strike>collaborate. So the map says: One dot is 10 jews. Take it in and look history in the face.<br />
<br />
The particular situation here in the Netherlands (J.H.Blom - <a href="https://pure.knaw.nl/ws/files/640230/14275.pdf" target="_blank">source</a>) was that our government had fled and the Germans put their officials in charge of the Dutch civil servants. This is a marked contrast with Denmark, where they let the Germans enter with the military but stayed in office and controlled their bureaucracy.<br />
<br />
There is a lot more to read in the study of Blom but one of the very striking elements is the efficient bureaucracy in the Netherlands, in combination with a tendency to cooperate and answer properly to Authority. Whichever the source of Authority.<br />
<br />
The very sad fact of the matter is that after the war we could learn that in Western Europe, the Netherlands turned out to be the country where 75% of its Jewish population died, as compared to 40% in Norway and Belgium, 25% in France and almost 0% in Denmark.<br />
<br />
If we look history in the ugly eye, this is (literally) a track record that the Dutch must carry as a scar on and in their souls. A fact that obliges us to honour the deceased and make sure that we learnt something. But do we really?<br />
<br />
<u>History is distant and can be easily forgotten</u><br />
This is all maps and statistics from earlier days. If we wish we can look away and forget. So let me warn you as I bring the lesson closer to home. To this end I draw on a pre-Corona visit that I paid to the excellent exposition covering<a href="https://www.asrnederland.nl/over-asr/asr-300" target="_blank"> 300 years of insurer Stad Rotterdam. now ASR</a>. During the visit I stopped by and looked at the part on World War II, where I bumped into someone who turned out to have contributed to that part of the exposition.<br />
<br />
He is a commited lawyer who until today still tries to resolve the administrative wrongdoings of the past. His story on what he found in archives, on what he did not find, was very sobering. He had seen files where a fanatic anti-semite employee hammered a J multiple times on the insurance policies of Jewish clients. And he explained how the Germans would start out with simple requests with more serious consequences kicking in later.<br />
<br />
A typical example of this is the introduction of a generic <a href="https://www.erzitgevaarindelucht.com/anti-joodse-verordeningen/" target="_blank">duty to register and issue personal ID-s</a>. This was formally introduced in October 1940 in the Netherlands and came info effect in April 1941. And then, one year later, all IDs of Jewish people needed to be stamped with a J. So we see bureaucratic evil of the end made possible by fairly innocent baby steps in the beginning.<br />
<br />
<u>Administrative witnesses of the insurance sector: during the World War 2</u><br />
One of the most well known German tricks pulled in World War 2 in Amsterdam was the take over and manipulation of the Lippman Rosenthal brand by setting up a sort of second bank or branch-office with the same name. This second office was effectively German run and a 'robbery-bank' that sold off assets of Jewish clients. This bank plays a sinister role in the documents that I will be publishing here.<br />
<br />
It started out with a request that Jewish people declare to their bank that they are Jewish, as via a specific <a href="https://www.erzitgevaarindelucht.com/anti-joodse-verordeningen/" target="_blank">Regulation</a>, the only bank paying out the life insurances would be the Li-Ro-robbery bank. Here's the snapshot of the regulation and the form to be filled in.<br />
<br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1Le1-2-yg2cffGA_nNjnQQivcO2Anhhy2JkBpricsvkvFpHx4J_yUY7_7vT1msK025ZBWFTo9EbWkSWLjKG4sKJQ_mbUWndvEc6voY3Hvawjfzg9TSaqlmzzZkbd1K86FNRnxqg/s1600/Liro.PNG" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="276" data-original-width="828" height="105" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1Le1-2-yg2cffGA_nNjnQQivcO2Anhhy2JkBpricsvkvFpHx4J_yUY7_7vT1msK025ZBWFTo9EbWkSWLjKG4sKJQ_mbUWndvEc6voY3Hvawjfzg9TSaqlmzzZkbd1K86FNRnxqg/s320/Liro.PNG" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Regulation outlining obligatioo to insurers to pay out <br />their clients only via the Li-Ro robbery bank</td></tr>
</tbody></table>
<br />And here is the form and letter that people were sent. Please declare yourself to be Jewish.<div>
<br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLwKS7P3mNGRX1p2HtQ1_bOjhffAVZ3ykyJxKiIxH-F5eal7EF53EPU8tHgeZAPSAFLeZmYX0604yVcw9BCXvi6t9x8Rx0Q4HUzvK1hqTTdToVmW_jpjIcCMNIjBNhBcJK2KkaKw/s1600/2Jofnee..PNG" imageanchor="1" style="clear: right; display: inline !important; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="577" data-original-width="817" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLwKS7P3mNGRX1p2HtQ1_bOjhffAVZ3ykyJxKiIxH-F5eal7EF53EPU8tHgeZAPSAFLeZmYX0604yVcw9BCXvi6t9x8Rx0Q4HUzvK1hqTTdToVmW_jpjIcCMNIjBNhBcJK2KkaKw/s320/2Jofnee..PNG" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Form with request to fill in if you are Jewish or not</td></tr>
</tbody></table>
<br />Now the involved insurers didn't really all like this idea and they figured out: if we don't know for certain if someone is deceased, we can't really transfer all the money to Li-Ro bank. So the exposition shows a bank writing to the Li-Ro bank on this specific issue. </div>
<div>
<br /></div>
<div>
Now beware of the answer which dates to January 1943. I will translate it here:</div>
<blockquote class="tr_bq">
<i>Through the contact that we have with the relevant authorities we have been informed that Jewish people that have been deported by government order will be totally taken out of the society and nothing will be ever possibly heard of them. As a result they are, sort of automatically, also completely annihilated in respect to your administration but we note that, if no further measures are taken, their remaining insurances would continue to exist.</i></blockquote>
<blockquote class="tr_bq">
<i>It will be clear to you that the circumstances in which the aforementioned Jewish people find themselves in society - but with respect to you as well - have lead to a situation that is equal to that where an insurance policy ends due to the death of the insured, which means that we need to find a way to bring those insurance to a pay-out.</i></blockquote>
<blockquote class="tr_bq">
<i>We invite you, the pay to us the relevant reserves that you have amassed to this end, while deducting a considerable reward for the risks that you have taken.We look forward to your proposal.</i></blockquote>
<div>
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0eNEtk_kjLumCKXTPII99T-5y4ODOk5CIlgOD_thlTpFhycScBOfObgKJyFM2Vem14sTkrxPjFmYNomgEl92tJHNNIyfv_GDHKODTF7k54K5KLIP9Lk9URpCdy6XWwl5FNBjPjQ/s1600/jan43.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="576" data-original-width="803" height="228" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0eNEtk_kjLumCKXTPII99T-5y4ODOk5CIlgOD_thlTpFhycScBOfObgKJyFM2Vem14sTkrxPjFmYNomgEl92tJHNNIyfv_GDHKODTF7k54K5KLIP9Lk9URpCdy6XWwl5FNBjPjQ/s320/jan43.PNG" width="320" /></a></div>
<div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1Le1-2-yg2cffGA_nNjnQQivcO2Anhhy2JkBpricsvkvFpHx4J_yUY7_7vT1msK025ZBWFTo9EbWkSWLjKG4sKJQ_mbUWndvEc6voY3Hvawjfzg9TSaqlmzzZkbd1K86FNRnxqg/s1600/Liro.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1Le1-2-yg2cffGA_nNjnQQivcO2Anhhy2JkBpricsvkvFpHx4J_yUY7_7vT1msK025ZBWFTo9EbWkSWLjKG4sKJQ_mbUWndvEc6voY3Hvawjfzg9TSaqlmzzZkbd1K86FNRnxqg/s1600/Liro.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a></div>
<br />
<br />
<u>Administrative witnesses: after the war</u><br />
Imagine that you survived this World War 2. And that you want to claim the insurance funds that you are entitled to. And the response being: please can you prove that the person you are referring to is actually dead? Survivors of the war atrocities had to endure long and terrible administrative procedures to restore their rights.<br />
<br />
Here is a witness that matters. It is a letter dating from 1950 and it is a declaration by a Red Cross official. It specifies the dates of deportation as well as the names of three survivors who have had to make a personal declaration to the Red Cross. It says that<br />
<blockquote class="tr_bq">
<i>... it is clear from the declaration of those three people (out of 33.000 deported to Sobibor), who stayed of a longer period in time in the camp, that almost all people that came to Sobibor were almost immediately being suffocated by gas and cremated afterwards. Given that nothing has ever been heard since the conclusion is that the person in question has died on 11-6-1943 of the consequence of suffocation.</i></blockquote>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzNuCRaeoIc53a5GBwsU4iiZwghxlyVTp8RjMpp5XjVeTAmM9fN2rFYlnp3QTS0MsG5mtrEW2ELqQGMbf0QGT65s8Krlj2jhhQJyCkGd6aaUZ25h8bHLGeodi7RWZ82VqupctbnQ/s1600/redcross.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="554" data-original-width="716" height="246" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzNuCRaeoIc53a5GBwsU4iiZwghxlyVTp8RjMpp5XjVeTAmM9fN2rFYlnp3QTS0MsG5mtrEW2ELqQGMbf0QGT65s8Krlj2jhhQJyCkGd6aaUZ25h8bHLGeodi7RWZ82VqupctbnQ/s320/redcross.PNG" width="320" /></a></div>
<br />
<br />
<u>No happy ending.... </u><br />
There is no happy ending to this story.<br />
<br />
Survivors had to fight administrative wars and it took until 1999 before some sort of settlement was made between representatives of the Jewish community and the Dutch Insurance Industry. Part of the settlement is that a<a href="https://stichting-sjoa.nl/" target="_blank"> Foundation for individual claims SJOA</a> has been set up. And until today the foundation is still actively assisting and doing research to do justice.<br />
<br />
Which brings me full square back to my neighbourhood in Amsterdam. There are not just the silent physical reminders of history, the Stolpersteine in the streets. We also find reminders on the web, in<a href="https://stichting-sjoa.nl/polissen/" target="_blank"> this list of holders of insurance premiums</a>. If I type in the names of the streets around me, their names come back to help me remember what happened.<br />
<br />
<u><b>Three lessons to heed...</b></u><br />
We, society in general but the Dutch in particular, owe it to all of those who gave their lives during the war, hoping for true freedom, to heed three lessons we appear to have never really learnt:<br />
<br />
1- we must better understand the mechanics, the workings of records, administrations and bureaucracies and the ease with <a href="http://moneyandpayments.simonl.org/2019/06/zimmermans-relevance-for-discussions-on.html" target="_blank">which what looks like a legitimate government action can turn into an evil one that starts a persecution on illegitimate grounds</a>,<br />
<br />
2- we must remember that it is the atrocities of World War 2 that made us formulate the <a href="https://www.humanrights.com/what-are-human-rights/universal-declaration-of-human-rights/preamble.html" target="_blank">Human Rights Declaration</a>, which formulates the fundamental rights that protect us,<br />
<br />
3- we must cherish and protect our fundamental right to privacy as one of the most important defenses against bureaucracies turning evil.<br />
<br />
<br /></div>
Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-62852520060893495532020-02-04T23:47:00.000+01:002020-02-05T08:48:17.653+01:00Perspectives on (Ca-)Libra #3: Why the Libra is not e-money (on the history of e-money and stablecoins)<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6t7sso_GxWbHyVTl78XbsJZvcBjEJdiSaaYYCGojw0kQCjyNVfUWmPVbfxQgLK95bEJuK19DQ1eo-JEJU7CIhbnHNL4wXLpsbVgH5fhsbG3HiPpW5HhcRFAYjh4YOpsVOKpHOrg/s1600/Libra.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="51" data-original-width="106" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6t7sso_GxWbHyVTl78XbsJZvcBjEJdiSaaYYCGojw0kQCjyNVfUWmPVbfxQgLK95bEJuK19DQ1eo-JEJU7CIhbnHNL4wXLpsbVgH5fhsbG3HiPpW5HhcRFAYjh4YOpsVOKpHOrg/s1600/Libra.PNG" style="cursor: move;" /></a>Quickly after the announcement of Libra, I, stated that Libra could not be viewed as e-money. Now has come the time to explain my earlier analysis (of June 2019) as to the organisational set up and regulatory qualification of Libra.<br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #1f497d; font-family: "calibri" , sans-serif; font-size: 14.6667px;">Libra is a privately issued and distributed </span><b style="background-color: white; color: #1f497d; font-family: calibri, sans-serif; font-size: 14.6667px;"><u>digital and virtual ‘currency’</u></b><span style="background-color: white; color: #1f497d; font-family: "calibri" , sans-serif; font-size: 14.6667px;">, that is intended to function as a means of payment. </span><b style="background-color: white; color: #1f497d; font-family: calibri, sans-serif; font-size: 14.6667px;"><u>It is not a true currency</u></b><span style="background-color: white; color: #1f497d; font-family: "calibri" , sans-serif; font-size: 14.6667px;"> because its actual composition/counter value is a basket of fiat-currencies and financial instruments. </span><b style="background-color: white; color: #1f497d; font-family: calibri, sans-serif; font-size: 14.6667px;"><u>It is not e-money </u></b><span style="background-color: white; color: #1f497d; font-family: "calibri" , sans-serif; font-size: 14.6667px;">as the Libra is not ‘monetary value’. The digital value qualifies </span><b style="background-color: white; color: #1f497d; font-family: calibri, sans-serif; font-size: 14.6667px;"><i><u>as a financial instrument</u></i></b><span style="background-color: white; color: #1f497d; font-family: "calibri" , sans-serif; font-size: 14.6667px;"> (a mini-participation in an open ended investment fund) and is used in an open source</span><b style="background-color: white; color: #1f497d; font-family: calibri, sans-serif; font-size: 14.6667px;"><i><u> payment instrument</u></i>,</b><span style="background-color: white; color: #1f497d; font-family: "calibri" , sans-serif; font-size: 14.6667px;"> to be used for payment and acquiring. Both payments and securities legislation apply, as well as the relevant competition and consumer protection rules. </span></blockquote>
<blockquote class="tr_bq">
The Libra association is a manager of the governance and operational arrangements and activities that come with using the virtual currency Libra and participating in the Libra (payment) scheme. This Libra scheme is a private and commercial arrangement which:<br />
- defines a unit of account for a new virtual currency: the Libra,<br />
- defines the asset mix that backs one currency unit,<br />
- lays out the distribution and management rules of the currency units and reserve funds,<br />
- lays out commercial rules and does a private placement to further promote the use of the Libra by giving them away (for free or at a discount). </blockquote>
<u>Definitions of e-money and term: monetary value</u><br />
The reason why Libra, as a basket of different currencies, cannot be considered e-money is that it doesn't qualify as such under the definition as it is not monetary value. And to comprehend the definition we must understand that the e-money directive has had a <a href="https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32000L0046:EN:HTML" target="_blank">first version</a> and that the <a href="https://www.ecb.europa.eu/pub/pdf/other/emoneyen.pdf" target="_blank">European Central Bank</a> was clear on its analysis. E-money is a fiat currency in a digital shape and must be treated as such in terms of: reporting requirements for monetary aggregates, redeemability (at par), assurance that customer fiat money equivalent was kept safe etcetera.<br />
<br />
The definition and use of the term 'monetary value' in the first version reflects that all we could think of was digital tokens that one-on-one reflected the physical or existing scriptural account-money forms. This is particularly clear from the consideration 19 in the <a href="https://www.ecb.europa.eu/ecb/legal/pdf/c_18919990706en00070010.pdf" target="_blank">Opinion of the central bank on the first draft directives</a>.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqY-7GtN6IRUqk36EoEMK_mRUW1r-MDbowH18ZkBH6ka9-cYCxHz3mre5q1Ptv0jJoagdi5754rNqmOxPyfGFijm6PJYx4ZnFS4cun203LqYBUT6bZ1yg7BNKqPdEesaTxYMrHig/s1600/emoneymonetary.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="386" data-original-width="367" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqY-7GtN6IRUqk36EoEMK_mRUW1r-MDbowH18ZkBH6ka9-cYCxHz3mre5q1Ptv0jJoagdi5754rNqmOxPyfGFijm6PJYx4ZnFS4cun203LqYBUT6bZ1yg7BNKqPdEesaTxYMrHig/s320/emoneymonetary.PNG" width="304" /></a></div>
<br />
What we can see here is a central bank ensuring that redeemability against the fiat currency is obliged, in combination with a definition of e-money which does not allow offering e-money at a discount:<br />
<div style="font-family: Tahoma, Verdana, Arial, Helvetica, sans-serif; font-size: 0.8em; margin: 10px 35px 10px 15px;">
"electronic money" shall mean monetary value as represented by a claim on the issuer which is:</div>
<div style="font-family: Tahoma, Verdana, Arial, Helvetica, sans-serif; font-size: 0.8em; margin: 10px 35px 10px 15px;">
(i) stored on an electronic device;</div>
<div style="font-family: Tahoma, Verdana, Arial, Helvetica, sans-serif; font-size: 0.8em; margin: 10px 35px 10px 15px;">
(ii) issued on receipt of funds of an amount<u> not less in value than the monetary value issued</u>;</div>
<div style="font-family: Tahoma, Verdana, Arial, Helvetica, sans-serif; font-size: 0.8em; margin: 10px 35px 10px 15px;">
(iii) accepted as means of payment by undertakings other than the issuer.</div>
<div style="font-family: Tahoma, Verdana, Arial, Helvetica, sans-serif; font-size: 0.8em; margin: 10px 35px 10px 15px;">
Redeemability</div>
<div style="font-family: Tahoma, Verdana, Arial, Helvetica, sans-serif; font-size: 0.8em; margin: 10px 35px 10px 15px;">
1. A bearer of electronic money may, during the period of validity, ask the issuer to redeem it at par value in coins and bank notes or by a transfer to an account free of charges other than those strictly necessary to carry out that operation.</div>
To me, the full analysis and reasoning behind the e-money rules, can only mean that e-money thus covers the 100% forms of convertible fiat currencies. The whole regulatory construct and monetary safeguards in the e-money directive wouldn't work for other constructs. Also, the idea of issuing anything else than a digital equivalent of fiat-currency would have been hypothetical.We are talking the days that each digital player would seek maximum acceptance of the public of any new forms of payments, by piggy-backing on the trust/security mechanisms of the fiat instruments. Introducing a non-fiat-related digital currency was just a step too far and it's not what the E-money directive was meant to support.<br />
<br />
When the second e-money directive came in and was aligned with the EU payments directive, it changed some of the structure and definitions. The <a href="https://www.ecb.europa.eu/ecb/legal/pdf/c_03020090206en00010009.pdf" target="_blank">ECB opinion as to redeemability</a> and monetary matters remained unchanged however, so in essence the rules are still of the same construct. E-money means a one-on-one converted form of existing fiat money and all kinds of monetary statistics, redeemability etc are still in place for the wide variety of mechanisms that now use this regulatory avenue.<br />
<br />
We must also understand that at that time we were nowhere near the existence of worldwide consumer platforms with such inherent power to dictate an alternate currency alongside fiat currencies. But now we do have those, including one that tries to issue and launch a Libra. Given the EU e-money directive however, the only reason this Libra would qualify as e-money is when it would be a 100% EU currency backing the Libra. As this is not the case, the Libra will not qualify as e-money.<br />
<br />
<u>Should we adapt the EU definition for e-money then?</u><br />
In theory one could argue that the e-money definition needs adjustment in order to allow the Libra basket of currencies to be regulated. But this doesn't make sense from a financial instruments/securities perspective.<br />
<br />
Whenever you dilute a 100% currency basket in the users own currency towards a different asset base, you reform the token at hand into a investment basket. The user is exposed to an additional form of currency and counterparty risk, which does not exist when using the 100% e-money form. Of course the issuer of the financial instrument can proclaim the new asset base to be stable. Or almost stable, but the rules of the financial instrument game are different. If you issue such combinations of assets, you must warn the user of risks, assess whether he/she may be up to the investment/risks that they are taking and so on.<br />
<br />
Not obliging Libra to have to do so would be creating an uneven playing field towards all kinds of other providers of financial instruments that equally seek to provide their financial services to customers via a similar asset package that can be bought in tiny portions. In addition, the monetary concerns involved in overissuance of the e-money product may go beyond the geography of the central banks involved as monetary authorities in the currency basket. Merely allowing a basket of currencies as backing for an e-money product would not be consistent with the ECB analysis on relevant monetary considerations and rules to ensure financial stability.<br />
<br />
So, as stable as you may give your product a name or try to sell it to the public or regulators, all regulatory and market experts know that no currency basket will ever be stable. Effectively, suggesting the fact that it would be stable for the end-user would be mis-selling of the product, misleading the consumer and what have you. So name it stablecoin as you like, but it remains a risky participation in an investment fund/currency basket. And all rules under EU securities to such investments do apply. Meaning disclosure rules, but also rules as to who can trade/distribute this instrument. It will not at all be open to trade for everyone, without restrictions.<br />
<br />
<u>Does paying with Libra involve a payment instrument then?</u><br />
Next up is the question what exactly qualifies as a payment instrument in the Libra setup. In my view the financial participation is a digital asset/financial instrument. And of course, if you wish, such an instrument could be used to pay. Rather than sending someone digital fiat currencies, the provision of the tradeable digital financial instrument would consist the payment. The payment with Libra would thereby be a payment in kind, as if I exchange a bread for a bottle of water.<br />
<br />
So is there a payment instrument involved and where is it?<br />
<br />
Next up is the question if we can see a payment instrument, a payment order and a payment transaction under the Payment Services Directive, leading to the placing, transferring or withdrawing of <b>funds</b>. I think the main idea in this respect is to take the intentions of Libra to serve as a worldwide payment system as a starting point. This means we will have to take a close look at the question if tools are provided to the user (yes) meaning those tools (wallets) may qualify as payment instruments, if they move funds, which are defined as:<br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #444444; text-align: justify;">banknotes and coins, scriptural money or electronic money as defined in point (2) of Article 2 of Directive 2009/110/EC;</span></blockquote>
If the Libra is not banknotes and coins nor eletronic money, we only have the wonder if it could qualify as scriptural money. But this is indeed where it becomes a bit complicated. As the ECB put it, when <a href="https://www.ecb.europa.eu/ecb/legal/pdf/c_10920060509en00100030.pdf" target="_blank">advising on the Payment Services Directive</a>:<br />
<blockquote class="tr_bq">
12.10 The term ‘scriptural money’ is used in the proposed directive without being defined, e.g. in Article 3(b), Article 4(8) of the proposed directive and paragraph 7 of the Annex to the proposed directive. It is suggested that a definition of scriptural money should be established (in the definitions article), bearing in mind that only central banks and credit institutions (which include e-money institutions) may hold such funds.</blockquote>
So we have two options. We could consider the Libra issued by Libra association to the Libra association members (who are all registered security companies, allowed to offer, trade and sell financial products to the public and each other) a form of scriptural money. This is not illogical, given the explicit intentions of the Libra association and it would require the regulatory flexibility to allow for a self issued unit of account / securities product to be viewed as a form of money.<br />
<br />
The other option is of course to not view the Libra as scriptural money and not apply the Payment Services Directive to a payment instrument which has a worldwide scope and impact. Although this may sound illogical, it is not illogical at all. The apps and tools that are used to pass on the Libra to other consumers would still have to comply with all securities related regulations. Users would have to sign up, pass suitability tests, issuers, brokers and exchanges of the Libra would need to have their MIFID licenses and such, so the customer would still be protected.<br />
<br />
The exercise does show however that the Libra association has had little consideration to the relevant EU requirements and definitions when choosing Switzerland as their jurisdiction. Their guess may have been that they might be able to convince the local regulator to bend the rules a little, but the choice of a currency basket (and financial instrument structure) effectively deters its worldwide inclusive use for cross-border payments. Alternatively, a choice for a single currency basket might work, which would make it regular e-money, to which the PSD and all kinds of KYC/AML rules apply. Yet, this would mean that there needs to be a single issuer in the business model, as the reselling of e-money is prohibited under the EU regulations.<br />
<br />
It is this considerable ignorance of relevant EU rules that has made it clear to me that Libra and Facebook will at no point in time be able to make their business model work. A brief visit to any innovation hub at any central bank would have made the above inconsistencies clear, but they apparently chose to ignore this. And the reason may be that the Swiss policy papers on stablecoins may have provided them with the impression that there was some leeway here. But even the relevant local supervisor has explained to them <a href="https://www.finma.ch/en/news/2019/09/20190911-mm-stable-coins/" target="_blank">that both securities and payments legislation applies and that their business model will not work</a>.<br />
<br />
Then again, this is Facebook, pushing and moving so why could they have been so wrong in their assessment?<br />
<br />
My hunch is that Facebook have applied a US centric approach to the whole regulatory debate on issuance of stablecoins and forgot how the regulatory regimes between EU and US differ. But for that I refer to the PS.<br />
<br />
The main conclusion for now is: Libra does not qualify as e-money and the transfer of Libra might constitute a payment transfer, depending on the view one has with respect to the application of the word scriptural money under todays context.<br />
<br />
February 5, 2020<br />
<br />
<br />
PS. <u>Regulatory regimes for stablecoins (US) and e-money (EU)</u><br />
To put this in perspective for US readers, I want to shed a regulatory light onto the difference between stablecoins and e-money and the relevance of 1990s legislative landscapes in the US en Europe with respect to payments. The background against which the e-money directive was being developed here in Europe, was one in which - just as now - all over the world, people were thinking about the best forms of regulation of a new phenomenom: e-cash: electronic cash or Internet cash.<br />
<br />
At that point in time I worked for the Dutch central bank and I investigated the difference between the existing regulatory regimes in Europe and in the US payments (see the <a href="https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1390&context=aulr" target="_blank">American Law Review article</a> here). And the big thing to take away here is that:<br />
- the US had both banking supervision laws and money transmission laws,<br />
- Europe did not have money transmission laws and only bank supervision regulation (somewhat harmonized under EU rules).<br />
<br />
The consequence of this difference is that the US regulators had a clear money transmission framework that they could use, to apply to new forms of Internet payments and digital coins. In essence they all proclaimed new internet payment stuff to be some fort of money transmission, either by their design or by their nature. And thus: the regulation of those new forms of payment was easily done. No change in laws was required.<br />
<br />
In Europe, there was no uniform payment legislation on a European scale. Different member states had different local rules on payments. We had to have a euro in place and many years of deliberation before we even ended up with a harmonised Payment Services Directive in 2007. So we had no payments legislation but we did have some form of e-cash begging to be regulated somehow. As the ECB had clearly outlined its concerns in this respect.<br />
<br />
So the fierce debate in Europe was: should e-money be considered the functional equivalent of banking?<br />
<br />
The main reasoning was: upon issuance of an e-money token of 1 euro, the issuer receives one euro of the public. This means attracting deposits from the public, which is part of the banking definition. Whereas central banks and Ministries of Finance felt this way, the Ministries of Economic Affairs succeeded in convincing them that an intermediate, light-weight banking regime should be set up. So we got an E-money Directive, creating EU license regimes for organisations that issue electronic money to the public, upon receipt of regular fiat money, which electronic money is then used for all sorts of payments.<br />
<br />
The digital e-money had to be issued and redeemed at a 1 on 1 level (at par) and the e-money organisation had to safeguard the full reserve in a separate financial vehicle (or insurance arrangement). No license would be given if the safeguards weren't in place, so this means that the European e-money regime boils down to a regulatory regime which safeguards e-money. Or, what most US people would view as stablecoins (digital tokens, to be issued, traded, sold and transacted on the basis of an at-par rule with the original fiat currency).<br />
<br />
Now back to the US. Initially the US payments regulation thus seemed well suited to adapt to new technologies. The birth of the bitcoin and other currencies created an issue. In essence, the US regulators didn't care to define a separate token or form of e-money into their payments regulation. They just stated that virtual currencies were a form of currencies and hence the money transmission regulations should be in place somehow.<br />
<br />
Therefore Tether and TrueUSD are registered with the Fincen, but without the legal European safeguards in place to guarantuee the peg. Then again the New York bitlicense regime does have those safeguards, but it is clear that no US regime for stablecoins exists. We can see that the US now lags in regulatory terms. It has fragmented state laws on payments, where EU caught up with harmonised payments legislation and harmonised e-money legislation. And the European e-money regime is essentially the unified EU stablecoin regime for tokens that seek a 1-1 peg with a fiat currency.<br />
<br />Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-75374681622421512052019-10-16T09:13:00.000+02:002019-10-16T16:32:43.712+02:00Perspectives on (Ca-)Libra #2: On the Libra association (board) and business drivers First of all apologies to many of you: I promised a blog on the reason why Libra would not qualify as e-money, but please accept my rain check for that. Right now, it is the day after constitution day for Libra. An event coloured by the absence of many payment industry players, that indeed felt the pressure of competition law too big to be able to join.<br />
<br />
So yesterday, the Swiss association was set up, and we got a glimpse of<a href="https://libra.org/wp-content/uploads/2019/10/Libra-Association-Charter-Press-Release-.pdf" target="_blank"> more information</a> on the organisation. I will discuss the ramifications and conclusion that we can draw later this afternoon in the Dutch radio-broadcast BNR Digital News. And this blog contains a brief analysis, which builds on <a href="http://moneyandpayments.simonl.org/2019/06/perspectives-on-ca-libra-1-first-we-get.html" target="_blank">my first blog that identified a couple of smokescreens by Libra</a>.<br />
<br />
My brief summary is basically:<br />
- it is still a Facebook/David Marcus show, disguised as an independent association: the governance is still substandard in terms of industry best practices,<br />
- Facebook has the fear of losing Africa to the Chinese and Libra is instrumental in helping them establish the foothold,<br />
- Kiva and Payu are seeking actual microcredit expansion with practical product offers and Libra will be their vehicle,<br />
- PayU, Andreesen and Xapo are regular VCs, in it for the money. If you're daring enough to step into bitcoin early, why not do the same with Libra? Worst case you lose a little money, best case, you're more on top of the world than ever.<br />
<br />
The longread is below, but note that it is still only scratching the surface. Readers and other journalist may further research and draw additional conclusions.<br />
<br />
<u><b>Governance: still shaky</b></u><br />
As it stands, the board that is now chosen has released <a href="https://libra.org/wp-content/uploads/2019/10/Fact-Sheet.pdf" target="_blank">info on its charter</a> which is still very brief. It shows five board members which appointed three staff members of the Libra association. Interestingly, the head of the association is also the chair of the board and the PR role acts as the deputy chair. This is atypical, but my guess is that this is done to avoid the impression that David Marcus effectively pulls the strings.<br />
<br />
If we compare the setting that has been now created with the one that the <a href="https://www.betaalvereniging.nl/en/governance-and-organisational-structure/board-of-directors/" target="_blank">Dutch Payment Association</a> has set up (after long deliberations and scrutiny by many lawyers to make a well developed governance structure) we can see some differences.<br />
- Libra has no independent board directors<br />
- Libra's chair of the board is also the head of the working payment organisation<br />
- Libra has no formal Board of Appeal to deal with questions of acceptance as members, certification with respect to services/complying with rules and regulations.<br />
<br />
The Dutch rules state:<br />
<span style="background-color: white; color: #27323f; font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;"><i>An independent Board of Appeal makes it possible to appeal against decisions on acceptance and certification when parties are unable to reach agreement with the Executive Board, the Board and finally with the Appeals Committee of the Board.</i></span><br />
<br />
And then an observation on what is missing. The association now has a director, a business development person, a policy/communication person. But not.... a legal council/compliance expert. As if the past months with all the varying regulatory discussions haven't happened at all. This is a very telling ommission; the organisation is all about commerce and not about compliance (but we knew that already...).<br />
<br />
There is a lot more to say here, but I stand with my former analysis: the governance is ill conceived and not up to standard for a normal payment scheme/provider that Libra wants to be (as they announced in September to go for at least a payment license in Switzerland.<br />
<br />
<b><u>Libra members: three payment institutions remaining, not one</u></b><br />
Reuters incorrectly informs the public in<a href="https://www.reuters.com/article/us-facebook-cryptocurrency/facebooks-libra-announces-board-as-support-shrinks-further-idUSKBN1WT17D" target="_blank"> their article</a> that the only founding member that is into payments is PayU. They missed out on the fact that Uber and Coinbase are e-money institutions which also act as payment institutions.<br />
<br />
Of those, Uber is the youngest kid on the block. It ay either be too new to payments to understand the ramifications of the proposed governance or the underbidding and breaking of regulation may be part of the business strategy and it sees no risk here. Coinbase interestingly only has a UK license as e-money institutions and where most EMIs have their backup Brexit-license in place I don't seem to find it for them. I expect them to have a workaround or whitelabel agreement at hand however.<br />
<br />
We should be paying more attention to Coinbase, as it is the linking pin that connects the five current board members. Also Vodafone (exempt under EU payments legislation) should not be forgotten (see PS1) as it has long standing unchallenged experience in avoiding proper banklike regulation of its payments processes.<br />
<br />
<u><b>The Board Members; interesting incrowd</b></u><br />
Now what is Libra really up to?<br />
For that we need to do a deep dive into the people and relationships.<br />
I'll make a start below, but this is only scratching the surface.<br />
<u><b><br /></b></u>
The idea behind is that recruitment of board members always has a certain dynamics. In the Netherlands it is a well know fact that through charities (like the board of the Concertgebouw) top level executives meet and do networking. It also serves as a recruiting platform for next board members.<br />
<br />
With this in mind we can see that Coinbase, Paypal and Kivi are the entities that connect the dots between the board members. And in essence, we can see that it is David Marcus who is at the center, having received what appears to be a blanc cheque from Zuckerberg to make this happen.<br />
<br />
Therefore, let's start with <u>David Marcus of Calibra</u> (a Facebook tech subsidiary in US; interesting choice given the fact that Facebook Payments also holds e-money licenses in Ireland). <a href="https://www.linkedin.com/in/dmarcus/?locale=nl_NL" target="_blank">Marcus is a serial entrepreneur</a>, coming out of telco environments, with one of the companies being bought by Paypal and thus ending up at Paypal. He then moved to Coinbase and shortly thereafter Zuckerberg scouted him for the Facebook/Libra plan.<br />
<br />
<i>Marcus via Paypal to Ellis</i><br />
He has worked together at Paypal with Laurent le Moal, who heads PayU. So there we have connection number one. Do note that the PayU representative Patrick Ellis is primarily a lawyer, but not with payments background. He is more a securities regulation guy with African and South African experience.<br />
<br />
<i>Haun via Coinbase/Cesares to Horowitz</i><br />
Connection two is with Katie Haun from Andreessen Horowitz. She is a <a href="https://www.cnbc.com/2019/10/06/meet-the-former-prosecutor-who-became-the-face-of-crypto-vc-investing.html" target="_blank">former prosecutor</a> who was firmly into all kinds of legal cases and bitcoin dark markets. As such she undoubtedly also came in contact with the Winklevoss twins and most likely may have met Wences Cesares as well. Her work in crypto-land led Coinbase to invite her to their board: a classic defence mechanism to ensure good contacts with legal prosecutors/supervisory community. This board role at Coinbase resulted in an invitation to work at Andreessen Horowitz, where she manages a huge VC fund that invests in crypto. The people hiring her said: 'She is a credible face for crypto'.<br />
<br />
<i>Cesares via VC world and Paypal</i><br />
Connection three is <a href="https://en.wikipedia.org/wiki/Wences_Casares" target="_blank">Wencles Casares of Xapo Holdings</a> He set up on online financial firm early on, which was subsequently bought. Onwards he setup Wanako Games (with exit), Lemoncard (with exit). The he was smart to set up a safe storage facility for bitcoin for the super rich that invested early in bitcoin. So he is a serial entrepreneur, now well taken care of due to all the bitcoins in his possession (we can assume he is a whale and sometimes see him retweeting large bitcoin movements on the blockchain). Xapo itself was funded by the VC Community involving.<br />
<br />
His involvement in charity can be tracked into his participation in Viva trust, aiming at financial inclusion in Latin America. Later on he also served as a board member at Kiva (which accidentally also holds a seat on the board of Libra). And then of course, he is still a board member of Paypal, so there we have some dots connecting. So he is smart, rich and you may want to see how in 2006 he bought a <a href="https://www.lasmajadas.cl/en/who-we-are/history/" target="_blank">nice real estate venue</a> to live back home but returned to California later. The house is now part of a charity foundation and acts as a meeting point/venue for businesses and such.<br />
<br />
<i>Davie via Kiva/Paypal (Prenmal Sha) and Cesares (Kiva-board)</i><br />
Connection four is the connection to Kiva Microfunds. Matthew Davie is s serial entrepreneur, pretty much involved in the strategy area of this longtime charity. Do read <a href="https://t.co/8erFJQ5Ivm?amp=1" target="_blank">this article</a> on how Kiva was set up as peer to peer crowdfunding and further developed into a lending platform. This has inclusion written all over it. And Kive, by the way, since the start did all its payments via Paypal. This was due to their contact with Premal Shah, who had also been experimenting with his own microfinance project while working at PayPal. So again, dots are connecting to the Paypal line, with a crossover to the VC community via Cesares.<br />
<br />
Again, there is a lot more to say, but I leave it up to the crowd to further investigate.<br />
<br />
<u><b>Business proposition and drivers</b></u><br />
As for the business drivers, you may want to look into what Kiva is doing <a href="https://ssir.org/articles/entry/kivas_crowdfunding_platform_transforms_into_hub_for_impact_investing_and_financial_inclusion" target="_blank">recently</a>. It is setting up a Kiva Protocol in Sierra Leone, to do microcredits based on reputation. My good friend <a href="http://blog.dgwbirch.com/?p=489" target="_blank">Dave Birch</a> has been very keen on <a href="https://www.coindesk.com/buried-in-facebooks-cryptocurrency-white-paper-a-digital-identity-bombshell" target="_blank">identifying early</a> on that this was one of the future points for Libra already mentioned in their plans. So Kiva is basically doing the proof of concept for phase 2 of Libra.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfD_OmuR1RWt1eC_zSuXuHkL09YoXRb2p0cPwbH2EywQmHlP7r38VQuor5jiRfcdFS7foATTTxDvgC_LP9jD0BwO2M-IUmB2Y2R2qneerbm8iHQKYW6UgmUC_5HU_gzpAp6MqW_g/s1600/Kiva-libra.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="317" data-original-width="674" height="297" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfD_OmuR1RWt1eC_zSuXuHkL09YoXRb2p0cPwbH2EywQmHlP7r38VQuor5jiRfcdFS7foATTTxDvgC_LP9jD0BwO2M-IUmB2Y2R2qneerbm8iHQKYW6UgmUC_5HU_gzpAp6MqW_g/s640/Kiva-libra.PNG" width="640" /></a></div>
<br />
Next up to PayU. They are not just a payment processing company, but also a VC company owning reddot payments. <a href="https://techcrunch.com/2019/07/04/payu-enters-southeast-asia/" target="_blank">And that is a company that brings Wechat and Alipay to Africa</a>. Even more notable is that they own a large share in Tencent (Wechat) and their role as a big investor in the payments game. What is interesting here is that PayU thus seems to be introducing the Libra competitors into Africa. At the same time they join the initiative that seems to be set up to counter this development.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgI5jivV4dhvkE0PEhy1pwjjZUIcbHQdnrBRknlwXrjULZY6xITGwQb70ebuDSU9ClpDV7AAl506ll5n4qXXLys7ePD5yfxXRYG0zXyj4mdkdkd55iUe_zILxQ33NVQGZ064xdpyg/s1600/Reddot.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="233" data-original-width="815" height="180" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgI5jivV4dhvkE0PEhy1pwjjZUIcbHQdnrBRknlwXrjULZY6xITGwQb70ebuDSU9ClpDV7AAl506ll5n4qXXLys7ePD5yfxXRYG0zXyj4mdkdkd55iUe_zILxQ33NVQGZ064xdpyg/s640/Reddot.PNG" width="640" /></a></div>
<br />
Because this much is more clear to me now. Facebook has the fear of losing Africa to the Chinese and Libra is instrumental in helping them establish the foothold. Kiva and Payu in the meantime are seeking microcredit expansion and Andreesen and Xapo are regular VCs, in it for the money. If you're daring enough to step into bitcoin early, why not do the same with Libra? Worst case you lose a little money, best case, you're more on top of the world than ever.<br />
<br />
<u><b>Further blogs: on definition and e-money and securities regulation in Eu</b></u><br />
I promise, the blog #3 will come. But first I hope this blog inspires many people to do some further digging.<br />
<br />
<br />
<u><i>PS 1. On Vodafone, mpesa and payments</i></u><br />
John Maynard pointed out to me that Vodafone and Mpesa also come into play here. Which is true for two reasons. First of all as part of the business opportunity in Africa and the desire to seek solutions that go beyond the one country. Cryptically speaking one could say that Mpesa itself may be the result of incidental local stakeholder constellations rather than the logic of business and regulation.<br />
<br />
But the second reason is that effectively, <b><u>the mobile operators have a great record of ducking relevant e-money legislation in the EU</u></b>. If you would browse many pages of history of the e-money directive and a number of mobile phone payment initiatives (<a href="https://moneyandpayments.simonl.org/search?q=mobile+operators&updated-max=2004-01-28T13:41:00%2B01:00&max-results=20&start=20&by-date=false&token=Cjb_AL_pQFJgAP8A_wD___73gqTSDP__QdPOz8rJz8jGysXIyMzGz8bIzsrIycvNx8bJycbP__4QFCEHUmzeQQSOblAAWgsJ4T0vudgbjuYQA2D_uNHVAQ%3D%3D" target="_blank">feel free to do so here</a>) you will see that At some point in time the EU mobile operators succeeded in getting an exemption in the PSD2 and the e-money directive of the net-effect that funds on mobile phone accounts will not be considered e-money or funds under the payment services directive, even though they can be used to make sms-payments or added-service payments.<br />
<br />
The trade off in those days was that mobile operators had just paid huge sums for 3G licenses and lobbied the Ministries of Finance via their Ministries of Transport/Telecommunications to call for a specific exempted regime for electronic money when residing on a mobile phone account. I still see this as one of the best executed bank-lobbies by non-bank institutions, which prevented the whole e-money directive being applicable to them. See also this website <a href="http://www.11a2.nl/" target="_blank">11a2.nl </a> or read <a href="https://pdfs.semanticscholar.org/2832/3baa09815c53e13c0bab94312e074c5dd778.pdf" target="_blank">this consultation feedback that tries to provide this adhoc idea with a reasoned basis</a>.<br />
<br />
Therefore, when we look at the EBA payments institutions register you will thus see <a href="https://euclid.eba.europa.eu/register/pir/view/PSD_EXC/IE_CBI!C65302" target="_blank">Vodafone being exempted for their payment business</a>. They have a long standing experience in being able to duck e-money regulation and avoid the rational interpretation of regulation and may well be thinking that with the power of Facebook behind the initiative, this may also work now. This holds particularly true if your aim is not the developed market, but to capture the underdeveloped market in societies which have less robust regulators and supervisors.<br />
<br />
<i>PS 2. The team doing the association work: David Marcus reassembles colleagues</i><br />
- Managing director of Libra. <a href="https://www.linkedin.com/in/bertrandperez/" target="_blank">Betrand Perez</a> has had some tenure with Paypal and also worked at Zong (the David Marcus company that Paypal bought). The same goes for Business Development person . <a href="https://www.linkedin.com/in/khemecker/" target="_blank">Kurt Hemecker</a>. So we can see the classic recruiting movement of having a soccer trainer taking along some of his trusted players to the new club.<br />
<br />
- Head of Policy and Communication is<a href="https://www.linkedin.com/in/dantedisparte/" target="_blank"> Dante Disparte</a>, a profiled professional with Harvard Business School and NY Stern education and diverse work experience. I sense a flavour of business and geopolitical work experience, related to national security. This can also be seen in repeated statements from Marcus outlining that for the US to keep its role/position, Libra is a necessity (in order not to let Chinese take over everything).<br />
<br />
<i>PS 3. What's the rush: the Chinese central bank on its heels</i><br />
In response to the Libra initiative, central banks are now reconsidering the relevance of issuing central bank based digital currencies. The Chinese central bank is actually moving forward very fast in this respect. It appears to use similar concepts as Libra and thus develop a state-owned issuer of e-currency. See the <a href="https://www.coindesk.com/chinas-digital-currency-is-being-built-in-a-secret-office-with-restricted-access" target="_blank">Coindesk article here</a>.<br />
<br />
My personal take is that it may not have to be the central banks, but could be the Ministries of Finance that take up the issuance of digital coins (just as they usually mint the physical coins). But that is a whole different discussion, laid out in this article: <a href="https://www.simonl.org/wp-content/uploads/262-265_Lelieveldt-eng.pdf" target="_blank">The Full Reserve Bank is up for grabs</a>.<br />
<br />
<i>PS 4. And of course the VR/AR angle</i><br />
I almost forgot. Introducing a new currency into a real world does not make a lot of sense, as existing currencies and e-money may be more efficient. But imagine that there is a virtual agumented reality world / economy. You convert fiat money, step in and then use the game money. Like the Second Life Linden Dollars. But it's not a game and game money any more. It's IOUs of central bank Libra (aka Facebook). That may well be the end game (and first mover advantage) that Zuckerberg is seeking.<br />
<br />
<br />
<br />Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-72796003691164122042019-06-22T23:30:00.000+02:002019-06-24T07:36:58.165+02:00Perspectives on Ca-Libra # 1. Getting rid of three smokescreens <div class="separator" style="clear: both; text-align: center;">
</div>
This week the world has witnessed<a href="https://newsroom.fb.com/news/2019/06/coming-in-2020-calibra/" target="_blank"> the announcement by Facebook of Calibra</a>, a digital currency wallet and company. The wallet holds Libra, a virtual currency, with the idea to be used globally. Its distribution and use will be further promoted, organised and executed via an association of partners, called the Libra-association. The information pack (<a href="https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/WhitePaperAndSupportingDocuments-2.zip" target="_blank">download here</a>) also outlines more technical details on programming languages, future plans and committment to regulatory compliance.<br />
<br />
Immediately thereafter, a storm of analysis emerged in order to understand the initiative. Quite some politicians and regulators are eager to quickly respond and that is completely understandable.<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdmp6H6e_cWcn_Kn_Wo5NM4cTlg20blDo1mpvkO8T-l7zIQqyOtIgAjy90Thye2qhboGc7ATHu0Lh3EsNZ-l1_RRT1zUrfR-3fiB3IU9SYGgcLA5Tt80-CLBb4QE2uWS-oGXwawQ/s1600/calibra-logo-wordmark_purple.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="659" data-original-width="960" height="135" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdmp6H6e_cWcn_Kn_Wo5NM4cTlg20blDo1mpvkO8T-l7zIQqyOtIgAjy90Thye2qhboGc7ATHu0Lh3EsNZ-l1_RRT1zUrfR-3fiB3IU9SYGgcLA5Tt80-CLBb4QE2uWS-oGXwawQ/s200/calibra-logo-wordmark_purple.png" width="200" /></a>Facebook is not just the grocery shop around the corner, dabbling about with some new technology. It has allocated significant resources to the development of Libra. With a customer base of at least 2 billion (close to 25% of the worlds population) it is an entity that in itself acts as a world-wide platform and does not need others to achieve a network effect.<br />
<br />
<i>Perspectives as the approach for this series of blogs</i><br />
As the Libra-initiative can be viewed from many angles, I plan to write this series of blogs and label them as perspectives. It's always helpful to view things from a couple of angles and that is precisely what I intend to do. This means we will be looking into definitions, regulatory regimes, business case and previous historical analogies. And as we go along I will take stock of developments and responses.<br />
<br />
As you may notice, I will be judging Facebook by a very high standard. The reason for that is simple. If an organisation has so many resources available, I expect them to come up with careful, consistent and accurate thinking, wording and technology. And as a sneak preview: this is not what we got over the last week.<br />
<br />
While the maturity of the exercise may look impressive to some observers, the huge inconsistencies and home-brewed interpretations of what a blockchain is cannot be a coincidence. We can see an announcement that Calibra will become available in 2020, while the state of thinking mid 2019 is 'early in the process'. This is accompanied by a PR-smokescreen on cryptocurrencies, that doesn't help our understanding the effort.<br />
<br />
So the very first challenge that exists, when discussing the Ca-Libra virtual currency initiative, is to separate fact from fiction and to be precise in terminology. That is why this first blog seeks to get rid of the three biggest smokescreens that we were facing this week.<br />
<br />
<u><b>Smokescreen #1: libra association is not an ecosytem but </b></u><u><b>a payment association with added functionalities</b></u><br />
If we start with the source of payments revenue for Facebook, this originally all boiled down to payments related to Flash games (in 2015). But technical problems in Flash would hit their revenue. So they quickly understood the need to be more flexible and to be able to operate different business propositions and solutions. Therefore they moved towards licenses in the US (<a href="https://newsroom.fb.com/news/2015/03/send-money-to-friends-in-messenger/" target="_blank">cash via messenger</a>) and in <a href="https://moneyandpayments.simonl.org/2016/11/facebook-obtained-its-e-money-license.html" target="_blank">Europe</a>. They also moved the US e-cash system to France and UK, but<a href="https://techcrunch.com/2019/04/16/facebook-is-discontinuing-p2p-payments-in-messenger-in-the-uk-and-france-on-june-15/" target="_blank"> announced 2 months ago that they would drop it in Europe per June 15, 2019</a>.<br />
<br />
And now, per June 18, 2019 Facebook essentially announce to re-up their game, but not with electronic euro's but with a self-invented world currency, backed by other currencies and liquid financial instruments. To blow away the first smokescreen, let's analyse the difference between the old Facebook e-cash or e-money with fiat currencies and the new Facebook libra, as distributed by Libra Association.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_OpLAiLK9S0xCOLn8WcmhoBQxRjVb1l5swjlkTpsSBX1zt0DqR3yPxXugEErWzulhskNIcOg90TvtyghEY5cr7IvS1jrxcGC_2X7SWC2vApy0QidpLoFxzgr4leae2hVy0Q8Ljg/s1600/Librakort.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="720" data-original-width="960" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_OpLAiLK9S0xCOLn8WcmhoBQxRjVb1l5swjlkTpsSBX1zt0DqR3yPxXugEErWzulhskNIcOg90TvtyghEY5cr7IvS1jrxcGC_2X7SWC2vApy0QidpLoFxzgr4leae2hVy0Q8Ljg/s400/Librakort.jpg" width="400" /></a></div>
What we can see is that Facebook seeks to move the fiat-currency of its e-money system out of its direct control and responsibility as an issuer. Facebook Payments Inc is currenlty the entity that is responsible and guards all the relevant rules with respect to working with the e-currency. But in the new construct Facebook Calibra is merely one validator that can use the Libra-system under open source rules. So we see the fiat-e-currency companies of Facebook stepping aside and a new Libra association entering the playing field. At the same time, the technology shifts from in-house proprietary systems to an open-source codebase in the hands of no one in particular.<br />
<br />
<table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; mso-border-alt: solid windowtext .5pt; mso-padding-alt: 0cm 5.4pt 0cm 5.4pt; mso-yfti-tbllook: 1184;">
<tbody>
<tr>
<td style="border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
<b><u>Top organisation<o:p></o:p></u></b></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<b><u>Facebook Inc<o:p></o:p></u></b></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<b><u>Facebook Inc<o:p></o:p></u></b></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
Type of asset<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
Virtual Currency<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
E-money<o:p></o:p></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
Denomination<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
Libra (self-invented)<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
Pound, Dollar<o:p></o:p></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
Issuer / Currency creation<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
Libra ‘association’<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
Facebook Ireland<o:p></o:p></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
Nature of issuing<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">No direct issuance to customers.<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Direct issuance to validators.<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Direct issuance to customers <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Direct redemption at issuer<o:p></o:p></span></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
Secondary market<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Secondary/tertiary market with reselling - disbursement
via <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">exchanges/other institutions <o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">No reselling of e-money.<o:p></o:p></span></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Fee structure for <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Reselling<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Unknown, but most likely the price for validators
is unequal to that for exchanges or customers.<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Issuance at par and redemption<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Of full amount minus some cost<o:p></o:p></span></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
Issuing without <o:p></o:p></div>
<div class="MsoNormal" style="line-height: normal;">
Customer demand<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Currency base may change <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">without actual demand of customers.<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Issuance as part of buy-transaction o</span>f the customer</div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
Reserve pool<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">100% reserve in <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">basket of currencies<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">100 % reserve in <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Denominated fiat currency<o:p></o:p></span></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
Technology<o:p></o:p></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Open Source community<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Proprietary <o:p></o:p></span></div>
</td>
</tr>
<tr>
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 97.55pt;" valign="top" width="130"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Control and use of technology<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Unknown contractual arrangements and
safeguards for entities in the value chain<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 153.55pt;" valign="top" width="205"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">All usage governed by contract with issuer and
financial law<o:p></o:p></span></div>
</td>
</tr>
</tbody></table>
<br />
<i>Bringing the currency to the public or ducking the issuance responsibilities?</i><br />
Of course one could frame the above shift of roles as bringing a currency to the public. Facebook is however dumping its core-responsibilities with respect to shaping and operating a currency-system and moving a lot of activities to an ill-equipped new Libra association with no track record at all.<br />
<br />
While Calibra states that it will comply with all relevant legislation, we can see that the actual information of the Libra Association in this respect is pretty thin. They issue a currency-like digital token/record but do not explain which legal regimes would apply. Also their actual claim as whether they are a not-for-profit organisation does not align fully with this <a href="https://twitter.com/BenParker140/status/1141032027371819011" target="_blank">twitter thread outlines that it is a regular company with wider statutes</a>.<br />
<br />
<i>If it looks/talks/qucks like a payments scheme, it is a ...?</i><br />
In payment terms - which is what Facebook says to be aiming for - the Libra Association is essentially a payment scheme. Such a scheme defines the rules for an ecosystem that wishes to transact electronically. Examples are <a href="https://usa.visa.com/dam/VCOM/download/about-visa/visa-rules-public.pdf" target="_blank">Visa </a>and <a href="https://www.mastercard.us/content/dam/mccom/global/documents/mastercard-rules.pdf" target="_blank">Mastercard</a>, organisations that need to abide with a lot of rules in order to avoid them becoming a place of illegal cartel-agreements on price and illegitimate contract terms to end users.<br />
<br />
With payment schemes we have huge and long <a href="http://europa.eu/rapid/press-release_IP-19-2311_en.htm" target="_blank">discussions and deliberations of price levels</a>. There is the obligation <a href="https://www.osborneclarke.com/insights/separation-of-card-schemes-and-processing-entities-what-you-need-to-know/" target="_blank">to ensure that there is no obligation to buy processing power from the scheme itself</a>. There are policy views and obligations that schemes should be interoperable and open. And then there is a mountain of rules that specifies how to use the brand and which technical criteria must be complied with in order to be allowed to connect to the system.We find very little of this in the current papers on the association.<br />
<br />
<i>What makes this payment scheme special, a payment-scheme-plus ?</i><br />
What sets Libra apart from Visa and Mastercard is that the association is effectively an issuer of the currency. This means a blurring of operational roles and scheme responsibilities, which is generally considered as a bad practice in governance terms. But what is most striking is that the membership rules are not geared towards controlling/monitoring and creating a safe and sound currency. We find no mention of specific prudential licenses or governance/quality certifications required for different roles under the scheme and as a member (or shareholder).<br />
<br />
The only thing we read is: we seek to expand, we want to incentivise the use of the token and for this we don't want the small players in the market. We aim for the big players with market power. We separate the wholesale participants from the retail participants (allowing for price upticks). And then - the devil is in the details - the customer pricing format is based on a FOMO-principle (do you want your transaction processed: please throw in some more gas).<br />
<br />
I am curious what reasoning Facebook and its founding members have had in this respect. The whole association setup is ostensibly aimed at market dominance, without proper governance safeguards and without any guarantees as to operational security and safety and soundness of the system. If I were a competition regulator I would jump at the opportunity to wait for the founders to sign the participation agreement and deliver a letter to their doorstep, next day, to start investigating the market abuse that might be at play here.<br />
<br />
<i>Governance claims and reality: a scheme is a supertanker without effective governance</i><br />
I have been reading all the statements on the public structure of the association with a lot of amusement. Facebook is claiming that it will bring the intellectual property into the public domain and of course all the members of the association have a voice. So this seems to be well arranged with room for consultation, discussion and changing course.<br />
<br />
The reality is completely different, as everybody in the banking sector knows. There is sufficient experience with clearing houses and associations (even with a relatively small number of shareholders) that are unable to essentially change course, once set up. Large associations like EPC, Visa, Mastercard, are effectively orphans without parents. Stakeholders are always irritated about the fact that these associations set their own course and associations always claim their shareholders have no vision. Bottom line: if you transfer your Libra-currency design into this domain, it is quite likely to be persistent. So don't expect any radical changes after this one is live; it will be gradual evolution from here onwards.<br />
<br />
<i>Not just a scheme for the payment instrument, but the unit of account (and a security as well)</i><br />
There is another difference between Libra and Mastercard and Visa that I would like to highlight. The regular payment schemes seek to transact efficiently, taking existing currencies/structures as a basis. But this scheme introduces a new currency itself and regulates this currency via the management of reserve assets. It demonstrates that the aim of Facebook is to design its own Facebook buck, push it into the public domain and then profit from the benefits of having their own unit of account in place, while hiding behind the members and the open source philosophy when things go wrong.<br />
<br />
A specific element in the scheme is that the unit of account is backed by a basket of currencies and financial instruments. Effectively this means that if you buy one Libra, you buy a couple of foreign currencies. Or put differently: you participate in an open ended money market / investment fund. And you use the digital representation of your participation in this fund as a means of payment.<br />
<br />
This is a bit of double work as this means the association and the scheme are not just subject to payments legislation but also to investments/securities legislation. But it is legally possible: the payment would legally not be a discharge of obligations via a financial payment, but via a payment in kind (currency basket).<br />
<br />
So what do we see here?<br />
<br />
The Libra association is a mere manager of the governance and operational arrangements and activities that come with using the virtual currency Libra and participating in the Libra scheme. This Libra scheme is a private and commercial arrangement which:<br />
- defines a unit of account for a new virtual currency: the Libra,<br />
- defines the asset mix that backs one currency unit,<br />
- lays out the distribution and management rules of the currency units and reserve funds,<br />
- lays out commercial rules and does a private placement to further promote the use of the Libra by giving them away (for free or at a discount).<br />
<br />
The Libra association itself will be steering future technical development and is charged with the project goal to move the whole infrastructure towards a permissionless setup. This is completely impossible (as these associations act with oil-tanker dynamics) but that brings us to the next smokescreen.<br />
<br />
<b>Smokescreen #2: Libra is not a blockchain, not a cryptocurrency but a digital virtual currency /financial instrument</b><br />
It was fascinating to see that the carefully crafted and prepared introduction of the Libra sought to position it as blockchain and as a cryptocurrency. This creates a lot of noise. Also, the use of similar words for different concepts and organisations is confusing.<br />
<br />
We should distinguish between:<br />
1- Calibra, the organisation, a 100 % subsidiary of Facebook, acting as a validator node,<br />
2- Calibra, the branded digital wallet developed by Calibra to carry the Libra virtual currency,<br />
3- Libra, the digital currency that will be in the Calibra wallet<br />
4- Libra, <a href="https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/TheLibraReserve_en_US.pdf" target="_blank">the reserve pool of assets</a> that backs the digital currency,<br />
5- Libra Core, the Network or '<a href="https://developers.libra.org/docs/the-libra-blockchain-paper" target="_blank">blockchain</a>' that forms the core operating technology for clients and validators,<br />
6- Move, the programming language developed for the Libra Network.<br />
7- Libra, <a href="https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/TheLibraAssociation_en_US-1.pdf" target="_blank">the association governing, promoting and executing the virtual currency system</a>,<br />
8- Libra members, big commercial players that may join the Libra association, provided that they are a validator.<br />
<br />
What struck me in the communication is the flagrant re-definitioning by Facebook of the concepts blockchain and cryptocurrency. Facebook really wants to be seen as doing some cryptocurrency stuff. But they don't. Just for fun I will be comparing the Facebook FAQ with the wisdom of the Wiki-crowd.<br />
<br />
<i>Libra is not a blockchain</i><br />
Facebook succeeds in not mentioning the facts that blockchains are, by definition and terminology, a chain of blocks, linked together. Wiki has it right.<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsKMJW1332hNoILl3FSSUi16LbAnPGZJrhrEdIsLseQtPuqbyqWQIH5EkrUO8tt7DaaxBzGk25Jp25Z5KEOgiToiNzEf2ptLUnykKvLtz9Ck2hVzpYfvMXsVKXCkoBCwIfpCx9KQ/s1600/Noblockchain.GIF" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="384" data-original-width="1018" height="150" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsKMJW1332hNoILl3FSSUi16LbAnPGZJrhrEdIsLseQtPuqbyqWQIH5EkrUO8tt7DaaxBzGk25Jp25Z5KEOgiToiNzEf2ptLUnykKvLtz9Ck2hVzpYfvMXsVKXCkoBCwIfpCx9KQ/s400/Noblockchain.GIF" width="400" /></a></div>
<br />
<i>What is a cryptocurrency exactly: native currency of an open blockchain</i><br />
Wiki states, that the decentralized control of cryptocurrencies works through distributed ledger technologies, typically a blockchain. Personally I would not have mentioned those ledgers as the blockchain is not so much a ledger as a journal (log roll of transaction entries). And apps are creating the ledger feeling for blockchains. But let's look at the wording in the image.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDqQUP32vICC-q4TNgaWD17YC5-DX3-vpPcYRBIGIp_OO3g2LJJYWB_OvvQvhDDcbIKln9NynZoUCKe2ApQcCsQEe37pE1F1nBQJeumXAJnGWDQs3ngBeSa_PZkFAPPh8Q-2EYCg/s1600/Nocryptocyurrency.GIF" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="445" data-original-width="1017" height="171" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDqQUP32vICC-q4TNgaWD17YC5-DX3-vpPcYRBIGIp_OO3g2LJJYWB_OvvQvhDDcbIKln9NynZoUCKe2ApQcCsQEe37pE1F1nBQJeumXAJnGWDQs3ngBeSa_PZkFAPPh8Q-2EYCg/s400/Nocryptocyurrency.GIF" width="400" /></a></div>
<br />
The wording of Facebook is interesting. It speaks of using cryptocurrency due to the use of strong crypto. This leaves out the issue that cryptocurrencies may be native to blockchains (as in chains of blocks). And then Facebook moves on to cryptocurrencies being built on blockchain technologies.<br />
<br />
Which is true of course, but if I use all the parts of an air plane to build a firmly grounded restaurant, this doesn't mean that my restaurant is still an operational air plane. It is built on air plane technology, but the wording matters. Facebook puts up a smoke screen here to position itself in the blockchain community.<br />
<br />
<i>Libra is not a cryptocurrency</i><br />
The funniest part of the Facebook FAQ was the mere statement that the Libra is a new cryptocurrency designed to have a stable and reliable value. Coming from a perspective where cryptocurrencies are inherent elements of open, truly decentralised permissionless blockchains, this is an interesting statement. It demonstrates that Facebook wishes to be a cryptocurrency but it isn't.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzWWnSHj9alW6zDWvDJPR3djhJtkEjk7uybOZSsCbOBl562lpKblAFtizTHDL3OCqDQzZwuSvDZyCATaJV0si2efl76UrtRmcLE_wi2yoWGyY_sbpDcnXx1NWQTVF0XrgMW37JkQ/s1600/def3.GIF" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="373" data-original-width="1006" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzWWnSHj9alW6zDWvDJPR3djhJtkEjk7uybOZSsCbOBl562lpKblAFtizTHDL3OCqDQzZwuSvDZyCATaJV0si2efl76UrtRmcLE_wi2yoWGyY_sbpDcnXx1NWQTVF0XrgMW37JkQ/s400/def3.GIF" width="400" /></a></div>
<br />
The text above also shows that Facebook has its eyes on the stablecoins that are around. These stablecoin are, in my view, privately issued currencies, with the goal of a fiat peg. The stable-'coin' is used a lot in the cryptoworld to facilitate fiat/crypto exchanges in times when the financial system is not online. The fact that this currency is used a lot in the cryptoworld, does however not make it a cryptocurrency in the terms of an inherent currency of an open permissionless blockchain.<br />
<br />
<u><i>Libra, what is it then, in regulatory terms?</i></u><br />
My conclusion, after quite some pondering and tweeting is the following.<br />
<blockquote class="tr_bq">
<span lang="EN-GB" style="color: #1f497d; font-family: "calibri" , "sans-serif"; font-size: 11.0pt; line-height: 115%;">Libra is a privately issued and distributed <b><u>digital and virtual ‘currency’</u></b>, that is
intended to function as a means of payment. <b><u>It is not a true currency</u></b> because its actual composition/counter value
is a basket of fiat-currencies and financial instruments. <b><u>It is not e-money </u></b>as the Libra is not ‘monetary value’. The
digital value qualifies <b><i><u>as a financial instrument</u></i></b> (a mini-participation
in an open ended investment fund) and is used in an open source<b><i><u> payment instrument</u></i>,</b> to be
used for payment and acquiring. Both payments and securities legislation apply,
as well as the relevant competition and consumer protection rules. </span></blockquote>
The Libra association is the scheme owner and scheme operator of the Libra virtual currency. This currency/investment can only be bought directly by members of the Libra association. Other entities or customers must revert to second tier players, exchanges or peer-2-peer applications. Technical development of applications is encouraged and rules to secure the application by contract or licensing seem to be absent.<br />
<br />
Due to the blending of scheme and operations, the Libra association cannot really be viewed as the beginning of a proper payment scheme. Functionality, pricing and membership rules make Libra and the Libra association an easy target for consumer/data protection and competition supervisors, bank supervisors and securities supervisors.<br />
<br />
<b>Smokescreen #3: Libra is not a charity exercise that seeks to operate a public good but a commercial enterprise</b><br />
A huge amount of effort has gone into convincing the public this week that Libra is all about helping the rest of the world. Getting more inclusive finance. Making payments faster, easier and such. It is striking that these statements mirror the claims that originally come from the Bitcoin community or from the Fintech community.<br />
<br />
Of course those claims strike a chord. People may well be fed up with their banks and the perception of banks with slow procedures and expensive fees for foreign payments are an easy target for PR-people who want to position their initiative in a friendly way to the public. Who doesn't want to take on the banks and improve the world.<br />
<br />
Commercially, the thinking of Facebook is most likely to be that it needs to counter the We-chat Pay dangers and all other Fintech movements that lead to easy in-app payments. Payments will increasingly be an afterthought and harvesting the data in those payments will allow for even higher ad revenues, as Facebook will see what works and what doesn't. Interestingly Facebook did not increase the speed of its current developments; it chose to move up the value chain, towards setting up its own currency and hoping that it will work as a unit of account (and may stay in the system for long).<br />
<br />
Of course, the move by Facebook is a big signal. But we must note that there are still also other players that could make the same move. Which would lead to some form of a duopoly (as with Mastercard and Visa) and the need to agree on interoperability or on open access to infrastructures of the big techs involved. I did not come across this notion a lot, so far.<br />
<br />
<i>The public good narrative: unbelievable coming from Facebook</i><br />
What struck me most, coming from Facebook as a centralised company that is not interested in respecting democracies and laws written by those democracies, is the sketch of opportunities in the White Paper. And do have a look at the phrasing on public good.<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCn-o-Gt1Mkkcr0KRZ9q6vYxFZJElqMca3hWwtsV2pSifiIOLW7nackVKQAKUN0_ujjKAhzn6Dk1gtKglnDxl3WTKSUQ7sa9y5EorVE2RmTIv-eCwpIse9UaKPQ8Us1W5wITy46Q/s1600/Opportunity.GIF" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="516" data-original-width="736" height="279" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCn-o-Gt1Mkkcr0KRZ9q6vYxFZJElqMca3hWwtsV2pSifiIOLW7nackVKQAKUN0_ujjKAhzn6Dk1gtKglnDxl3WTKSUQ7sa9y5EorVE2RmTIv-eCwpIse9UaKPQ8Us1W5wITy46Q/s400/Opportunity.GIF" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
Given that by now I hope to have convinced you that the design of the Libra association and its constituency is far below the usual standards to be expected from payment schemes, you can imagine that I was unable to reconcile these laudable beliefs with the actual proposition.<br />
<br />
If you truly wish to create a new public good, a new worldwide currency, it is not impossible to deliver this with private sector entities. There is a whole range of public policy theories (delivery of universal services or service of general interest) that can help out here. But putting the richest, biggest enterprises of the world in one room, to distribute a world currency/investment proposition without proper safeguards or recognition and qualification of the activities of the issuing association is not the way I would go about.<br />
<br />
<i>Facebook cloaking its plans in cryptoterms,but why? </i><br />
Let's face it. This whole complex open source, cryptocurrency story that Facebook has published is not necessary. If Facebook Payments Inc or Facebook Ireland wishes to change its currency mechanism towards a different setup it could do so itself. Why is there a need to involve other stakeholders with a trendy and hip storyboard on decentralisation, blockchains, cryptocurrencies and such?<br />
<br />
It can't be a money issue. Facebook has sufficient resources to fund the whole exercise itself. And the quality of the exercise could then convince other commercial partners to join. So why the need to step out of its digital currency issuing role itself?<br />
<br />
To me it is pretty clear that Facebook seeks to move up in our lives. Doing our financial business is not enough. It is all about entering our mind at a deep level. At the fiat currency level. We should think prices in terms of Libra, not in terms of fiat currency. And there is a good power reason for it. Because as long as Facebook uses digital fiat currencies it can be under the rule of the government that issues it. Now, by having a basket of currencies, Facebook can kick out currencies/countries if need be. State regulators and supervisors lose their power.<br />
<br />
In addition, Facebook chooses to limit its own role and hide behind am Swiss association, to cover the fact that they don't want to take the responsibilities that come with issuing a worldwide association. They are suckering/forcing partners into joining this programme, without alerting them to the obvious violations of competition rules that may arise. They leave out all mentions of safeguards and contractual arrangements that can aid in ensuring operational integrity for this worldwide currency. Rather they throw the technology in the public domain, knowing well that this means that it's use cannot be fully controlled.<br />
<br />
It is no surprise why politicians and regulators were keen to act. Their immediate response was that this was a further extension of an a-moral company that stops at nothing. As Maxine Walters outlined in the US, when asking Facebook to stop further development:<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbqhVd6KrpYsXdjQqnrqXaV4uVN4ZgEpsDhb4MpdEbpgLEJGLlXsFqN7cBeLHxqtadespAk06YLYxV6z9UlSc6Nf6STkAOnkLMxyUBJQptPXIbzsyKvXvm0lPmpmBQ2u32aIICaA/s1600/MWaters.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="504" data-original-width="1200" height="165" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbqhVd6KrpYsXdjQqnrqXaV4uVN4ZgEpsDhb4MpdEbpgLEJGLlXsFqN7cBeLHxqtadespAk06YLYxV6z9UlSc6Nf6STkAOnkLMxyUBJQptPXIbzsyKvXvm0lPmpmBQ2u32aIICaA/s400/MWaters.jpg" width="400" /></a></div>
<br />
<i>Reversing the statements to see what's hidden in plain sight: ruthless selfishness</i><br />
As a thought exercise I was wondering. If they claim that it is a blockchain and cryptocurrency, while essentially it isn't, shouldn't we also reverse the other statements to see what is truly happening here.<br />
<br />
I leave the result for you to ponder and thank you for bearing with me in this ultralong blog.<br />
Up next I expect blog 2 to be about EU-definitions and legislation.<br />
<br />
<blockquote class="tr_bq">
<b><span style="font-family: "georgia" , "times new roman" , serif;">THE THREAT</span></b><br />
<span style="font-family: "georgia" , "times new roman" , serif;">As we, as Facebook are in it strictly for our own goals, we intend to hide our true intentions and motivations so we can fool the community and our partners in the ecosystem to go along. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: "georgia" , "times new roman" , serif;">We believe that many more people should buy financial and identity services from our company specifically, even when doing so will come at a higher cost than the available alternatives. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: "georgia" , "times new roman" , serif;">We don't believe that people have an inherent right to control the fruit of their legal labour. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: "georgia" , "times new roman" , serif;">We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce for us in particular. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: "georgia" , "times new roman" , serif;">We believe that people will increasingly trust centralized forms of governance. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: "georgia" , "times new roman" , serif;">We believe that a global currency and financial infrastructure should not be designed and governed as a public good. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: "georgia" , "times new roman" , serif;">We believe that we don't bear a final responsibility ourselves to help advance financial inclusion, support ethical actors, and continuously uphold the integrity of the ecosystem.</span></blockquote>
<br />
<br />
PS. I have changed the definition on June-24, to reflect that the currency is a mini-investment fund which is used in an app/ecosystem that would qualify as a payment instrument. Definition blog will follow.Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-83365085185188783792019-06-14T09:29:00.001+02:002019-06-14T09:32:29.245+02:00FATF as in: Facebook As The Foe or Facebook As The Friend ? <div class="MsoNormal" style="line-height: normal;">
<span style="font-size: 14.6667px;">Dear Mr Billingslea, dear Members of the FATF and dear civil servants in the room,</span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;">As you are nearing the end of a very productive year I wish to commend you on your very hard and wise work of the last year. If we look back on the objectives that the President laid out for 2018-2019 we can see the many accomplishments of this year. It has been a very productive year and one that will be remembered for many years to come. Because you will define what FATF truly stands for. </span><br />
<br />
<span style="font-size: 14.6667px;">Of course there are some <a href="https://twitter.com/finhstamsterdam/status/1126769490518106112" target="_blank">commentators</a> that challenge the legitimacy of your work on virtual assets. They outline that your so called open-ended mandate is by definition constrained by the boundaries set by <a href="https://www.humanrights.ch/en/standards/un-treaties/" target="_blank">Human RightTreaties</a>, <a href="https://www.ohchr.org/EN/Issues/DigitalAge/Pages/DigitalAgeIndex.aspx" target="_blank">UN Resolutions</a>, <a href="https://www.law.cornell.edu/constitution/fourth_amendment" target="_blank">Fourth Amendments</a> or rulings of the <a href="http://curia.europa.eu/juris/document/document.jsf?text=&docid=186492&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=3801014" target="_blank">EU court ofJustice (Tele2)</a> or the <a href="https://www.supremecourt.gov/opinions/17pdf/16-402_h315.pdf" target="_blank">US Supreme Court (Carpenter)</a>. And they outline that effectively the <a href="https://moneyandpayments.simonl.org/2019/06/g20-and-fatf-should-not-infringe-on.html" target="_blank">FATF Standards are leading to a privacy infringement under those Human Rights agreements</a>. I leave those comments aside for now. Historians and judges may be the judge for that.</span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;">For now, I wish to draw your attention to a practical dilemma that you will be facing the upcoming week. The dilemma is: does FATF stand for Facebook As The Foe or Facebook As The Friend? </span><br />
<br />
<span style="font-size: 14.6667px;">The answer depends on your own view: which society do you wish to leave behind for your kids?</span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;"><u>FATF: Facebook As The Foe</u></span><br />
<span style="font-size: 14.6667px;">While you were looking out of the frame of libertarian misuse of virtual currencies for all kinds of criminal purposes, you may have forgotten to look out the other window: at bigtech players such as Facebook and Google. Widening your view is of particular relevance now that you are about to endorse a virtual asset recommendation that obliges names of citizens to be sent along with virtual asset transfers (one way or the other).</span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;">Let's take a closer look at Facebook. They have thrown the privacy hundreds of million people under the bus. They opened up their systems to developers and allowed mass scale harvesting of personal data to other companies. They have come under severe criticism for this. And they changed a lot of operations, moved people out and such, all in other to counter the criticism about their harvesting of data. Bottom line: they need to remove personal data or ensure that they have proper consent from citizens that are properly informed on the whereabouts of their personal data.</span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;">Their latest project is a cryptocurrency / virtual asset programme, with the naam Libra. It leads to the creation of a world currency, backed by a combination of assets. And Facebook will cooperate with other bigtech and Fintech players to make it happen. As the Wall Street Journal outlines:</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTqnasYjYM1wKnPeEhmhRvgPtoJzLkrqkrii5-LhRereva0gVemb4iJGnYsVniEcm_xbXvElCfk-aO8wZO9EYp7J9YtDUnh8M99hWXDKtyPIb7_XWLlZ7SHzVlBaikxZfyRQ1rBQ/s1600/Facebook.GIF" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="189" data-original-width="634" height="118" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTqnasYjYM1wKnPeEhmhRvgPtoJzLkrqkrii5-LhRereva0gVemb4iJGnYsVniEcm_xbXvElCfk-aO8wZO9EYp7J9YtDUnh8M99hWXDKtyPIb7_XWLlZ7SHzVlBaikxZfyRQ1rBQ/s400/Facebook.GIF" width="400" /></a></div>
<span style="font-size: 14.6667px;"><i><br /></i></span>
<span style="font-size: 14.6667px;"><i>FATF-virtual asset rule: cryponite to send and harvest personal data without caring about consent </i></span><br />
<span style="font-size: 14.6667px;">I am wondering if you have thought trough your recommendation on standards for virtual assets sufficiently. Are you aware that Facebook itself will become a huge Virtual Asset Service Provider? Are you aware that it is now soliciting other big tech companies to become verification nodes in their virtual asset programme? And are you aware this means they don't have to ask any consent from the users who use their coins, to add name information in or with the transaction (whichever way they see fit, as long as they oblige). And this information must also be shared with counterparts (if any) meaning that if I operate a verification node, I am sitting on the information as well? </span><br />
<br />
<span style="font-size: 14.6667px;">The unintended consequence of what you are doing with the virtual asset rules is that, in times of personal data as the economic fuel for society, you are handing out cryptonite to all kinds of private sector players that want to have a free pass for passing on and harvesting personal information. All kind of other companies may follow suit as the FATF-rule is really an easy tool in the box of companies that actively seek to engage in regulatory arbitrage to avoid privacy rules as much as possible. </span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;"><u>Facebook as the Friend....?</u></span><br />
<span style="font-size: 14.6667px;">The other alternative is that the FATF effectively sees Facebook as a friend. You are aware of the above consequence and view it as a necessary consequence that will be very helpful in capturing the criminals of the future. That would mean that with the FATF-rule you have deliberately chosen to marry with bigtechs.</span><br />
<br />
<span style="font-size: 14.6667px;">Now if I Imagine the biggest data-harvesting company in the world marrying the world-wide law enforcers in the world I must say I am sort of afraid to imagine what their kids will look like. This would be too big a confluence of private and public sector roles and it will have a desastrous impact on the world. Some may argue that we were already living in Orwells 1984, but with this rule you will have definitely sealed the deal. </span><br />
<br />
<span style="font-size: 14.6667px;">What you may just do when agreeing to this virtual asset rule, is outlaw all the citizens of their world. Their data are free for all to harvest and in the process you will ride along to see if you capture a terrorist every now and then. </span><br />
<br />
<span style="font-size: 14.6667px;"><a href="https://pure.uva.nl/ws/files/1737805/126131_thesis.pdf" target="_blank">Historic data</a> does show, by the way, that all the virtual transaction data will not really help as evaluations of the impact of the travel rule indicate that the number of crooks preventively caught in 15 years of its use can be counted on one or two hands. It is always other law enforcement info that gets you to detect them beforehand, never the transaction data. </span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;"><u>What will FATF stand for: wich kind of society do you leave behind?</u></span><br />
<span style="font-size: 14.6667px;">Will FATF stand for Facebook as the Foe and will you reconsider virtual asset article 7b?</span><br />
<span style="font-size: 14.6667px;">Or will FATF stand for Facebook as the Friend and will you outlaw all personal data of world citizens?</span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;">Next week the choice is up to you. I have a hunch you will be going for the Facebook is my Friend model. Because in your groupthink you may be driven to annihilate all kinds of perceived criminal evil even when the tools for doing so are ineffective. Or just beause your are inclined to do as is told and answer to call of your bosses as they said to approve the virtual asset rules. </span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;">Thereafter, you may end up seeing your choice annulled by judges. This may be the result of lengthy procedures or otherwise geopolitical incidents in which one of the kids of the marriage of FATF and Facebook will have turned evil. And then, each one of you in the room will have to answer towards its citizens, politicians, children and grandchildren: how did you not see this coming? </span><br />
<span style="font-size: 14.6667px;"><br /></span>
<span style="font-size: 14.6667px;"><u><b>Don't finalise the paragraph 7b text</b></u></span><br />
<span style="font-size: 14.6667px;">I call upon you to consider the above with an open mind and an open heart.</span><br />
<span style="font-size: 14.6667px;">Do the right thing: vote to re-consider or postpone finalisation of the pragraph 7b text. </span><br />
<br />
<span style="font-size: 14.6667px;">Postponing allows for more time to explore all impacts and consequences and have a further debate on what you wish the true acronym FATF to stand for.</span><br />
<br />
<span style="font-size: 14.6667px;">Simon Lelieveldt</span><br />
<br /></div>
Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-20806398502896835092019-06-09T13:42:00.001+02:002019-06-13T18:16:09.252+02:00G20 and FATF should not infringe on the human right to privacy by prescribing mass surveillance for virtual assets !Over the past weeks, I have been <a href="https://twitter.com/finhstamsterdam/status/1126769490518106112" target="_blank">sounding the alarm</a> as to the envisaged FATF-recommendations in the area of virtual assets. Essentially they require the private sector to build in a privacy leaking front-door in all blockchain applications, so that law enforcement officials in the whole world will have useful information already available nearby (rather than having to ask for it when need arises).<br />
<br />
While at first I merely looked at it technically, seeing it as a disproportional silly measure by regulators who don't understand blockchain technology, over the past weeks I have learnt that it could also be viewed as part of a larger debate on the human right to privacy. People sent me more information on this matter including this dissertation (<a href="https://pure.uva.nl/ws/files/1737805/126131_thesis.pdf" target="_blank">link: M. Wesseling: mustread!</a>).<br />
<br />
The dissertation outlines how a similar measure in the banking domain (the travel rule) was first rejected in US congress, to be adopted within weeks after the 9/11 attack. The dissertation also shows the mechanism of depolitization: making something a technical 'thingy' in order to avoid the true political debate on public interests that need to be balanced.<br />
<br />
<b>State vs citizens: police versus privacy </b><br />
What is at stake here is a political debate on the degree of surveillance measures that a society needs to prevent criminality versus the degree of human privacy and freedom that people need to live a dignified live in which they can communicate freely and are innocent until proven guilty (and not the other around).<br />
<br />
Let's have a close look at the two fundamental public policy issues at stake:<br />
<br />
<u>The human right to privacy in a digital age</u><br />
Under UN Resolution <a href="https://www.right-docs.org/doc/a-hrc-res-28-16/" target="_blank">RESOLUTION 28/16</a> (the right to privacy in the digital age), article 8.2 of the <a href="https://www.echr.coe.int/Documents/Convention_ENG.pdf" target="_blank">European Convention on Human Rights</a> and the EU Court decision on data retention (<a href="http://curia.europa.eu/juris/document/document.jsf;jsessionid=9ea7d2dc30d573c52441e12b44d0a94dfc5b5bdfc5ce.e34KaxiLc3qMb40Rch0SaxyKbN90?text=&docid=186492&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=165644" target="_blank">ECLI:EU:C:2016:970</a>) the <a href="https://www.echr.coe.int/Documents/Guide_Art_8_ENG.pdf" target="_blank">EU understanding</a> on mass surveillance of personal data of innocent persons is that it may very well constitute a violation of the right to privacy in cases where it is disproportional and no sufficient safeguards are in place.<br />
<br />
However, the human right to privacy is often not taken into account when developing anti-terrorist policies. Scientific <a href="https://www.wodc.nl/binaries/2689D_Summary_tcm28-372746.pdf" target="_blank">evaluations of the implementation of such policies</a> outline that social side effects, such as excessive reporting of transactions and privacy of citizens, (often) remain underexposed in public discussions. Similarly a<a href="https://www.rug.nl/research/portal/files/65647303/Complete_thesis.pdf" target="_blank"> recent dissertation in the Netherlands</a> clarifies that, when applying the EU Court of Justice criteria to the European Anti-Money Laundering Directive, 17 infringements of human rights can be identified.<br />
<br />
<u>Upcoming FATF-proposal to prevent fraud/crime/terrorism and apply broad rules to virtual assets</u><br />
This is exactly what is at stake with a recommendation that is phrased in paragraph 7b of an <a href="https://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html" target="_blank">interpretative note for Recommendation 15 of the FATF</a>.It requires all private sector entities to register and submit the names of the parties participating in a virtual asset transfer to all counterparts in the value chain. This is not based on suspicion of criminal behaviour but required as a standard data export for all use cases and customers transferring virtual assets.<br />
<br />
The virtual assets are defined as all non-regulated digital representations of value which may be transferred or held:<br />
<blockquote class="tr_bq">
‘..countries should consider virtual assets as “property,” “proceeds,” “funds”, “funds or other assets,” or other “corresponding value”.</blockquote>
<br />
As such the rule effectively requires private sector market players to develop a messaging system (and adapt internal systems) to make sure future blockchain applications also functions as a structure of mass surveillance. However, any law enforcement official may obtain the relevant information on a case-by-case basis with a proper legal warrant at the individual organisation involved in a virtual asset transfer. The proposed rule constitutes an unnecessary measure that brings personal data of innocent people into the public domain, without any further proper guarantees for its treatment.<br />
<br />
The rule has met with very heavy push back during a private sector consultation (in Spring 2019) due to its incompatibility with privacy laws and its unclear definition. The FATF members did not take this into account. Therefore, in the Netherlands, the NGO Privacy First joined the initiative of a group of virtual asset service providers (VBNL) to urgently request <a href="https://www.privacyfirst.eu/images/stories/financiele-privacy/20190523-VBNL-PrivacyFirst-letter-Hoekstra-FATF-AMLD5_English.pdf" target="_blank">the Dutch Ministry of Finance to not approve the proposal</a>. This has not lead to any further response.<br />
<br />
What disturbs me in the process, is that the private sector has effectively formulated an adapted wording which would balance the two public policy interest more properly (see the redacted statement in the graphic below). But FATF-officials and governments appear to ignore it.<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXwnNFeHYvE5qLTVJQ5zM0xNK2X3m2BByD9prfUmUoxNj_xu6sfiyVhgHXNnTEmhjEN5LZuJuCm6hXwbZtGASMkSucDHZ9iTFGaQMJ7QzIDhuJe9I9MugZ1MEPa2bGHw7-Hk00oA/s1600/fatfgif.GIF" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="453" data-original-width="887" height="202" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXwnNFeHYvE5qLTVJQ5zM0xNK2X3m2BByD9prfUmUoxNj_xu6sfiyVhgHXNnTEmhjEN5LZuJuCm6hXwbZtGASMkSucDHZ9iTFGaQMJ7QzIDhuJe9I9MugZ1MEPa2bGHw7-Hk00oA/s400/fatfgif.GIF" width="400" /></a><br />
<br />
<u>The public policy train moves on towards the G-20, without due process / democratic controls in place</u><br />
Right now, the process underway is one in which we will see all kind of <a href="https://news.bitcoin.com/g20-crypto-global-standards/" target="_blank">news reports</a> about the G20 Ministers of Finance discussing and deciding on virtual assets. We will see the FATF adopting its rule in their 16-20 June meeting. And then the G-20 heads of state adopting it in Osaka. There will be many news bulletins and spins outlining how important and good these steps are. And the FATF will be complimented for their laudable work in this area. But don't be fooled by the spinning.<br />
<br />
It is important to note that there has not been a sufficient and proper political debate on the balance between human rights and anti-terrorism measures. And as we already have Human Right Treaties in place outlining that mass surveillance and retaining of data of innocent people are a human right infringement, we can only conclude that our Ministries of Finance and Governments are about to make a historical and major mistake that violate their own commitments to privacy. There is no reason to boast about that.<br />
<br />
<u>Are all governments and private sector players benevolent forever?</u><br />
What is lacking is the fundamental helicopter view on the relation between states and their people. For this I refer to yesterdays blog post, <a href="https://moneyandpayments.simonl.org/2019/06/zimmermans-relevance-for-discussions-on.html" target="_blank">outlining the fundamental considerations that led Phil Zimmerman to develop encryption tool Pretty Good Privacy for the people</a>:<br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #222222; font-family: "arial" , "tahoma" , "helvetica" , "freesans" , sans-serif; font-size: 13.2px;">"Zimmerman outlined one very significant theme during his speech. He noted that the assumption of a continuous benevolent government is not realistic. Governments come and go, some may be more democratic than others and even strong democracies may turn into dictatorships, depending on the circumstances. It is therefore important to design society, governments and the technologies that we use to manage society, guarantee that a balance exists between the powers of government and those of the public. The public, the people should always be allowed to remain digitally out of sight of government. Such a robust structure would be important to ensure a fair treatment of the people over a long period of time."</span></blockquote>
<span style="background-color: white; color: #222222; font-family: "arial" , "tahoma" , "helvetica" , "freesans" , sans-serif; font-size: 13.2px;"><br /></span>
It is too bad, that our governments appear to be unable to properly balance the political interests at hand. Reality is that we do not live in paradise: both governments and market players may have ill intentions and we should be open to that fact of life. In this respect it is clear that a range of private sector players provided more than one elegant suggestion to help with the criminal perspective, while still protecting it. Why would there be a reason to ignore this?<br />
<br />
I do understand the dynamics however. In the words of Ian Grigg:<br />
<blockquote class="tr_bq">
<i>'It's hard to have a serious discussion on terrorism. It’s too much of a magic password that shuts down critical thinking.'</i></blockquote>
<br />
What's up next is, that we will need to resort to national and supranational courts to re-address this issue and correct our governments. Because like it or not, the future of our democracies is at stake.<br />
<br />
<br />
------<br />
And a video on this same topic here, for those who are more into the looking/listening mode:<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<iframe width="320" height="266" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/DEVQO7QOs20/0.jpg" src="https://www.youtube.com/embed/DEVQO7QOs20?feature=player_embedded" frameborder="0" allowfullscreen></iframe></div>
<br />
<br />Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-13588477127728347762019-06-08T20:08:00.001+02:002019-06-08T20:47:55.836+02:00Zimmermans' relevance for discussions on human rights and ICT-security surveillance<br />
<div class="MsoNormal">
If we look
at economic and social risks of new technologies, outsiders will often
immediately fall into the trap of considering this to be about the illegal use
of peer-2-peer networks, applications such as bitcoin etc, for socially
unwanted activities or even criminal activities. From there on it is a small
step to forbid such activity, regulate it, overregulate it. But we should take
a wider perspective here.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;">For me,
Phil Zimmerman was the person who made a lasting impact, when he explained,
somewhere in the late 1990s, during a speech at a digital money conference his
considerations behind developing Pretty Good Privacy (see also his explainer himself: <a href="https://www.philzimmermann.com/EN/essays/WhyIWrotePGP.html" target="_blank">Why I Wrote PGP</a>). His argument was mainly
that the new digital society has to be built in such a way that it guarantees a
situation in which a people are still able to communicate and act in way which
is not invaded or controlled by government tools/techniques. Whereas the old analogue
world would allow the people smart analogue ways of creating their own spaces
for communicating and fooling government with fake analogue id's and such, it
would be much harder to do this in a digital world. Hence the need for a
peer-2-peer simple mechanism as Pretty Good Privacy. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;">Zimmerman
outlined one very significant theme during his speech. He noted that the
assumption of a continuous benevolent government is not realistic. Governments
come and go, some may be more democratic than others and even strong
democracies may turn into dictatorships, depending on the circumstances. It is
therefore important to design society, governments and the technologies that we
use to manage society, guarantee that a balance exists between the powers of
government and those of the public. The public, the people should always be
allowed to remain digitally out of sight of government. Such a robust structure
would be important to ensure a fair treatment of the people over a long period
of time.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;">It is clear
that this requirement: to allow for and to actually create areas where the
government cannot see what happens means that those areas are scary for
regulators. Will they facilitate crime by doing so? Perhaps. Will they allow
for huge pockets of creativity? Certainly ! But it will be the strong
governments that are able to allow this. They will act from a position of
strength and not be afraid. The weak governments, or the scary governments, or
the ill-intending governments will seek to monitor everything and control all
digital activities. This will certainly fail. But while doing so, they may instil
tools that are very dangerous tools in the hand of governments when they turn
from benevolent to evil. It will tilt the balance towards a situation that
ill-intending governments can no longer be overturned by a social revolution. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;">There is no
need for governments to be afraid of technological progress in the hands of the
people. It is a good thing, to be cherished and to be allowed. The simple labelling
of such activity as possibly criminal is the wrong frame. The reverse is also
wrong: regulators with good intentions are not by definition tools in the hands
of dictators. The right frame is: dictators exist just as criminals. Society
should ensure that neither of these can become too powerful due to
technological of legal measures and it is for this reason that we need to
balance our human rights to privacy with the goal to prevent criminality. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;">Finding
this balance is not easy but over the last weeks we have witnessed too many occasions
where governments seem to go to far. <a href="https://www.ft.com/content/ad765972-87a2-11e9-a028-86cea8523dc2" target="_blank">German police wanting access to home devices</a>. <a href="https://moneyandpayments.simonl.org/2019/05/fatf-and-eu-need-to-fundamentally.html" target="_blank">The FATF-ruleon surveillance for virtual assets</a>. <a href="https://newamericadotorg.s3.amazonaws.com/documents/Coalition_Letter_to_GCHQ_on_Ghost_Proposal_-_May_22_2019.pdf" target="_blank">Ghost accounts into Whatsapp</a>. <a href="https://spcommreports.ohchr.org/TMResultsBase/DownLoadPublicCommunicationFile?gId=23851" target="_blank">Giving your social media handles when entering the US</a>. We should not let ourselves be
caught in this wrong direction over intrusive government behaviour. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;">There is a
very legitimate reason to develop and create new technologies that safeguard
the public and it is a pity that many policy makers in the world may not have
been hearing the clear message that Phil Zimmerman sent them. They really could
do with open their minds more. So for them I’m embedding this video. Just to be
able to learn from history.</span><br />
<span lang="EN-GB" style="mso-ansi-language: EN-GB;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/LI78ttpRdr8/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/LI78ttpRdr8?feature=player_embedded" width="320"></iframe></div>
Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-48905037032938214332019-05-09T15:13:00.002+02:002019-05-14T20:39:13.688+02:00FATF and EU need to fundamentally rethink their approach to virtual assets/currencies...<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ2sfr9CT39Z-buv0C14QXZ0kcvOgyOKeitBdxBNWBBSVbX3piW7BEJbqSVaGTYMGRNS9ka_uMBdznvm_tM-0h4TcbgRWEvNGA7vzqgFnIWk02zKOY7EST4kUAetA7_vlloQJWmg/s1600/FATF.JPG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="276" data-original-width="320" height="172" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ2sfr9CT39Z-buv0C14QXZ0kcvOgyOKeitBdxBNWBBSVbX3piW7BEJbqSVaGTYMGRNS9ka_uMBdznvm_tM-0h4TcbgRWEvNGA7vzqgFnIWk02zKOY7EST4kUAetA7_vlloQJWmg/s200/FATF.JPG" width="200" /></a></div>
Virtual currencies are on the radar of regulators for quite some time. Yet it is clear that they still struggle with definitions (which always happens when new technologies arise). The FATF is a key example now that they <a href="https://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html" target="_blank">are seeking to harmonise international guidelines for applying FATF-rules to the crypto-world</a>.<br />
<br />
In this post I will look at some of the issues at stake and explain why the FATF-exercise requires a lot more time and thinking before the FATF (or EU) move forward. Do note that this is a longread, more geared to specialists in the field, than the general public.<br />
<br />
For the public it boils down to this. The US is pushing all countries in the world to a situation where with each virtual or crypto transaction, your information needs to be distributed (by definition) to other players in the value chain.<br />
<br />
But as the crypto definitions in countries diverge (and the FATF-definition is ill defined, potentially covering everything in the world), the only sensible thing to do is to stick with the local definitions of crypto-assets and to demand transaction information to be stored locally at the point of transaction. Any law enforcer wishing access to that information should thus approach the relevant local authority for that information.<br />
<br />
Apart from this legal argument, we must acknowledge the recent regime changes in the world. It is by no means clear that countries that used to obey the law and follow the rule of law, will do so in the future. Thus, foreign law enforcers may become tools in the hands of local undemocratic rulers.<br />
<br />
That is an additional argument that requires the EU (but also the FATF itself) to avoid the situation that a local law enforcer in an undemocratic country can get EU data by harvesting its home companies data for the EU-info, without having an appropriate legal warrant under EU-rules.<br />
<br />
And now for the longread part of it...<br />
<br />
<u>Definitions: always tough</u><br />
Back in 2012, the <a href="https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf" target="_blank">ECB </a>had a hard time <a href="http://moneyandpayments.simonl.org/2012/11/the-ecb-report-on-virtual-currency.html" target="_blank">grasping the concept of cryptocurrencies</a>. They used the fact whether or not virtual currencies were regulated as their guiding principle:<br />
<i>A virtual
currency can be defined as a type of unregulated, digital money, which is issued and usually
controlled by its developers, and used and accepted among the members of a specific virtual
community.</i><br />
<i><br /></i>
The US regulator (<a href="https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf" target="_blank">FINCEN</a>) chose the following approach in 2013:<br />
<i>In contrast to real currency, “virtual” currency is a medium of exchange
that operates like a currency in some environments, but does not have all the attributes of real
currency. In particular, virtual currency does not have legal tender status in any jurisdiction.
This guidance addresses “convertible” virtual currency. This type of virtual currency either has
an equivalent value in real currency, or acts as a substitute for real currency. </i><br />
<br />
FINCEN then applied the money transmitter laws in an extensive way to bring exchanges of virtual currencies into their supervisory remit.<br />
<br />
Later on, the <a href="https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf" target="_blank">ECB changed its definition</a> to:<br />
<i>For the purpose of this report, it is defined as a digital representation of value, not issued by a
central bank, credit institution or e-money institution, which in some circumstances can be used
as an alternative to money. </i><br />
The EU stance remained that cryptocurrencies did not conform with definitions of funds and such in the EU legislation, hence their exchange and use was not regulated as such. Of course the integrity and consumer risks were identified and warned for.<br />
<i><br /></i>
In the FATF-context (2015) we read:<br />
<i>Virtual currency is a digital representation of value that can be digitally traded and functions as
(1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not
have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment)6 in
any jurisdiction. It is not issued nor guaranteed by any jurisdiction, and fulfills the above functions
only by agreement within the community of users of the virtual currency. </i><br />
<i><br /></i>
While these definitions may seem to work at first sight, we still need some creativity to determine the boundaries of these virtual currencies. Essentially it is possible to bring any loyalty point scheme under these definitions, as they do not use a subject based qualification to determine what exactly virtual currencies are.<br />
<br />
At that point in time, where the focus was mostly on payments and such, <a href="https://web.archive.org/web/20150817103841/http://www.wcl.american.edu/journal/lawrev/46/leli.html" target="_blank">using the experience we had with e-money definitions</a>, I suggested a framework based on objects of the digital values at hand:<br />
<br />
<table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="background-color: white; border-collapse: collapse; border: none; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><tbody>
<tr><td style="border: 1pt solid windowtext; padding: 0cm 5.4pt; width: 116.35pt;" valign="top" width="155"><div class="MsoNormal">
<br /></div>
</td><td style="border: 1pt solid windowtext; padding: 0cm 5.4pt; width: 123.8pt;" valign="top" width="165"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">User cannot buy tokens at all (loyalty-type)</span></div>
</td><td style="border: 1pt solid windowtext; padding: 0cm 5.4pt; width: 104.1pt;" valign="top" width="139"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">User earns tokens and can buy additional (hybrid of loyalty/payment)</span></div>
</td><td style="border: 1pt solid windowtext; padding: 0cm 5.4pt; width: 120.15pt;" valign="top" width="160"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">User buys and sells tokens</span></div>
<div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">(payment-type)</span></div>
</td></tr>
<tr><td style="border: 1pt solid windowtext; padding: 0cm 5.4pt; width: 116.35pt;" valign="top" width="155"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Tokens used in digital issuer-domain only</span></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 123.8pt;" valign="top" width="165"><div class="MsoNormal">
<br /></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 104.1pt;" valign="top" width="139"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">World of Warcraft</span></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 120.15pt;" valign="top" width="160"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">World of Warcraft</span></div>
<div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Lynden Dollar</span></div>
</td></tr>
<tr><td style="border: 1pt solid windowtext; padding: 0cm 5.4pt; width: 116.35pt;" valign="top" width="155"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Tokens used in digital or physical issuer-domain only</span></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 123.8pt;" valign="top" width="165"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Starbucks</span></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 104.1pt;" valign="top" width="139"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Nintendo Points</span></div>
<div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">-Digital Payment loyalty schemes for single retailers</span></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 120.15pt;" valign="top" width="160"><div class="MsoNormal">
<br /></div>
</td></tr>
<tr><td style="border: 1pt solid windowtext; padding: 0cm 5.4pt; width: 116.35pt;" valign="top" width="155"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Tokens used at other entities than the issuer</span></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 123.8pt;" valign="top" width="165"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Frequent Flyer Programmes</span></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 104.1pt;" valign="top" width="139"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Frequent Flyer Programmes</span></div>
</td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; padding: 0cm 5.4pt; width: 120.15pt;" valign="top" width="160"><div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">Bitcoin,</span></div>
<div class="MsoNormal">
<span lang="EN-US" style="font-size: 11pt;">e-money on mobile phone's</span></div>
<div>
<span lang="EN-US" style="font-size: 11pt;"><br /></span></div>
</td></tr>
</tbody></table>
<br />
I think it would be fair to say that, while we pretend to have solved the application of crypto-legislation to the payment-type currencies, we actually haven't truly done so. There are still classification issues pending, but they may have appeared to be too irrelevant to matter,<br />
<br />
<u>Enter: ICO's and token frameworks</u><br />
The next stage however was the widening of the blockchain concept, the application of crypto to generic tokens and the use of tokens as a form of share, security or other representation of objects, value, cash flows. This leads to a big confusion all around the world whether or not to view some tokens as security tokens, utility tokens and such. So, while our first definition already had flaws, we chose a new wording to cover this brave new world: crypto-assets or virtual assets.<br />
<br />
As ESMA noted in their <a href="https://www.esma.europa.eu/press-news/esma-news/esma-highlights-ico-risks-investors-and-firms" target="_blank">warning on ICO's</a> at the time:<br />
<i>Where ICOs qualify as financial instruments, it is likely that firms involved in ICOs conduct regulated investment activities, in which case they need to comply with the relevant legislation.</i><br />
So the essential discussion of application of financial law was left to local supervisors interpretations and definition of financial instruments.<br />
<br />
The definition-side remained quite weak, with crypto-assets being loosely described as:<br />
<i>Crypto-assets are a type of private asset that depends primarily on cryptography and
Distributed Ledger Technology (DLT). There are a wide variety of crypto-assets.
Examples of crypto-assets range from so-called cryptocurrencies or virtual currencies,
like Bitcoin, to so-called digital tokens issued through Initial Coin Offerings (ICOs). Some
crypto-assets have attached profit or governance rights while others provide some
consumption value. Still others are meant to be used as a means of exchange. Many
have hybrid features. </i><br />
<br />
ESMA noted then that there were many variations and that it was not necessary to regulate all forms of crypto-assets. In 2019 they <a href="https://eba.europa.eu/documents/10180/2545547/EBA+Report+on+crypto+assets.pdf" target="_blank">published an updated analysis</a> with still a very weak definition of crypto-assets:<br />
<i>Crypto-assets are a type of private asset that depend primarily on cryptography and distributed
ledger technology as part of their perceived or inherent value. A wide range of crypto-assets exist,
including payment/exchange-type tokens (for example, the so-called virtual currencies (VCs)),
investment-type tokens, and tokens applied to access a good or service (so-called ‘utility’ tokens).</i><br />
<br />
In their report they distinguish between payment, investment and utility token, to immediately outline that this distinction does not cover everything. So the definition issue remains as well as the question: which type of digital token falls under which type of regulation. Hence the EU is in need of more EU clarity on the subject.<br />
<br />
On the other side of the ocean, the <a href="https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets" target="_blank">SEC has further fleshed</a> out how to interpret generic financial sector rules to digital asset issuance/use. In a long awaited guidance note the answer ends up being: it depends on the way you structure the functionality of the token/asset and the use between investors and issuer. So depending on those features, it may well be a regular financial instrument and facilitating trading may constitute a regulated business of operating an exchange.<br />
<br />
<u>The FATF-approach: hammering financial services law into hardly defined virtual assets</u><br />
In essence, the idea of the FATF is now to make sure all crypto-related business is covered in a layer of regulation that at the least ensures proper KYC and AML/CTF rules. As such, this can be appreciated and understood as a recognition of the fact that cryptocurrencies and crypto-assets are here to stay. If we bring the sale of high-value items such as diamonds or gold watches under the FATF-KYC/AML remit, it makes sense to also do so for digital goods/assets/cryptocurrencies (whichever legal status they have).<br />
<br />
We do have a problem however, which is that the definition used by <a href="https://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html" target="_blank">FATF, since October 2018</a>, is still shaky:<br />
<i>A virtual asset is a digital representation of value that can be digitally traded, or
transferred, and can be used for payment or investment purposes. Virtual assets
do not include digital representations of fiat currencies, securities and other
financial assets that are already covered elsewhere in the
FATF Recommendations. </i><br />
<i><br /></i>
This definition is so wide, that the FATF needs to explain:<br />
<i>The FATF emphasises that virtual assets are distinct from fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the money of a country that is designated as its legal tender.</i><br />
<br />
The further definitions of virtual asset service provider clarify the intent of the FATF-definition: they wish to cover both former virtual currencies and the ICO area and use a very broad definition to describe virtual asset service providers. These are companies that for a business conduct:<br />
<i>i. exchange between virtual assets and fiat currencies; </i><br />
<i>ii. exchange between one or more forms of virtual assets; </i><br />
<i>iii. transfer of virtual assets; </i><br />
<i>iv. safekeeping and/or administration of virtual assets or instruments
enabling control over virtual assets; </i><br />
<i>v. participation in and provision of financial services related to an issuer’s
offer and/or sale of a virtual asset</i><br />
<br />
These definitions are very shaky grounds to use. One particular troublesome issue is that the virtual asset definition has a negative part: it does not cover currencies, securities and other financial assets that are already covered elsewhere in the FATF-recommendations. It is a catch all phrase that brings all loyalty points in the world under the FATF-remit. Now, the FATF will of course outline that that was not their intent, but as soon as you devise a crypto-based loyalty scheme, who is going to decide?<br />
<br />
And taking it one step further: if I convert my multilevel marketing scheme into digitally represented agreements on a blockchain, do these new tokens qualify as a contract (not covered) or as their value and virtual assets? And how does this interpretation play out in the US vs the EU legislative context?<br />
<br />
I am certain there is a host of applications/use cases where we will find the FATF definitions being not suitable for use. How about CO2-emission rights. World of Warcraft-tools. Shared ownership of my house or my bycicle. I would urge the FATF to do some more thinking in that respect. The negative catch-all in a definition (it is a virtual asset when all other definitions in our recommendations fail) is just not good enough.<br />
<br />
I can only commend the FATF on one point however. The positive thing about the definition is that it speaks of representation of <u><b>value</b></u>. This implies a monetary or self-invented value/currency. It does not state that it is about the representation of physical assets or objects (such as real estate). Or that value can also be understood to consist of anything in the real world, to which value can be attributed (ie. everything).<br />
<br />
<u>Applying FATF-money transmission rules to crypto-assets: technicalities!</u><br />
Right now the F<a href="https://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html" target="_blank">ATF has closed its public consultation on applying the money transmission rules to crypto-assets</a>. They are hammering a payments-network idea onto cryptocurrencies and crypto-assets alike to not just demand identification and transaction monitoring. The idea is to also apply the addition of originator and beneficiary into crypto-transactions:<br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #333333; font-family: "calibri" , sans-serif; font-size: 14px;">(b) R.16 – Countries should ensure that originating VASPs obtain and hold required and accurate originator information and required beneficiary information</span><a href="https://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html#Two" style="background: 0px 0px rgb(255, 255, 255); box-sizing: border-box; color: #0090b4; font-family: Calibri, sans-serif; font-size: 14px; text-decoration-line: none;"><span style="box-sizing: border-box; font-size: 10.5px; line-height: 0; position: relative; top: -0.5em; vertical-align: baseline;">2</span></a><span style="background-color: white; color: #333333; font-family: "calibri" , sans-serif; font-size: 14px;"> on virtual asset transfers, <b><u>submit the above information to beneficiary VASPs and counterparts (if any)</u></b>, and make it available on request to appropriate authorities. It is not necessary for this information to be attached directly to virtual asset transfers. Countries should ensure that beneficiary VASPs obtain and hold required originator information and required and accurate beneficiary information on virtual asset transfers, and make it available on request to appropriate authorities. Other requirements of R.16 (including monitoring of the availability of information, and taking freezing action and prohibiting transactions with designated persons and entities) apply on the same basis as set out in R.16</span></blockquote>
<br />
Where the approach worked in 2001 in a world where a payment was a payment, funds are funds and wire transfers are wire transfers how can it work in a world where fundamentally the core definition of virtual asset or crypto-asset is as vague as it is in EU and the US?<br />
<br />
The whole exercises strikes me as a hasty effort, given that the authors have not noticed that also the interpretative note for Recommendation 16 should be changed to include virtual assets (exempting intra-VASP payments and e-commerce virtual currency payments from the scope). And it is clear that the US is driving the FATF to adopt the above change hastily - and without solid analysis - by June 2019.<br />
<br />
To me, there is only one logical conclusion: in the decentralised world of virtual assets, with jurisdictions each applying different boundaries to crypto-stuff, there is no sufficiently harmonised basis to enforce the attachment of data to each transaction. Requiring service providers to hold the info and make it available by request is not a problem, but sending it out as we did with the former FATF7-rules is impossible due to the patchwork of diverging definitions.<br />
<br />
In my response to the FATF-consultation I have outlined this problem:<br />
<h3>
<i><span style="font-size: small;">In addition I would like to note that the divergent legal status of virtual assets (considering its wide definition) in different countries may have the consequence that under some local laws the transfer is not financial in nature and will not be covered under the financial legislation and AML/TF frameworks. It is possible that a sufficient legal basis is lacking in some jurisdictions to apply the crossborder wire transfer regime to such non-financial transactions and that data protection regulations take prevalence. This could be solved by applying the domestic wire transfer regime to transfers of virtual assets, regardless of their potential cross-border nature. The further application of this regime on the domestic level can then be geared to the specific legal qualifications for virtual assets in that specific jurisdiction.</span></i></h3>
My proposal is to follow the most efficiënt way. Strike out the part that says: <span style="color: #333333; font-family: "calibri" , sans-serif; font-size: 14px;"><u style="font-weight: bold;">submit the above information to beneficiary VASPs and counterparts (if any)</u><span style="background-color: white;"><u style="font-weight: bold;">.</u></span></span> It is simply not proportional and economically sensible to demand as the FATF to include privacy-sensitive information in crypto-transactions. Officers can can have access by asking and demonstrating lawfulness of the request via international channels. But the day and age of using local tricks and harvesting local companies for EU-data should be over.<br />
<br />
The area of digital assets, virtual assets is so ill-defined that the FATF cannot claim a full competency, as the legal basis in a number of jurisdictions will not be there. We should also keep in mind that the catch all definition - not elsewhere regulated under these FATF-rules - is still written under from the FATF role of being <u><b>Financial </b></u>Action Task Force, focusing on financial industry and financial services as the main objective. So if my home country defines certain digital goods as digital goods and not in scope of crypto legislation, that to me would be the end of the remit for the FATF (and it would remain out of scope of the catch-all clause as well).<br />
<br />
So much for the technicalities.<br />
<br />
<u>Applying FATF-money transmission rules to crypto-assets: geopolitics</u><br />
We should recognize that we are in a different moment in time than in 2001, when the FATF-7 rules were introduced. At that point in time the US was a beacon for democracy and rule of law. But it isn't any more.<br />
<br />
It's role became fuzzy when it turned out that US law enforcers had used US based servers of EU companies (Swift) to get hold of EU-data. And this made the EU sensitive to the protection of its citizens against unwarranted overly ambitious law enforcing in other countries.<br />
<br />
We should again be sensitive. The EU, but also the FATF, also have an obligation to protect their citizens from unduly harassment and intrusion by law enforcement authorities. And creating tons of data outside the consent-scope of the citizen does not sound like a good protection at all.<br />
<br />
Right now, we can witness around the world, a<a href="https://www.hrw.org/sites/default/files/supporting_resources/hrw_world_report_2019_etr_0.pdf" target="_blank">n increase in countries with all kinds of 'strong leaders' </a>that violate human rights agreements, do not obey the rule of law, that are involved in money laundering schemes, do not listen to lawful requests of their constituents and ignore climate agreements.<br />
<br />
I think the EU has a duty to not cooperate with implementation of so-called FATF-requirements when it is clear they are increasingly unable to protect the privacy and guarantuee the lawfulness of the data exchange. Requesting other states to go get the data (and ensure that it is proportional) is a better way forward.<br />
<br />
<u>In sum: improve definitions and reconsider the worldwide distribution of transaction data for virtual assets/currencies</u><br />
While I think that FATF should fully reconsider its definitions and redo its homework, this virtual-asset momentum and this train that is being pushed by the US may be rolling too fast to stop it. So as a stop-gap one could propose to eliminat 7b or at least strike out the distribution line:<br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #333333; font-family: "calibri" , sans-serif; font-size: 14px;">(b) R.16 – Countries should ensure that originating VASPs obtain and hold required and accurate originator information and required beneficiary information</span><a href="https://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html#Two" style="background: 0px 0px rgb(255, 255, 255); box-sizing: border-box; color: #0090b4; font-family: Calibri, sans-serif; font-size: 14px; text-decoration-line: none;"><span style="box-sizing: border-box; font-size: 10.5px; line-height: 0; position: relative; top: -0.5em; vertical-align: baseline;">2</span></a><span style="background-color: white; color: #333333; font-family: "calibri" , sans-serif; font-size: 14px;"> on virtual asset transfers, <u><strike><b>submit the above information to beneficiary VASPs and counterparts (if any)</b>,</strike></u> and make it available on request to appropriate authorities. It is not necessary for this information to be attached directly to virtual asset transfers. Countries should ensure that beneficiary VASPs obtain and hold required originator information and required and accurate beneficiary information on virtual asset transfers, and make it available on request to appropriate authorities. Other requirements of R.16 (including monitoring of the availability of information, and taking freezing action and prohibiting transactions with designated persons and entities) apply on the same basis as set out in R.16</span></blockquote>
The FATF-proposal is disproportional, technically unsound and uneconomic. We'd better store the citizens data locally and ensure distribution on piecemeal basis, based on solid legal grounds, only when there is a true virtual asset under local definitions.<br />
<br />
To the EU I ask to protect my reasonable concerns as a private citizen and not implement the proposal that comes out, until it ensures that my data stay local where they are and are not distributed at large to possibly evil states, dubious countries and their law enforcers.<br />
<br />
The latter holds particularly true when we can observe that the chair of the FATF, the US Treasury Secretary, <a href="https://www.rollcall.com/news/congress/mnuchin-rejects-neals-request-trump-tax-returns" target="_blank">is not living up to his national constitutional obligations to comply with the US law himself</a>.<br />
<br />
<br />
PS. I noted that the interpretative note to recommendation actually also holds an additional new definition, apart from the main text:<br />
<span style="background-color: white; color: #333333; font-family: Calibri, sans-serif; font-size: 14px;">1. For the purposes of applying the FATF Recommendations, countries should consider virtual assets as “property,” “proceeds,” “funds”, “funds or other assets,” or other “corresponding value”. Countries should apply the relevant measures under the FATF Recommendations to virtual assets and virtual asset service providers (VASPs).</span><br />
<br />
<span style="background-color: white; color: #333333; font-family: Calibri, sans-serif; font-size: 14px;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-23430056620691157142019-01-08T16:37:00.005+01:002019-01-08T16:56:31.038+01:00So what's up with the Google-licensesLast weeks, we hear all kinds of stories on the Google-license, so let's have a closer look.<br />
<br />
<i>Google already has a license since 2007</i><br />
Most people forget this, but the earliest register entry for Google dates back to 2007 for E-money, and was handed out to Google Payment Limited in London. I <a href="http://moneyandpayments.simonl.org/2007/03/google-moving-in-with-e-money-license.html" target="_blank">blogged about it</a> then, and since then we could see a <a href="http://moneyandpayments.simonl.org/search?q=google" target="_blank">Google Wallet in the works, Google bucks</a>. The register of the FCA/FSA still has the <a href="https://register.fca.org.uk/ShPo_FirmDetailsPage?id=001b000000Mg8TgAAJ" target="_blank">entry here, demonstrating that it was effective until 19/5/2011</a>. The brand name in the register is for Google-checkout.<br />
<br />
<i>Passporting</i><br />
Then from 19/5/2011 onwards there is the <a href="https://register.fca.org.uk/ShPo_FirmDetailsPage?id=001b000000m4IWpAAM" target="_blank">next register entry</a> (with the register later being handed over to FCA by 31st of March 2013). The register entry is still for e-money with passports to other countries. These passports date from 18-5-2011 as our <a href="https://www.dnb.nl/toezichtprofessioneel/openbaar-register/WFTEG/index.jsp#" target="_blank">Dutch e-money register</a> shows and the firm is also licensed to perform payments under the PSD1 definition. Offering additional PSD2 services is not part of this license.<br />
<br />
As for trading names the FCA entry shows Google Wallet is used from 4-1-2013 to 23-1-2018 and since 20-2-2018 it has the brand names: Google Pay and Google Pay balance in the register as well. So the sum entry of all brand names in the UK register is:<br />
<br />
<ul>
<li>Google Pay,</li>
<li>Google Pay balance,</li>
<li>Google Checkout,</li>
<li>Google Payment Limited,</li>
<li>Google Wallet</li>
</ul>
<br />
<i>Brexit coming: seek refuge</i><br />
Now, with the Brexit coming up, there is of course the question how to manage future uncertainty. Many players have been trying to solve the puzzle and my assumption is that the recent moves towards <a href="https://www.lb.lt/en/sfi-financial-market-participants/google-payment-lithuania-uab" target="_blank">Lithuania</a> and Ireland are Brexit-related. Lithuania is quickly becoming a hot spot for e-money licenses and taking over the dominant role of London in this respect. The license there will allow Google to continue operating in the e-money and payments domain and also offer Payment Initiation and Payment account services. This makes Google Brexit-proof and PSD2-proof.<br />
<br />
Also, we should note that Lithuania does a nice job <a href="https://www.lb.lt/en/frd/view_license?id=479" target="_blank">in offering a digital form of license</a> as well. Have a look at it over here.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivVkFDjXZIfnWwWZJxwfHrpnrJAsy6f3YWz1d-K176nCUJRzzFkHS3-9iPa9U_kKUpdLb_oTNWzRkJszWeqIabig7qfY81PMQUgF8GuosipN-kyjTF008I2IghM38Eyx41JrUyEw/s1600/Google.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="743" data-original-width="846" height="281" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivVkFDjXZIfnWwWZJxwfHrpnrJAsy6f3YWz1d-K176nCUJRzzFkHS3-9iPa9U_kKUpdLb_oTNWzRkJszWeqIabig7qfY81PMQUgF8GuosipN-kyjTF008I2IghM38Eyx41JrUyEw/s320/Google.JPG" width="320" /></a></div>
<div class="separator" style="clear: both; text-align: left;">
When checking the Dutch register, I noted that there is no passport for the Lithuanian entry, but still the UK one. I expect however that the new passporting will become effective in a couple of months, so Google can continue its operations in the EU, now under the Lithuanian passport rather then the UK passport.</div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
As for Ireland, the <a href="http://registers.centralbank.ie/FirmRegisterDataPage.aspx?firmReferenceNumber=C178423&register=61" target="_blank">license is limited to issuing payment instruments</a> and accepting payment transactions, which would point to the fact that Ireland may be the corporate base that also has a role in shaping the future payments infrastructure for Google. It also suits the concept of PSD2 that one has to get the license in the country where it is also used.<br />
<br />
<u>Conclusion</u><br />
Google is since many years in the payments domain and treading carefully, applying different concepts and such. They made themselves Brexit and PSD2-proof by moving to Lithuania (where they are still wating for the passport procedures to finalise) and created additional future business flexibility by applying for payments issuing/transaction acquiring in Ireland.Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-17945649245638918202018-03-23T13:47:00.000+01:002018-03-23T13:49:52.853+01:00EC gives open banking to bigtech via PSD-2 and Apple closes its doors to banks in return ?Just the other day I attended a session of the Dutch Foreign Bankers Association, all about Fintech disruption and innovation. Guest speaker <a href="https://www.linkedin.com/in/r-jesse-mcwaters-8319347/?lipi=urn%3Ali%3Apage%3Ad_flagship3_pulse_read%3B2cHy4qrBRBmCXAJHz%2Be14w%3D%3D" target="_blank">Jesse McWaters</a>, who is the project lead for the Fintech programme of the World Economic Forum, shared his insights into the tech-revolution and how this impacts the business models in financial industry.<br />
<br />
<b>Banks, big tech and big data: the uneven battlefield- thanks to PSD2 </b><br />
One very important observation that he made had to do with the place of banks in the future value chain. They can choose whether to be a product provider or whether to engage in battling for the end-consumer experience by providing multi-party platforms. In this latter approach, it is a big data game. Both banks and big tech will be battling in the same arena where banks need bigtech data and bigtechs need bank data to complete their 360 views of their customers.<br />
<br />
In this respect Mc Waters had an interesting question to us, Europeans. He asked if anyone at the European Commission would have understood the huge impact that PSD2 and obliged open banking will have on the competition balance between banks and big techs in the market. Doesn't this skew the balance in favour of the bigtechs without anything in return for the banks?<br />
<br />
My response was that in essence the whole open-banking idea in the PSD2 originated from an EC-monoline bureaucratic approach to solving a competition case between one fintech and the European Payments Council (see <a href="http://www.kemplittle.com/site/articles/kl_bytes/european_commission_closes_its_investigation.html?lipi=urn%3Ali%3Apage%3Ad_flagship3_pulse_read%3B2cHy4qrBRBmCXAJHz%2Be14w%3D%3D" target="_blank">newsbulletin</a>).<br />
<br />
I also sketched that the implicit rule of the PSD2 appears to be that such access without prior commercial contract would be free, even though <a href="https://www.acm.nl/en/publications/acm-study-fintechs-payment-system-risk-foreclosure?lipi=urn%3Ali%3Apage%3Ad_flagship3_pulse_read%3B2cHy4qrBRBmCXAJHz%2Be14w%3D%3D" target="_blank">an analysis from our Dutch competition authority</a> outlines why there is a good case for putting in place a compensation for banks for the access to the customer data. And no, the access is not reciprocal. Big data companies would not have to open up their accounts full of customer information for banks.<br />
<br />
<b>Bunq opening up Apple Pay for Dutch customers but then being foreclosed by Apple </b><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis209pYmg6L7ek0m9yebMtF1duNGR1qt8nzH6DofmxvymJ7-5LLHyIKl7I1b_HyDXQYJJTRuuN02sKn120xxo_7OE3c3KxSmUEK2ro_SNqx5UhqrUtC3GFquoUEMj0t4_GxGAf_A/s1600/Applepay.JPG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="342" data-original-width="641" height="170" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis209pYmg6L7ek0m9yebMtF1duNGR1qt8nzH6DofmxvymJ7-5LLHyIKl7I1b_HyDXQYJJTRuuN02sKn120xxo_7OE3c3KxSmUEK2ro_SNqx5UhqrUtC3GFquoUEMj0t4_GxGAf_A/s320/Applepay.JPG" width="320" /></a></div>
The interesting thing is that we were having the above exchange of thoughts in a week where Bunq had announced to move its systems fully into the could of Amazon (bigtech). And Bunq had also opened up <a href="https://www.nu.nl/tech/5186174/bunq-maakte-apple-pay-via-omweg-beschikbaar-in-nederland.html?redirect=1" target="_blank">Applepay for its customers</a>. By tweaking the geography settings, Dutch users could start using their phone for Apple-pay.<br />
<br />
The fun for bunq-ers didn't last too long though. Apple used its powerful bigtech position to shut out the Dutch bunqers from using Applepay. And my guess is, that its arguments for doing so would be pretty much the same arguments that Sofort heard when they connected to German banks. It would not be safe, there would be no required commercial contract allowing this access and so on.<br />
<br />
<b>Time for reciprocity?</b><br />
It seems that already some time ago the EC course on Bigtech has been changing. We are beginning to realize that we may need to protect our citizen's data somewhat better and that we should not help them avoid taxation. Hence the announcement this week of a 3% tax for bigtech, to make sure they do not get a free ride here in Europe.<br />
<br />
It would be very much in line with this new vision towards bigtech if the European Commission mandates open acces to customers big-tech information for banks or any other licensed entity that have the customers permission to request it.<br />
<br />
If the Commission truly seeks to achieve a balanced market with proper competition, it should redress the design errors in the PSD-2 and allow banks to ask fees for access and/or allow them reciprocal access to the customer data.<br />
<br />Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-36481125219599814272018-02-12T14:53:00.003+01:002018-02-12T14:53:42.990+01:00Retailer Albert Heijn demonstrating innovation and making payments the afterthought it isThree years ago, when we were all pondering the impact of PSD2 on the payments market, I was <a href="http://moneyandpayments.simonl.org/2014/11/where-and-how-to-look-for-innovation-in.html" target="_blank">challenged to outline where I believed the innovation in payments would occur</a>. My response then was that we needn't forget the area that we forget to look when speaking at banks. I was in particular referring to retailers, using technical innovations to provide shopping solutions with an almost invisible payment experience afterwards (based on old school direct debits).<br />
<div>
<br /></div>
<div>
Fast forward to today, where it turns out that by summer (the time we may indeed implement the PSD2 in the Netherlands) Albert Heijn will open its first checkout-free AH to go store. The store, the first of its kind in the Netherlands, will be located at a high-traffic location in Amsterdam and will be deployed with “tap to go” technology that allows customers to pay for groceries with a card or a smartphone without going through the register. </div>
<div>
<br /></div>
<div>
<iframe allow="autoplay; encrypted-media" allowfullscreen="" frameborder="0" height="315" src="https://www.youtube-nocookie.com/embed/IlUrPaWjJmE?rel=0" width="560"></iframe>
</div>
<div>
<br /></div>
<div>
As the video shows, the card itself will be an NFC-card version of the well-known loyaltycard (Bonuskaart). It uses the identification features of the card to register the purchases, with payments occuring later via the regular direct debit mechanisms of banks.<br />
<br />
So there we are: we find a non-bank, identity-based commercial app that uses new technology to make payments the afterthought that they really are. And we will see many more to come.</div>
Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-47622516291872422782018-01-14T19:39:00.001+01:002018-01-14T21:42:25.814+01:00PSD2, interchange fee and surcharging: lessons from historyNow that we have the second Payment Services Directive going live in a couple of jurisdictions, the news media are reporting on one of its prominent features: the retailers do not have the right to pass on payment fees to consumers for all cards that are subject to the EU regulation on multilateral interchange fees (MIFs).<br />
<br />
As can be seen in the tweet below, the UK chose to extend this to 3 party schemes as well.<br />
<blockquote class="twitter-tweet" data-cards="hidden" data-lang="nl">
<div dir="ltr" lang="en">
From today we're banning hidden charges for paying with your credit or debit card - a move that will help millions of people avoid rip-off fees when spending their hard-earned money. <a href="https://t.co/EEk5jxdk7R">pic.twitter.com/EEk5jxdk7R</a></div>
— Theresa May (@theresa_may) <a href="https://twitter.com/theresa_may/status/952108358668038146?ref_src=twsrc%5Etfw">13 januari 2018</a></blockquote>
As I expect quite some further discussions on this topic (and retailers circumventing the rules by introducing other types of charges to their customers) I figured it would be good to provide some background on the reasoning that is occuring in the area of MIF-regulations. A further look at history would even suggest that we need to take one step further back in order to rethink our analysis so far.<br />
<br />
<u>Some background on MIF-modelling (and subsequent regulation)</u><br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhy1VEq6gKV1kmLgABxyfqEnTC9xIyqgp6nTwiZ-g0qT0Ax8UrgxR7F8n2nf9idtzl14qJMpcHPS9nXxX0LrC3ZHuz-A-9Iknizv_M4kEI7Jsug4prZXIUdYeQtZArJZsxD9BJudQ/s1600/tirole.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="417" data-original-width="600" height="138" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhy1VEq6gKV1kmLgABxyfqEnTC9xIyqgp6nTwiZ-g0qT0Ax8UrgxR7F8n2nf9idtzl14qJMpcHPS9nXxX0LrC3ZHuz-A-9Iknizv_M4kEI7Jsug4prZXIUdYeQtZArJZsxD9BJudQ/s200/tirole.jpg" width="200" /></a>If we try to assess the arguments pro and con interchange fees, some important thinking in this area is done by <a href="https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2014/popular-economicsciences2014.pdf" target="_blank">Nobel prize winner Jean Tirole</a>, who worked <a href="http://www.rchss.sinica.edu.tw/cibs/pdf/RochetTirole3.pdf" target="_blank">together with Rochet</a> on competition in two-sided markets, such as <a href="http://www.rchss.sinica.edu.tw/cibs/pdf/RochetTirole3.pdf" target="_blank">payment-cards markets</a>. At the heart of their studies is the question what the pricing structures are in two-sided markets and under which conditions and to which extend compensation payments between different sides of the market (interchange fees) are justified.<br />
<br />
This work has been at the core of many regulatory strategies but it is subject to a lot of discussion. All market players, whether 3 or 4 party card schemes, issuing banks, acquirers, processors, retailers, consumers and <a href="http://ec.europa.eu/dgs/competition/economist/surcharging_jbf.pdf" target="_blank">regulators</a>, heavily debate pro's and con's of interchange fees. And in doing so they must use the reasoning and models of Rochet and Tirol. In essence the model tries to determine which cost and interchange fee levels are relevant for competing products/platforms such as cards vs cash.<br />
<br />
Do note however that already more than 10 years ago, Brookings Institution released a <a href="https://www.kansascityfed.org/hNpTK/publicat/pscp/2005/Evans-Schmalensee.pdf" target="_blank">very good paper</a> on interchange fees, concluding that <a href="http://moneyandpayments.simonl.org/2006/01/ultimate-paper-on-interchange-fees.html" target="_blank">it is impossible to prove one or the other side of the arguments on interchange fees, let alone determine which level of interchange fee is correct</a>. I think their analysis still stands which means that in the end, interchange fee regulation is more about lobbying and power politics than actual econometric calculations.<br />
<br />
<u>Europe's reality under PSD2 and MIF regulation</u><br />
What is happening under the current payments regulation in Europe, is that:<br />
- a maximum cap is defined for the interchange fee of credit-card and debit-card transactions (reducing the cost to the retailer),<br />
- retailers are forbidden to surcharge for payment costs, when the customer uses a card which has a capped interchange fee (reason being that they may not gain from reduced costs on the one hand while keeping surcharging intact on the other hand).<br />
<br />
In essence this means that the EU has bought into the argument that multilaterial interchange fees were being set to high and require regulatory intervention (thus emulating the behaviour of other regulators such as the FED and Australian Reserve Bank). In doing so they accept and embrace academic models which mostly focus on the topic of optimal price regulation in a stationary market with alternative platorms/products.<br />
<u><br /></u>
<u>Historic approach: where did the interchange fee come from in practice?</u><br />
It strikes me that all the economists at play use an empirical description and mathematic approach to start their reflections on interchange fees. One very obvious element is missing in a lot of papers (<a href="http://www.stern.nyu.edu/networks/phdcourse/Baxter_Bank_interchange_of_transactional_paper.pdf" target="_blank">except Baxter, who goes at length to discuss history)</a>: what were the market players thinking when they wanted to introduce these fees? What is the industry trade-off they are facing?<br />
<br />
In Dutch payment history, the banks have been very keen not to disclose their cost/benefit considerations and finances. It was only in 2005 that they allowed McKinsey - as a notary - to have a full look at all internal costs and benefits, in order to <a href="https://www.dnb.nl/en/binaries/Payments%20Services%20in%20the%20Netherlands_tcm47-145628.pdf" target="_blank">draw up a report on costs/benefits based on a full insiders view</a>. I have been personally committed to this effort and helped making it become a reality based on the belief that a lot of misconceptions can be eliminated by being open on ones business model.<br />
<br />
However, while this report shows the situation in 2005, it doesn't tell us where the interbank fees came from. The archives of banks do however and to me it is stunning that very few academics in the interchange fee domain have tried to uncover these sources to calibrate their reasoning. Because if they would, they might be able to enrich their analytical approach.<br />
<br />
<u>Core question: can we avoid double charging for the retail customer ?</u><br />
Reading through the old reports of collective groups of players in the Dutch payments domain, we can see an interesting game-theoretic approach to the multilateral fee discussion (which I will be disclosing more in detail in <a href="http://eepurl.com/ddFtFj" target="_blank">an upcoming publication on the history of Dutch retail payments</a>).<br />
<br />
In essence, in the 1980s the emergence of new players, that were going to be piggy backing on an existing infrastructure without interbank compensation, fueled an existing debate on the distortion of the cost/benefits of banks. Banks with a lot of private consumers would usually bear many processing costs, while banks with corporate customers would reap the benefits. And the winner in the game would be new players, for example investment funds, that would hold pooled accounts for customers funds at a large bank, without having to pay anything for the incoming deposits that came from all the Dutch banks.<br />
<br />
Setting an interchange fee in this context leads to:<br />
- a more appropriate allocation and compensation of payment costs along the payments value chain: the entity that benefits from a payment will also bear part of the originating cost,<br />
- the elimination of free-riders in the system,<br />
- interbank understanding that consumers would not be levied fees for instruments where an interchange fee arrangement existed.<br />
<br />
The explicit reasoning in a well documented cost/benefit study here in the Netherlands (never officially published as banks made sure to not disclose their thinking) was that it was of course also possible to not introduce an interchange fee system. The involved payment experts noted however that this would lead to bank fees on both the consumer and corporate side of the market. Absent coordination and agreement of reasonable interchange fees, the expectation was that those individual fees of banks to their respective customers would be higher than necessary.<br />
<br />
In addition, the bankers expected the corporate side of the market to also add on surcharges and administrative charges to the consumer, which meant that effectively the consumer would then pay twice for payments processing costs: one time at the issuing bank and the other time at the retailer/corporation side, where the payments costs were incorporated into the price of services. Thus, for the Dutch society as a whole, this situation with mark ups on payment processing costs starting at the bank individual level, would undoubtedly be more costly, than the situation where the bank layer coordinates its cost/fee level and thereby avoids double charging of the customer.<br />
<br />
<u>The EU-choice revisited: higher payment costs as unintended side-effects of the MIF-regulation</u><br />
It is clear that the EU perspective on interchange fees is:<br />
- we don't trust the diverging interests of banks and competing card schemes in combination with competition to lead to an appropriate level of interchange fees, so we set an interchange level by ourselves,<br />
- we also don't trust merchants and want to avoid them pocketing the benefits of lower interchange fees at the costs of consumers.<br />
<br />
In practice we may now see in Europe that:<br />
- issuing banks have shifted their income base and costs to consumers are increasing,<br />
- acquiring banks will use other fee mechanisms to charge the retailer for the relevant payment costs in the card chain (as long as it exists as such, because a move to instant sepa credit transfers looks pretty enticing of course),<br />
- retailers will use other fee mechanisms or labels (service charges) to charge the consumers for payments,<br />
- consumers are paying higher fees to their issuing bank,<br />
- consumers will effectively be paying twice for the relevant payment costs, in spite of the EU goal that they don't.<br />
<br />
Where Europe has chose to intervene in interbanc dynamics, in order to achieve the best result for society, I am not sure if this will indeed work out as such. Yet, I must confess I am not an academic scholar in MIF-models and I get dizzy when reading all the equasions. However, I sense that some of the MIF-modelling doesn't match the actual game-theoretic constellation that occurs in practice.<br />
<br />
Personally, I would rather place my trust in the diverging conflicts of interests between closely collaborating banks in an industry (leading to an interchange fee level that is scrutinised among quarreling bank experts) to keeping my payment costs appropriately low, than the good intentions of regulators that expand their interventions towards those mechanics themselves (thereby unleashing the possibility of double charging to me).Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-46163703342821448432018-01-12T11:36:00.001+01:002018-01-12T12:54:15.688+01:00Why Bitcoin Core and Bitcoin cash both make sense !The other day I was reading a<a href="https://vinnylingham.com/a-tale-of-two-bitcoins-20375d49d3d3" target="_blank">n excellent blog by Vinny Lingham on the differences between Bitcoin Core and Bitcoin Cash</a>. What I appreciated very much is his attempt to take the heat out of the intense discussions between 'followers' or 'supporters' of these two bitcoin types. And his overview inspired me to reflect a bit more on the reason why actually both Bitcoin Core and Bitcoin Cash make a lot of sense and why there is no need for petty bickering given the open source philosophy on which both protocols are based.<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisieJme6T5o9hZ6mHSkhutLuMGXDOVeyQaKmJgWkyCS1H1VMVWCo14iG4PUBCcER-TPNkpC9ovD5V5H5tTXWamU9DHjUSNY78kFAxWemJYRd6mJPqxOz0ALtHPcIyJiXVNXDJNYg/s1600/bitcoin.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="225" data-original-width="225" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisieJme6T5o9hZ6mHSkhutLuMGXDOVeyQaKmJgWkyCS1H1VMVWCo14iG4PUBCcER-TPNkpC9ovD5V5H5tTXWamU9DHjUSNY78kFAxWemJYRd6mJPqxOz0ALtHPcIyJiXVNXDJNYg/s200/bitcoin.png" width="200" /></a></div>
<div>
<div>
<br /></div>
<div>
<u>Essential philosophy of Bitcoin: everyone may participate in each role</u></div>
<div>
If we look at the design philosophy of bitcoin, the essential idea is that all participants may act as a user or a producer (miner) at the same time. This is very much in line with all other P2P business models that we see emerging, based on networked technology. With AirBnB, owners of houses also become producers and numerous other sharing platforms seek to achieve the same.</div>
<div>
<br /></div>
<div>
The combined producer/consumer role in bitcoin is very much in line with the design principle to outsmart the centralized institutions of a central bank that issues fiat-currency or with similar players as banks which have their own specific their role in the money-value chain. </div>
<div>
<br /></div>
<div>
However, the obsession with the dominant role of central banks and banks is so strong in the bitcoin world, that there is too little attention for standard logistics/economics, when looking at the basic proposition of provision of payment services by all to all. So let's have a look at those logistics.</div>
<div>
<br /></div>
<div>
<u>Logistics of any peer-to-peer value exchange system</u></div>
<div>
Anyone participating in payment systems will recognise that a full peer-to-peer system is intrinsically inefficient. Imagine a market fair where all participants are both buyers and sellers. They could pay each other after each sale and hand over cash or other payment instruments. This provides everyone with instant security and payment, but also with cash in hand and time spent to make and accept payments.</div>
<div>
<br /></div>
<div>
Now, if the fair happens regularly, some smart participants will come up with a more efficient idea, which is to not pay after each sale, but to keep track of all payments and net out the payments via clearing cycles. Effectively this is what already happened during <a href="http://www.eh.net/eha/wp-content/uploads/2013/11/boerner.pdf" target="_blank">the payment days of late medieval fairs</a> and can be witnessed in all kinds of informal or formal constellations (clearing houses etc) that have come into existence since then. </div>
<div>
<br /></div>
<div>
The conclusion is therefore that, wherever payments are made, at some point in time a new underlying structure will evolve in which specialisation occurs. Those that are very active participants will have different roles and interests than those that only use it sometimes. And it's the active community that will seek some efficient alternatives, while the less-active part will go with the flow. Eventually you will end up with a specific constellation that works for that payment community. </div>
<div>
<br /></div>
<div>
In these constellations, you will see distinctions in roles such as:</div>
<div>
- small users</div>
<div>
- big users</div>
<div>
- big providers of payment mechanisms</div>
<div>
- clearing agents for providers</div>
<div>
- settlement agents for providers</div>
<div>
- super settlement agents (mostly, but not necessarily, central banks).</div>
<div>
<br /></div>
<div>
<u>The inevitable specialisations in the bitcoin community</u></div>
<div>
If you start a payment system, such as bitcoin, from scratch by allowing everyone to fulfill every role in the system, economics dictate that in the end specialized roles will occur. We've seen this happening early on with the difference between light-wallets and full nodes. Similarly different players have chosen to serve a different part of the value chain.</div>
<div>
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi55mS2sxO-TKzPMO5SjZhgRC2S15TL_GN2GIJOxATK9SH66l-k7fcVZ2kMhYcFERB8fKX4NQSMmP9z3Sx-ud062XJkiLojPExSuxXbILmdB5J9h_QVfLH578OnqRO7-RXJQ6KfYw/s1600/bitcoincash.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="205" data-original-width="246" height="166" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi55mS2sxO-TKzPMO5SjZhgRC2S15TL_GN2GIJOxATK9SH66l-k7fcVZ2kMhYcFERB8fKX4NQSMmP9z3Sx-ud062XJkiLojPExSuxXbILmdB5J9h_QVfLH578OnqRO7-RXJQ6KfYw/s200/bitcoincash.png" width="200" /></a></div>
<div>
In the context of an open source protocol, it is just as inevitable that opinions differ on the most efficient way forward. And that's where both Bitcoin Core and Bitcoin Cash have a valid proposition. </div>
<div>
<br /></div>
<div>
As the <a href="https://vinnylingham.com/a-tale-of-two-bitcoins-20375d49d3d3" target="_blank">blog by Vinnie Lingham outlines</a>, the Bitcoin Core community sticks with the idea that as a design principle all users must be able to run a full node. Scaling and performance issues for the payments mechanism can be solved by adding an outside transaction layer, meaning that Bitcoin Core chooses to be the settlement layer (in classic payment terms). </div>
<div>
<br /></div>
<div>
Bitcoin Cash on the other hand takes the economics of payment systems as a starting points and accepts the economic reality that in practice, the majority of bitcoin users will not (and cannot) be producers at the same time. Their philosophy is to not tamper with security choices in the area of digital signatures but simply increase the block size, in order to cater for the end-user need to have easy, cheap, simple and fast value transfers. In doing so, they remain IMHO closer to the original idea in the Bitcoin paper (provide an alternative easy fast and cheap transfer mechanism) than Bitcoin Core. </div>
<div>
<br /></div>
<div>
<u>Stop bickering please !</u></div>
<div>
I am amazed at the amount of energy and emotions that are wasted in the crypto community in what comes down to petty bickering. Whether this is between Bitcoin Core and Bitcoin Cash or between whichever of the other cryptocurrencies, blockchains or DLT-designs. </div>
<div>
<br /></div>
<div>
It is and was inevitable for the bitcoin protocol to run into the standard efficiency problem for evolving payment and settlement mechanisms. It is just as inevitable that different solutions exists and both Bitcoin Core and Bitcoin Cash are equally valid. The one just wants to end up becoming a settlement layer provider while the other wants to be stick to the user layer of payment systems. Where is the harm in that?</div>
<div>
<br /></div>
<div>
The open source philosophy means that we will see in practice which solutions play out best for the ecosystem(s) and rather than bickering about advantages or disadvantages we should cherish the variation and choice that the open source philosophy brings. </div>
</div>
<div>
<br /></div>
Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-66812450735945054272017-12-04T17:04:00.001+01:002017-12-22T12:19:12.610+01:00Cryptocurrencies, initial coin offerings (ICO's) and tokens: we remain puppets on someone else's strings !<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKwxHJdpVRsQYz2UY9yzDPsot5sJ6SUq7mVmBbAtad1qE37tUC0QAloWJCh6jTBtdl5e-0T7Zl8vSTaoqJEuzpxEQqz7AGNaogaZ7xYUVH_9zLkiIquqaHFJcGRh4fQiiv9AksOQ/s1600/Flippening.JPG" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="724" data-original-width="1325" height="172" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKwxHJdpVRsQYz2UY9yzDPsot5sJ6SUq7mVmBbAtad1qE37tUC0QAloWJCh6jTBtdl5e-0T7Zl8vSTaoqJEuzpxEQqz7AGNaogaZ7xYUVH_9zLkiIquqaHFJcGRh4fQiiv9AksOQ/s320/Flippening.JPG" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Screenshot www.flippening.watch </td></tr>
</tbody></table>
Now that the bitcoin price is heading towards $10K and beyond, we see another wave of interest in the cryptocurrency domain. Regulators warn about the risk of Initial Coin Offerings and news bulletins keep on re-discussing what is happening in this space.<br />
<br />
<b>It's a matter of private currencies and tokens</b><br />
What we are looking at in the cryptocurrency, blockchain and distributed ledger space is that seemingly public and democratic technologies are being put to work for specific groups of individuals/companies. While the technology may be sold as serving a public purpose, in the end it's just a variation of any medieval local Duke issuing his private currencies to the population: profits to the Duke and potential losses to the public.<br />
<br />
What is happening now is a convolution of low interest rate regime, overhyped media and greed, leading to private individuals scrambling for profits in the area of cryptocurrencies. They can do this either by investing in the cryptocurrencies themselves or as an entrepreneur by sharing a mining pool, setting up exchange's or trade functions or developing new token types or blockchains. And as with the gold rush, it will be the sellers of shovels and buckets that will in the end really make the profit.<br />
<b><br /></b>
<b>Beware: we remain puppets on a string</b><br />
While in the initial stages of the bitcoin blockchain, we could see a whole lot of alt-coin scams, we are now seeing a range of ICO-scams, as people are exploiting the ethereum capabilities to venture out in the cryptocurrency world. Only a very few of those will survive and the rest will disappear just as the nonsense alt-coins did.<br />
<br />
So, whoever participates in cryptocurrencies or ICOs deliberately hands in governance to an unknown constellation of companies and individuals. Or as I put it in <a href="http://moneyandpayments.simonl.org/2013/12/is-a-democratic-crowd-based.html?lipi=urn%3Ali%3Apage%3Ad_flagship3_pulse_read%3B0urReD9fRnSCYpZVkggJqQ%3D%3D" target="_blank">this 2013-blog</a>:<br />
<blockquote class="tr_bq">
<i>The redistribution of value that can occurs with these new currencies may look democratic, but that is a wolfe in sheep' s clothes. Effectively the new currencies are and will be the domain of private individuals trying to seek private gain rather than anything else. And there is no guarantee whatsoever that this constellation will have the interests at heart of all people in society. </i></blockquote>
<blockquote class="tr_bq">
<i>It will be Darwins' survival of the fittest all over again, which will exclude certain groups of citizens from participating fully in society. As democratic as a crowdbased currency looks: you will still be <a href="http://www.businessinsider.com/927-people-own-half-of-the-bitcoins-2013-12?lipi=urn%3Ali%3Apage%3Ad_flagship3_pulse_read%3B0urReD9fRnSCYpZVkggJqQ%3D%3D" target="_blank">a puppet but on a different string</a>, with unknown gains being made by unknown players in the value chain of this collective currency. </i></blockquote>
<br />
<b>To bubble or not to bubble? </b><br />
The question that is now on the public table: is the value of bitcoin a bubble as the tulipomania? Despite the tendency to say yes, I would argue that the answer could effectively be no.<br />
<br />
First of all, the whole western money system is a bubble right now, as central banks have inflated our financial systems to an enormous degree with the Quantitative Easing. We should realize that neither bitcoin nor any other good in this society has its proper value right now. Thanks to these central banks, the amount of money that I get in my savings account has been too low for almost a decade now.<br />
<br />
Second, within this skewed monetary world, market-forces do still apply. They will also apply to bitcoin-core so that with each fork (bcash) or new blockchain (ethereum, eos) a potential new competitor may turn out to become the winner. The word used for a shift in this momentum is: the flippening (as sentiment may flip to different assets or infrastructures in a very brief moment of time).
<br />
<br />
The interesting thing is of course, that in this digital world, anyone can monitor this real-time on sites such as <a href="https://www.flippening.watch/" target="_blank">Flippening Watch</a>. It will be like watching the strings of the puppets move, without knowing who the real players are.Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-87141602307733642122017-11-12T14:02:00.000+01:002017-11-14T16:13:39.082+01:00Why some countries started using cheques and others chose giroThese days I am busy writing a book on the history of Dutch retail payments. The focus of the book is on the dynamics of the Netherlands, without the aim to compare with other countries or to explain country differences. Still, the process leads to some observations that I would like to share as they may be useful for other researchers in the field.<br />
<br />
<b>What explains the origins of giro and cheque countries?</b><br />
One of the basic facts in retail payments is that there is a structural difference between so-called giro-countries (Austria, Switzerland, Japan, Germany, Netherlands, Belgium etc) and cheque-countries (France, US, Canada, Australia).<br />
<br />
In his excellent <a href="https://www.merit.unu.edu/training/theses/JLeibbrandt.pdf" target="_blank">dissertation on payments and network effects</a>, Gottfried Leibbrandt sets out to answer this question. After a thorough investigation of literature, he concludes that network effects are an important factor that helps explain the typical development path per country. At the same time, he finds it hard to trace the origin of the difference between cheque- and giro-countries<br />
<i>1. There is no satisfying explanation for the country differences. Empirical
studies find that country idiosyncrasies rather than variables like GDP
and crime explain the differences in instrument usage.</i><br />
<br />
In a similar vein, the first <a href="https://www.bis.org/cpmi/publ/d33.pdf" target="_blank">BIS working group on Retail Payments</a><span id="goog_1913852712"></span><a href="https://www.blogger.com/"></a><span id="goog_1913852713"></span> observes:<br />
<i>Use of different retail payment instruments in the so-called cheque countries and giro countries can be
explained by the differences in: </i><br />
<i>• concentration of market supply among traditional providers of retail payment services; </i><br />
<i>• financial incentives for providers with respect to debit and credit transfers; </i><br />
<i>• nature of the risks in the value transfer processes for the two types of payments; and </i><br />
<i>• legal framework and regulatory environment.</i><br />
Of course the above list is long enough to be right and the report also mentions numerous French regulations that influenced its use, in particular also the rule that payment with cheques should be free to the people. And indeed this legal factor must not be forgotten.<br />
<br />
<b>Where is the cheque in the Netherlands?</b><br />
In the Netherlands, a well functioning system of so-called cashiers notes existed, alongside regular cash for quite some time. Then in 1814, the establishment of the central bank and the introduction of bank notes introduced competition for the cashiers. In the early 1830s one of the cashiers fought a heavy legal battle to preserve the use of its cashiers notes, but eventually gave in to the reality that the bank notes were becoming the standard.<br />
<br />
Ever since, the central bank was careful not to obstruct the cashiers and bankers too much in their business operations. So as a practical measure, the central bank took care to set its fees for deposits and discounted bills of exchange at a less competitive rate than the market. But fact of the matter remains that a possible candidate for a privately issued Dutch payment cheque, was no longer available.<br />
<br />
Some parliamentary proceedings suggest that the legal rules with respect to bills of exchange 'wissels' were insufficient to really create a sound basis for the use of cheques as a payment instrument. As a result the market used bank notes in combination with clearing arrangements.<br />
<br />
This intrigued me so when looking for more information on the topic I encountered <a href="http://www.delpher.nl/nl/api/resource?identifier=MMKB02B%3A000000037%3A00007&coll=boeken&operation=download&type=pdf" target="_blank">a college book</a> (by Mr. W. Molengraaf) that suddenly shed more light on the situation in other countries.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9fwZxC0ry-bLvhABT4yK7dqWSl9-SYvpm__76aUIMAUstfQdFlmNB2rJcANCHbaewpv-TYMFu7qwx-2soAHeQXMVJnelDXKEY7JmA-BDvnNEk7gn8P_tw7MKXy1VJRegI-83dgw/s1600/1916HandelsrechtKnipsel.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="370" data-original-width="642" height="230" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9fwZxC0ry-bLvhABT4yK7dqWSl9-SYvpm__76aUIMAUstfQdFlmNB2rJcANCHbaewpv-TYMFu7qwx-2soAHeQXMVJnelDXKEY7JmA-BDvnNEk7gn8P_tw7MKXy1VJRegI-83dgw/s400/1916HandelsrechtKnipsel.PNG" width="400" /></a></div>
<br />
What Molengraaff states is that cheques came into existence in the United Kingdom as 'sight-bills' on a banker. They were brought into circulation as an alternative payment instrument to circumvent the stamp duty that would apply to a regular bill of exchange. He continues to state that also in France the cheques owe their existence solely to tax considerations.<br />
<br />
Up next I figured I would take a look at a <a href="https://hdl.handle.net/2027/hvd.hl4oeg?urlappend=%3Bseq=118" target="_blank">US stamp duty register</a> from 1866. And we can indeed see the difference there. A bank check would cost 2 cents, regardless of the sum involved, while a bill of exchange would cost 5 cents and possibly more when higher amounts were involved.<br />
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjizaM54YJlQDfO_dQ9fSIxiOgMVpqf1cfTDHbkRVVFU0AVAvRtWwwoN55mkPmwepQG2hVoxgcG0_fkA-uuwxzcVwQETd5o4yTLrq7h8c4-9_Zw_770IAHcJ8S9HrxJ0KFLG26XEg/s1600/1866stampduty.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="265" data-original-width="745" height="141" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjizaM54YJlQDfO_dQ9fSIxiOgMVpqf1cfTDHbkRVVFU0AVAvRtWwwoN55mkPmwepQG2hVoxgcG0_fkA-uuwxzcVwQETd5o4yTLrq7h8c4-9_Zw_770IAHcJ8S9HrxJ0KFLG26XEg/s400/1866stampduty.PNG" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
To me it's clear that stamp duty may well be an important part of the puzzle, explaining the difference between giro and cheque-countries. But we should add an analysis of market structure, competing instruments to complete the picture.<br />
<b><br /></b>
<b>The particular Dutch situation.... </b><br />
In the Dutch situation we will see that the discussion on setting up postal giro services started around 1902, already with references to the situation in other countries. It took us more than 10 years to decide on the establishment of the postal giro services and indeed market structure and some regulatory capture may have influenced the discussion. Also it became pretty clear that the incumbent bankers and cashiers did not want to move forward with their own version of bankers giro. But that's stuff for a next blog.<br />
<br />
In the mean time, if you enjoyed this blog, you may want to let me know that you're interested to be informed when my book on hundred years of Dutch giro payments will be published. This will help you understand more of the intertwined dynamics that are at work when retail payment systems and instruments are developed.<br />
<br />
Just <a href="mailto:simon@financieelerfgoed.nl" target="_blank">send an e-mail here</a><span id="goog_1913852748"></span><a href="https://www.blogger.com/"></a><span id="goog_1913852749"></span> and I will notify you when the book is coming up.<br />
<br />Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-16713357592171304402017-10-17T16:46:00.000+02:002017-12-08T17:10:55.042+01:00DAO-fork at odds with Ethereum terms and conditions<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDa5HPX9hEyDh9mQx2YavvuJ27F3bF60AwEU-zHCmfCnYiS0XJswmUs6TOaYs5XrOrjKvJupEYU2_QLN0qPxcu7QqipWfhETHIXOzxOy30xKlP0ShwcMsNBlk5bLvlV1hwdPakAA/s1600/DAO.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="705" data-original-width="857" height="164" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDa5HPX9hEyDh9mQx2YavvuJ27F3bF60AwEU-zHCmfCnYiS0XJswmUs6TOaYs5XrOrjKvJupEYU2_QLN0qPxcu7QqipWfhETHIXOzxOy30xKlP0ShwcMsNBlk5bLvlV1hwdPakAA/s200/DAO.png" width="200" /></a></div>
Last month, Antonio Madeire <a href="https://www.cryptocompare.com/coins/guides/the-dao-the-hack-the-soft-fork-and-the-hard-fork/" target="_blank">nicely summarized the discussion on the DAO-hack and the fork which brought Ethereum classic into being</a>. I remember that my contribution to the discussion at that time was that the Ethereum developer community should not revert to a hard fork <a href="http://moneyandpayments.simonl.org/2016/06/the-dao-ethereum-incident-if-you-cant.html" target="_blank">but to the judge and/or arbitration</a>.<br />
<br />
<u>Governance and terms and conditions</u><br />
The other day, I was discussing with Ian Grigg, a long time mutual topic of interest: making technology work by adding proper arbitration to smart contracts and agreements. This can even be done in code, as he had demonstrated way back in the 1990s in his ricardo system.<br />
<br />
This prompted me to actually take a look at the <a href="https://www.ethereum.org/agreement" target="_blank">Ethereum terms and references</a> to see what it said about disputes. Well, have a look yourselves:<br />
<br />
<span style="background-color: whitesmoke; color: #443a37; font-family: "source sans pro" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 17px;">All disputes or claims arising out of, relating to, or in connection with the Terms, the breach thereof, or use of the Ethereum Platform shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with said Rules. All claims between the parties relating to these Terms that are capable of being resolved by arbitration, whether sounding in contract, tort, or otherwise, shall be submitted to ICC arbitration...... </span><br />
<span style="background-color: whitesmoke; color: #443a37; font-family: "source sans pro" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 17px;"><br /></span>
.... And so on.<br />
<br />
<u>What does this mean for Ethereum governance?</u><br />
While I hugely appreciate the development of Ethereum and all the efforts that have gone into it. it does strike me that when push came to shove, the developers brushed aside their own terms and conditions. The use of Ethereum was instrumental to setting up the DAO, so why not revert to the ICC Arbitration?<br />
<br />
My guess would be that, not being lawyers or into governance, the developers used the tools that came in handy and quickly. Alternatively, it might be the case that they might have invested in the DAO themselves quite considerably.<br />
<br />
Regardless of the exact reasons behind not using the dispute resolution mechanism, the paradox is that, while there is a formal basis for dispute resolution under Ethereum, the likelihood exists that in future instances of trouble, the developers will again fork their way out of trouble.<br />
<br />
<u>Create an additional dispute resolution layer.</u><br />
Any practical use and implementation of Ethereum should therefore come accompanied with additional agreements on dispute resolution, so that organisations that cooperate on the basis of the ethereum blockchain create their own governance basis.<br />
<br />Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-55871990667917109512017-09-21T13:45:00.000+02:002017-10-17T16:32:51.879+02:00Ceci n'est pas une 'payment instrument': a reflection on fuel cards and the PSD2In september this year, the FCA published its <a href="https://www.fca.org.uk/publication/policy/ps17-19.pdf" target="_blank">policy statement and approach document on the PSD2</a>. I've been eagerly watching this document to find out what their final take would be on the understanding of the limited network exemption in relation to the specific nature of fuel cards. Because there is more than meets the eye here.<br />
<br />
In essence, some fuel cards effectively function as a purchase button on a website. They don't initiate payment orders at all. They would thus fall outside of the PSD2-scope, as any other shopping-button on websites. Due to a twist of faith however, the bank supervisors seem to be keen to ignore this reality for fuel cards and bring those under the PSD2.<br />
<br />
In this post I will highlight the flaws in this approach and conclude that the result is that if all regulators start re-writing the definitions themselves, we better label the PSD2 the Purchase Service Directive (see also the <a href="http://www.simonl.org/wp-content/uploads/Lelieveldt-Paysys-on-Fuel-Cards.pdf" target="_blank">full and more elaborate analysis</a> on the subject here).<br />
<br />
<u>Background</u><br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="MsoNormal">
<span lang="EN-GB">In the
original payment services directive article 3k provided for a proportional
application of the PSD1. Instruments with a limited geographical reach and
scope, such as store cards and fuel cards were not subject to its provisions.
The exemption 3k) was thus called the limited network exemption.<o:p></o:p></span><br />
<blockquote class="tr_bq">
<span lang="EN-GB"><i style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">3 (k) services based on instruments that can be used to acquire</i></span><span lang="EN-GB"><i style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">goods or services only in the premises used by the issuer or</i></span><span lang="EN-GB"><i style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">under a commercial agreement with the issuer either within</i></span><span lang="EN-GB"><i style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">a limited network of service providers or for a limited range</i></span><span lang="EN-GB"><i style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">of goods or services;</i></span></blockquote>
<span lang="EN-GB">In its
proposal for the new version of the PSD, the Commission claimed the existence
of payments </span>systems,
waivered as “limited networks” with massive volumes, which imply greater risk
and no legal
protection for payment users as “feedback from the market”. However, this feedback was not really a result of the <a href="http://ec.europa.eu/internal_market/payments/docs/framework/130724_study-impact-psd_en.pdf" target="_blank">external impact analysis onthe economic impact of the PSD1</a>. </div>
<div class="MsoNormal">
<br />
What could be seen though is that the interpretations of local supervisors ranged
from strict to very lenient, which distorted the playing field in Europe. In
addition, some observers noted that there was a strong desire by supervisors to
have stricter rules for in particular the fuel cards market (see the mystery of unregulated massive payment volumes, as discussed in the <a href="http://www.paysys.de/download/SepaMar14.pdf" target="_blank">Paysysreport of March 2014</a>).</div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
In the end,
the net result was a very strict version of article 3k in the PSD2, to ensure
that its future application would be for truly limited networks only. In
addition, any organisation that uses this specific exemption has to notify the
supervisor. But let's take a good look at the pre-amble and the exemption text.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<u>The definitions</u></div>
<div class="MsoNormal">
The pre-amble states that payment instruments covered by the limited network exclusion could include store cards and fuel cards, but it isn't conclusive. They could, but they could also not.<br />
<blockquote class="tr_bq">
<i>(14) Payment instruments covered by the limited network exclusion could include store </i><i>cards, fuel cards, membership cards, public transport cards, parking ticketing, meal </i><i>vouchers or vouchers for specific services, which are sometimes subject to a specific </i><i>tax or labour legal framework designed to promote the use of such instruments to </i><i>meet the objectives laid down in social legislation. </i></blockquote>
<blockquote class="tr_bq">
<i>Where such a specific-purpose </i><i>instrument develops into a general purpose instrument, the exclusion from the scope </i><i>of this Directive should no longer apply. Instruments which can be used for </i><i>purchases in stores of listed merchants should not be excluded from the scope of this </i><i>Directive as such instruments are typically designed for a network of service </i><i>providers which is continuously growing. The limited network exclusion should </i><i>apply in combination with the obligation of potential payment service providers to </i><i>notify activities falling within its scope.</i></blockquote>
</div>
<div class="MsoNormal">
Article 3k is actually more clear, certainly in comparison to the previous version. It now refers explicitly to services based on specific <b><u>payment instruments</u></b>. </div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="MsoNormal">
<blockquote class="tr_bq">
<span lang="EN-GB"><i style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">(k) services based on specific payment instruments that can be used only in a limited</i></span><span lang="EN-GB"><i style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">way, that meet one of the following conditions:</i></span><span lang="EN-GB"><i style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><br /></i></span><br />
<ul style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; line-height: 1.4; margin: 0.5em 0px; padding: 0px 2.5em;">
<li style="margin: 0px 0px 0.25em; padding: 0px;"><i>(i) instruments allowing the holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers under direct commercial agreement with a professional issue;</i></li>
</ul>
<ul style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; line-height: 1.4; margin: 0.5em 0px; padding: 0px 2.5em;">
<li style="margin: 0px 0px 0.25em; padding: 0px;"><i>(ii) instruments which can be used only to acquire a very limited range of goods or services;</i></li>
</ul>
<ul style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; line-height: 1.4; margin: 0.5em 0px; padding: 0px 2.5em;">
<li style="margin: 0px 0px 0.25em; padding: 0px;"><i>(iii) instruments valid only in a single Member State provided at the request of an undertaking or a public sector entity and regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers having a commercial agreement with the issuer; </i></li>
</ul>
</blockquote>
<span lang="EN-GB"><span style="background-color: white; color: #222222; font-family: "arial" , "tahoma" , "helvetica" , "freesans" , sans-serif; font-size: 13.2px;"></span></span><br />
<span lang="EN-GB">The legal conclusion is thus: first you need to have something that is a payment instrument and then it may fall under a limited network exemption. </span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><u>The FCA's approach: let's not be clear about the payment adjective</u></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The above may not be how the FCA are looking at it. Both in their consultation and further guidance they seem to that 3k is written as pertaining to all instruments, not just payment instruments. I pointed this out in a response to the consultation (<a href="http://moneyandpayments.simonl.org/2017/06/response-to-fca-consultation-please.html" target="_blank">see this separate blog</a>) and asked for further clarification.</span><br />
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Yet, their feedback document, doesn't mention anything on this definition question at all, which is a bit disappointing given the timely and good job efforts that the FCA usually put in with all their consultation work. So the ambiquity stays: while the notification forms clearly outline that applications must clarify the nature of the involved payment services and payment instruments, all the guidance does is steer towards an understanding of the 3k article as pertaining to all instrument (as under PSD1). </span><br />
<span lang="EN-GB"><br /></span>
<span lang="EN-GB">This still leaves us with the question: when would a fuel card qualify as a a payment instrument. Or is it just as exempt from the PSD as a purchase button in an Internet-webstore? </span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><u>Fuel card as a payment instrument or purchase device?</u></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Let’s have a closer look at the workings of a fuel card and what it does in terms of
business processes. Generally speaking, fuel cards are delivered by oil
companies to corporate fleet owners, sometimes distributed via resellers or
co-branding arrangements. They effectively are a tool that validates the legal
competency of its holder, to take out goods/services from service delivery
stations. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB">The company
to which the cards are provided takes full responsibility for all
services/goods delivered to the users of the cards and receives a monthly
overview of all purchases done with the cards. It can set usage levels per
card, ensuring that no more than a certain amount of goods and services are to
be delivered to the cardholder. It can also set the range of goods to be
delivered from narrow (fuel only) to wide (fuel and shop goods). <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB">Every
month, the fleet owning company receives an invoice with an overview of all
purchases made and the rebate applied (mostly volume based). This specifies the
purchases made in the network of the oil company itself as well as those in
other networks and by other service providers. These other networks of service
stations may also deliver goods/services to the card holder. What happens in
practice is that prior to the actual delivery, the cardholders’ oil-company
buys the whole service/goods package that the card-holder wishes to take out at
the selected other networks with whom the oil-company has struck delivery and
service agreements. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB">This
results in a chain sale of goods/services from:<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-left: 35.45pt; text-indent: -35.45pt;">
<span lang="EN-GB">- the service station dealer to its
country organisation,<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-left: 35.45pt; text-indent: -35.45pt;">
<span lang="EN-GB">- the service station country
organisation to the oil company national organisation<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-left: 35.45pt; text-indent: -35.45pt;">
<span lang="EN-GB">- the oil company in a country to the
corporate client that distributed its cards to the employees.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB">While
technically there may be many variations to this flow, it does serve to achieve
an important effect in VAT-terms. It allows the involved oil companies and
networks to reclaim the relevant VAT from local authorities and thus lower the
end-fee to the corporate fleet-owners. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<u>What's the difference between purchase and payment?</u></div>
<div class="MsoNormal">
In the table below, I've summarized the functional difference between the use of a payment card or a purchase card at an oil station.</div>
<div class="MsoNormal">
<br /></div>
<table border="1" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; border: none; mso-border-alt: solid windowtext .5pt; mso-border-insideh: .5pt solid windowtext; mso-border-insidev: .5pt solid windowtext; mso-padding-alt: 0cm 5.4pt 0cm 5.4pt; mso-yfti-tbllook: 1184; width: 614px;">
<tbody>
<tr style="height: 29.2pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
<td style="border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<b><span lang="EN-GB">Using a purchase tool</span></b><span lang="EN-GB"><o:p></o:p></span></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<b><span lang="EN-GB">Using a payment instrument</span></b><span lang="EN-GB"><o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 1;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Used to instruct the retailer or service
station to deliver goods/services <o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Used to instruct the bank to make a payment
to a third party bank account<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 2;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">The amount to be paid is unknown. At the end
of the month, rebates are applied and the reconstruction of what the actual
equivalent price at this moment of sale would have been, is always a
mathematic reconstruction. <o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">The amount to be paid is clear.<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 3;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Authentication of the card holder equals the
right to receive goods/services up to a certain threshold <o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Authentication of the card holder equals the
digital signature of the payment transfer<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 4;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Positive response by oil company equals the
formal sale of the services/goods from service station to oil company and the
mandate to provide the services/goods to the card holder<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Positive response equals the proper
processing of the payment instruction <o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 5;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Holder of purchase instrument is not (by
definition) authorised to give payment orders that relate to the billing
account of the fleet owner<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Holder of instrument is by design authorised
to give payment orders from that account to the payees account<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 6;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Holder only receives proof of purchase /
delivery but not proof of payment<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Holder receives proof of payment and possibly
also proof of purchase<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 7;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">No cash-back possible<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Cash back might be possible under the rules
of the cards-account<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 8;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Oil company may design its own purchase,
control and billing procedures, use its own set of purchase tools and may set
its own acceptance and risk parameters. Intercompany delivery agreements will
apply. <o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Card is a payment instrument and payment
transactions with it fall under legislation (PSD) and payment brand
regulation, with bank specific acceptance and risk parameters<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 9;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">VAT-recovered and rebate applied to purchases
by all cardholders of the fleet-owner<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">VAT-recovery not included<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 29.2pt; mso-yfti-irow: 10; mso-yfti-lastrow: yes;">
<td style="border-top: none; border: solid windowtext 1.0pt; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Aggregated invoice for goods and services
delivered, sent to the corporate treasurer of the fleet owner, and paid for
using the direct debit instrument<o:p></o:p></span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; height: 29.2pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 230.25pt;" valign="top" width="307"><div class="MsoNormal" style="line-height: normal;">
<span lang="EN-GB">Periodic account statement for payments made
or (as in the case of credit cards): aggregated invoice for total value of
payments made, followed by direct debit.<o:p></o:p></span></div>
</td>
</tr>
</tbody></table>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB">While the
bank card ticks all the boxes, the fuel cards as outlined above, do not qualify
as payment instruments under the current Payment Service Directive. There is no
request being made to place, withdraw or transfer funds, hence there is no
payment transaction, no payment order and no payment instrument. Hence, article 3k is nowhere close to being relevant. </span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span>
<span lang="EN-GB"><u>What will happen to the fuel cards niche?</u></span><br />
As the editors of the Paysys report outlined earlier in March 2014, there may exist a hidden regulatory agenda in Europe to capture fuel cards under the 3k article of the PSD2.<br />
<br />
This seems to be exactly the discussion right now for the relevant stakeholders around this subject in Europe. While technically the legal argument is straightforward, leading to fuel cards being out of scope, some lawyers point to the spirit of the article or the statements of regulators (in whichever respect being made) to claim that fuel cards do fall under article 3k and require notification.<br />
<br />
As in many situations, it's not the final legal analysis that is relevant but the legal uncertainty. Arguing the above case with a regulator may take too much time and is not the preferred option for risk-averse large issuers of fuel cards. So we may well see some players in the oil industry ending up not arguing their legal case and abiding with a flawed regulator view that takes fuel cards into the exemption scope of PSD2.<br />
<span lang="EN-GB"><br /></span>
<u>The wider implications: Payment Service Directive becomes Purchase Services Directive</u></div>
<div class="MsoNormal">
If the fuel card case is not being challenged in courts, it sets an interesting precedent. Because in essence, there is no analytical difference between the fuel card and PIN mentioned above and the user-id /
password combination that is in use by retail customers that are shopping at
websites, using purchase buttons. Both tools are and should be out of scope for a payment service regulator. Just arguing that the instrument looks to much like a payment instrument is just not enough. Ceci n'est pas une <strike>pipe</strike> 'payment instrument'.<br />
<br />
Forgetting the adjective 'payments' in article 3k means that the second Payments Services Directive may well turn into a full swing Purchase Services Directive. And by the looks of it, this is what the FCA may be doing in the fuel cards niche right now. This leaves the rest of the market wondering if their niches may follow at some point in time. </div>
<div class="MsoNormal" style="margin-left: 35.45pt; text-indent: -35.45pt;">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB">Supervisors should however not
cross that Rubicon and avoid transforming the PSD2 into a Purchase Services
Directive. They should stick to the legal definition and if they don't like the consequence should not take justice in their own hands by forgetting adjectives that stand in the way of their (hidden) agenda's. </span><br />
<span lang="EN-GB"><br /></span>
<span lang="EN-GB">Let commerce be commerce and payments be payments. </span></div>
<div class="MsoNormal">
<br /></div>
Unknownnoreply@blogger.comtag:blogger.com,1999:blog-10560795.post-24232320437246478762017-08-01T17:11:00.000+02:002017-10-16T16:57:07.287+02:00Dutch central bank can further encourage innovation for payment institutions with a quick win<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7NKNWlNLZQrOwOFTg5EMyzMTZMQzDueW4kFYUQ_5jHdWvk0fExUWBMHGXur-X5Hm5CPWO9vbqVREoHLGvfvM0ZD0MqL69ZAokm1N9HSJQkH3L8Qi5VUkKykmqBmz8c2QoThWmOA/s1600/Paymentsdeposits+-+kopie.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="147" data-original-width="332" height="141" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7NKNWlNLZQrOwOFTg5EMyzMTZMQzDueW4kFYUQ_5jHdWvk0fExUWBMHGXur-X5Hm5CPWO9vbqVREoHLGvfvM0ZD0MqL69ZAokm1N9HSJQkH3L8Qi5VUkKykmqBmz8c2QoThWmOA/s320/Paymentsdeposits+-+kopie.JPG" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Article 18.2 in PSD2 (Article 15 in PSD1) on the nature of funds<br />
in a payment account of a payment institution</td></tr>
</tbody></table>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<br />
<div style="height: 0px;">
</div>
It's a logical thing. As the bakery provides bread, banks provide loans and allow savings, e-money institutions offer e-money, payment institutions are allowed to provide payment accounts to their customers. These accounts would neither be redeemable deposits or repayable funds, nor e-money, as the article in the PSD(2) states.<br />
<br />
<u>Stricter interpretation by De Nederlandsche Bank </u><br />
De Nederlandsche Bank, our local supervisor, however does not appear to allow the above flavour in the Netherlands easily. Companies that have business models in which payment accounts (whether with or without IBAN) are offered, should not be surprised if they are told that the funds would qualify either as redeemable deposits or e-money, with little inbetween.<br />
<br />
As a result, one will not encounter a lot of payment-account issuing by payment institutions in the Netherlands. And this is in spite of the fact that even the <a href="https://zoek.officielebekendmakingen.nl/kst-31892-3.html" target="_blank">Explanatory Memorandum of our Financial Supervision Act</a> explicitly mentioned this possibility.<br />
<br />
<u>Other supervisors follow the EU-approach </u><br />
Thus we can see issuers from other countries, such as <a href="https://pocopay.com/en/" target="_blank">Pocopay from Estonia</a>, offer payment services and payment accounts to students where these can't be offered by local players. On their website, we see this issuer outlining (USING CAPITALS) in the <a href="https://pocopay.com/en/terms-and-conditions/" target="_blank">terms and conditions</a> that the funds are not redeemable, to be used for payments and not covered by deposit insurance of any kind.<br />
<br />
Other instances can be found in German or French markets, leading to the situation that Dutch payment institutions are restrained in product innovation and less able to compete with PIs from other countries, which may offer a broader solution range to their customers.<br />
<br />
<u>Quick win to facilitate innovation in payments in the Netherlands </u><br />
There is a clear quick win here in the Netherlands in terms of payment regulation. Instead of claiming that funds are either deposits or e-money, De Nederlandsche Bank should more easily allow payment institutions to also offer the third flavour: non-redeemable funds on payment accounts, used for payment purposes.<br />
<br />
Of course, one could raise the question whether it is possible to make such a business model work, but it should be the market that decides rather than the supervisor.<br />
<br />
<span style="font-size: x-small;">This article is a translation of a <a href="https://fd.nl/opinie/1211684/brieven" target="_blank">contribution to the Financieel Dagblad of July 29, 2017</a>.
</span>Unknownnoreply@blogger.com