Bitcoin and border crossing, fintech and foreign exchange

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Transfer fees have an impact on the poorest people. Blockchain won’t help. What will be?

In 1540 Sir Thomas Gresham (who later became Queen Elizabeth I’s banker and is in many ways the father of the modern city of London) embarked on a true pioneer style of fintech to escape control capital and smuggle the equivalent of some $ 40 million in today’s money from Antwerp to Calais on behalf of King Henry VIII. Nowadays, he allegedly used bitcoins and slipped them through a few mixers, but due to the technological limitations of Tudor money transfer, he was forced to sneak out of the Netherlands with 25 bags of gold coins. and money.

(You would think absolutely everyone would use bitcoin instead of gold for money transfer today, but apparently not! Someone recently left 3kg of gold on a train in Switzerland. )

Anyway, as John Guy notes in his superb Sir Thomas biography, for this very risky cross-border transfer he was paid around $ 40,000. This means that the cost to the king was one basis point. This is less than what Wise charged me to transfer money from the US to the UK last week, although to be fair it took Sir Thomas a month to hand over the loot to him. ‘Henry whereas with Wise it was only a matter of seconds.

But that makes me wonder about the costs. Ever since Sir Thomas’ escapades we’ve invented laser beams and transistors – so how come it costs so much money to send money? According to the World Bank, while remittances to low- and middle-income countries hit an all-time high last year, the average transaction cost remains around seven percent. This is much more than it cost Henry VIII. How can sending photons cost so much more than sending a horse and a cart?

Well, the point is, the cost of moving photons is not the issue. Costs are not due to payments, they are due to identity. Cross-border fund transfers will at some point involve a regulated institution. A money sender can withdraw money from a UK bank account and deposit it in a bank account in India, for example. This means that the bank has to conduct extremely expensive Know Your Customer (KYC) surveys of the money transmitter and its clients, as well as extremely expensive anti-money laundering (AML) monitoring of transactions as well as oversight. extremely expensive penalties. etc. Meeting these customer due diligence (CDD) standards is expensive. As a result, there are significant hurdles against cost-competitive tech companies wishing to break into the remittance industry.

The only way is to go up

A few years ago, the Financial Action Task Force (FATF) extended its recommendations on CDD to include cryptocurrency exchanges and wallet providers (collectively referred to as Virtual Asset Service Providers, or “VASPs” ). This meant that all countries had to apply anti-money laundering and anti-terrorist financing controls, whether the money goes through the bank or through the blockchain: i.e. CDD and all that. All of this goes through the application of the “Travel Rule” which aims to prevent money laundering by identifying the parties to a transaction when transferring a value greater than a certain amount.

The decision to apply the same travel rule on VASPs as on traditional financial institutions was met with some dismay in the cryptocurrency world, as it meant that service providers had to collect and exchange information on customers during transactions. The technically non-binding guidelines on how member jurisdictions should regulate their ‘virtual asset’ market included the contentious detail that whenever a user of an exchange sends cryptocurrency worth more than $ 1,000 or euros to a user of a different exchange, the original exchange must send identifying information about the sender and intended recipient to the beneficiary exchange. Many people think that even this limit is too high: At the “V20 Virtual Asset Service Providers Summit,” Carole House of the Financial Crimes Enforcement Network, FinCEN, said she wanted to see this threshold reduced to $ 250 for any outgoing transfer. . United States.

(The FATF has in fact just completed its second 12-month review of the implementation of these VASP amendments, noting that less than half of their reporting jurisdictions have the rules in place and that the “implementation gaps” mean that there is not yet a global regime in place to prevent the misuse of virtual assets for money laundering or terrorist financing purposes.)

There is a lot of information requested. According to the FATF Interpretative Note on Recommendation 16, the information should include the name and account number of the originator and benefactor, the (physical) address of the originator, the national identity number (or something similar) or the date and place of birth. Essentially, this means that the personal information of the counterparty will be sent over the web. Simon Lelieveldt is a former head of the banking supervision department at the Dutch Central Bank. He’s balanced about such things, and he called it a “disproportionately silly move by regulators who don’t understand blockchain technology,” which can be a bit harsh, but whatever the crypto folks are. money can think of it, they have no other choice but to implement it.

So what will cut costs?

So how can fintech help you? With blockchain? The April 2020 OECD Discussion Paper “Can Blockchain Technology Reduce the Cost of Remittances?” (Hint: no) identifies a number of limitations to the ability of blockchain technology to reduce transfer costs. In particular, he notes that the cryptocurrency is unlikely to solve the “last mile” problem. However, it highlights the cost of KYC as one of the main cost drivers and notes the potential to help use digital identities. At the same time, it has raised questions about the possibilities of data misuse, thus deepening, as they put it, “existing political asymmetries”. The Brookings Institution “How to Keep Remittances Flowing” makes a similar point, calling for digital technology to meet KYC’s risk-based requirements to help combat “risk reduction” practices by businesses. correspondent banks (intended to avoid rather than manage risk) which continue to affect access to bank accounts for money transfer companies operating in smaller and poorer money transfer corridors, thus reducing competition . So it seems to me that if we can find a way to use digital identities but prevent the misuse of data, then we (i.e. the FinTech industry) may be able to help. the less well off.

At the end of the day, it doesn’t matter whether you send dollars or Dogecoin, identity spending eclipses payment spending. So if we want to reduce the cost of remittances, that’s where we need to focus. Not as a special or temporary fix for remittances, but as part of a more general strategy to improve financial inclusion. Carlos Torres Vila, President of BBVA, put forward an interesting idea based on digital identities and data sharing. It suggests something along the lines of the Financial Stability Board (a global panel of regulators) but built for global digital assets. Such a body would develop data model standards, regulations and policies incorporating privacy protection in line with the European GDPR.

This “digital stability board” would give members the platform to share best practices and monitor risks in online trading and other industries. With such a board in place, data trusts (a structure that I think holds great promise) could be built to manage the individual and organizational data associated with digital identities. This would make the controlled and well-regulated sharing of vital information easier and smoother while simultaneously protecting personally identifiable information through the use of mature privacy enhancing technologies.

You see, the point is, if someone knows who everyone is, then payments are easy. And not expensive.


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