Wednesday, February 25, 2015

Live at APEX | Digitizing of Money Movement, Remittance, & P2P

 Live at Apex: The Digitization of Money Movement, Remittance, and P2P

 Welcome back to the official All Payments Expo Blog. We recently concluded the “Disruptive Technology Forum: Digitizing of Money Movement, Remittance, & P2P.” The forum centered on the many changes that are occurring in the movement of money, from new rules and regulations to an influx of non-traditional, online players. I would like to thank our panel, Tammi Shapiro (Fiserv), Ajay Hans (Mobetize, Corp.), and Peter Kelly (ABRA), and our moderator, Robert Courtneidge (Locke Lord) for joining us today. Their insight and expertise greatly simplified a very complicated and rapidly changing ecosystem.

In an APEX podcast, Rik Willard (MintCombine) suggests that Bitcoin and other alternative financial services are potential category killers in remittances. He gives the example of Mpesa, a service that allows people to transfer money throughout Kenya almost instantaneously and inexpensively. For example, there is a 12% transaction fee to transfer money from the U.K. to Kenya with conventional remittance companies, whereas there is only a 3% fee with Mpesa. Seeing as 90% of Kenyans are unbanked, but 80% of Kenyans have mobile phones, Mpesa and other similar financial services are radically changing the remittance industry.

Still, services such as Mpesa charge a 3% fee and Bitcoin, as well as other alternative financial services offer means to transfer value at a near-zero cost. One such service is Venmo, which allows two individuals to send money to one another, called person-to-person (“P2P”) payments. There is no fee if the money originates from the user’s bank account or debit card, but there is still a 3% fee for using a credit card. Meanwhile, companies such as Circle Financial and Ripple Labs are attempting to change this by developing platforms based on the Bitcoin system that enable the transfer of money anywhere in the world for pennies, if not for free. This is in contrast to Venmo, which is currently limited to people residing in the U.S.

Seeing as Bitcoin and other alternative financial services improve upon a number of deficiencies in how we currently move money, it is not surprising that banks are studying Bitcoin intensively. In fact, Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and Wells Fargo have all published reports on Bitcoin for their customers. Bank of America reported that Bitcoin may emerge as a serious competitor to traditional money-transfer providers. Still, Bitcoin cannot be massively adopted until there is further regulatory clarification. Barry Silbert (SecondMarket) explains that “banks are waiting for clearer guidance at the federal level on how businesses are having interactions with bitcoin,” in addition to other state regulatory concerns.

DISCLOSURE: What follows is a summary of important legal and regulatory issues, but it does not cover every legal or regulatory issue. You should always consult counsel. If you would like to find a certified digital currency attorney, you can check the member directory at the Digital Currency Council.

At the federal level, the Financial Crimes Enforcement Network (“FinCEN”) imposes certain requirements on money service businesses (“MSB”). A business may be considered a MSB if it offers any of the following products and services: money orders, traveler’s checks, money transmission, check cashing, currency exchange, currency dealing, and prepaid access. The regulations require MSBs to ensure that their services are not being used for nefarious activities and requires that these companies: file Suspicious Activities Reports, implement an anti-money laundering (“AML”) program, and check customers against OFAC’s Specially Designated Nationals List, in addition to a number of other requirements.

Because Bitcoin is pseudo-anonymous, it is not known who the real-identities of the parties to the transaction are, only their Bitcoin addresses. This is a major reason why banks were initially hesitant to engage with Bitcoin: they are worried that they will be punished for not getting sufficient information about their customers. Bitcoin companies are beginning to find ways to obtain this information from customers, which has led to banks beginning to partner with Bitcoin companies. There is still a long way to go. For example, because of U.S. regulations, Bitcoin wallet, Xapo, is unable to offer its debit card product in the U.S. until it can find a banking partner.

This lack of clarity also exists at the state level. Whereas states such as North Carolina and Texas regulate Bitcoin Companies within their existing money transmitter laws, states such as New York are attempting to create an entirely new type of license, coined the “BitLicense.” The BitLicense is highly controversial as some welcome clarity while others point out that Bitcoin is a technology and not something that should be regulated. The proposed BitLicense is currently undergoing its second iteration, with New York welcoming comments on the proposal until March 6, 2015. You can read the most recent proposed regulations here.

Matt Gertler is the Head of Strategy at the Digital Currency Council (“DCC”) and is pursuing his JD/MBA at USC. He is experienced in FinTech, having worked for Venmo, Braintree Payment Solutions, and Earnest before joining the DCC. If you have any questions, please tweet @magertler using, #APEXLV15, and they may be included in a future post.

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