2015 07-31 São Paulo Presentation

July 31, 2015

REGULATORYLandscape

São Paulo

Worlwide@JuanL lanos + u n s o l i c i t e d c o n t r a r i a n p o l i c y

a d v i c e

“transmission of money or value”“cash or monetary equivalent”

“value that substitutes for currency”

B i t c o i n Re g u l a t e d B e f o re B o rn

© 2015 Juan Llanos

Risk Areas• operational • credit• money laundering • terrorist financing• information loss• Liquidity• fraud• identity theft

Stakeholders• federal agencies• state agencies• investors• consumers• employees• society

Goals• safety• soundness• security• privacy• crime prevention• health• integrity

R e g u l a t i o n Inevitable, yet valid

Risks & Stakeholders

C o m p l i a n c e Onerous, yet valuable © 2015 Juan Llanos

© 2015 Juan Llanos

Smart EntrepreneursEnlightened Policy-makers, Regulators,

Leaders

KNOW ITWORK TOGETHER

FOCUS ON THE GOALS

MUST

WANT

CAN

WANT – MUST = CAN© 2015 Juan Llanos

• COMPETITIVE ADVANTAGE except ional compl iance attracts favorable reviews from regulators and bankers.

• REPUTATION high compl iance and internal contro ls standards ra ise the e l ig ib i l i ty of the company for partnerships

• SHAREHOLDER VALUE a spot less compl iance record reduces the d iscount a potent ia l acquiror is l ike ly to apply to the valuat ion

“ T he Va l ue o f a N e c e ssa r y Ev i l ”

© 2015 Juan Llanos

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

browser

tokensrewards

WOWRipple

ProtocolEGold

BitcoinProtoco

l

VenRipple XRP

LitecoinLinden Dollars

Entropia Universe

QQ Online

Exchanges

Altcoin ExplosionRegulated Exchanges

BeenzFlooz

Colored CoinSmart Contracts

Ethereum

Square CashAmazon Coin

Sovereign CoinReal Estate

EquitiesDerivatives

?

Bi t co in O p e n S o u rc e P ro t o c o l S o l v e s D o u b l e S p e n d Pro b l e m v i a O p e n Le d g e r

© DATA

cryptocurrency

virtual currency

digital currency

© 2015 Juan Llanos

Re a s o n s f o r Re g u l a t i n g F i na nc i a l I n te r m e d i a r i e s

CONSUMER PROTECTIONML & TF PREVENTION

SYSTEMIC RISKSTAXATION

© 2015 Juan Llanos

Fi n a n c i a l S e r v i c e sR i sk A r e a s

© 2015 Juan Llanos

Anti-Money Laundering (AML)Countering the Financing of Terrorism (CFT)Privacy and Information Security (InfoSec)

Safety and soundness (S&S) Consumer disclosures & support (CP)

2005-01-20 FAT F S p e c i a l R e c o m m e n d a ti o n 7 o n W i r e Tr a n s f e r s2006-10-13 FAT F R e p o r t o n N e w P a y m e n t M e t h o d s 2007-04-24 E - G o l d f e d e r a l i n d i c t m e n t2011-09-19 F i n C E N e x p a n d s M S B d e fi n i ti o n t o i n c l u d e f o r e i g n2012-04-24 F B I R e p o r t o n B i t c o i n V i r t u a l C u r r e n c y F e a t u r e s2012-09-16 B i t c o i n R o m n e y b l a c k m a i l e r2012-10-01 E u r o p e a n C e n t r a l B a n k r e p o r t o n V C s c h e m e s

© 2015 Juan Llanos

Regulatory / Law Enforcement Milestones

B e f o r e 2 0 1 3

Special Recommendation VI

Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value,

including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that

apply to banks and non-bank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions.

F inancial Action Task Force Groupe d’Action F inancière

Internationale(FATF-GAFI)

© 2015 Juan Llanos

Anonymity = Anathema• Anonymous

identifi cation• No value limits• Anonymous funding• No transaction records• Wide geographical use• No usage limits

Cash featuresFAT F R e p o r t o n N e w P a y m e n t M e t h o d s ( 2 0 0 6 )

© 2015 Juan Llanos

2008-07 Guilty Plea • Conspiracy To Launder Monetary Instruments (federal)• Conspiracy To Commit The Offense Against The United States

(federal)• Operating Of Unlicensed Money Transmitting Business (federal)• Transmitting Money Without A License (District of Columbia)

“The root causes o f E -Go ld ’ s fa i lu re were design fl aws i n the account c reat ion and prov i s ion ing

log i c that l ed to the un for tunate consequence o f vulnerabi l i ty to cr iminal abuse .

“We acknowledge that E-Gold is indeed a fi nancial inst itut ion o r agency as defi ned in US

law and shou ld be regu la ted as a fi nanc ia l i ns t i tu t ion .”

Douglas Jackson, E-Gold Founder

E-Gold

© 2015 Juan Llanos

Foreign-Located MSBs…(September 19, 2011 )

…are financial institutions under the BSA (Bank Secrecy Act).

With respect to their activities in the United States, foreign-located MSBs must comply with recordkeeping, reporting, and anti-money laundering (AML) program requirements under the BSA. They must also register with FinCEN.”

…are subject to the same civil and criminal penalties for violations of the BSA and its implementing regulations as MSBs with a physical presence in the United States.

© 2015 Juan Llanos

2013

© 2015 Juan Llanos

2013-03-18 F i n C E N G u i d a n c e o n V i r t u a l C u r r e n c y2013-05-13 C F T C v o w s t o c o n s i d e r B i t c o i n r e g u l a ti o n 2013-05-13 D H S f r e e z e s D w o l l a a c c o u n t s2013-05-28 L i b e r t y R e s e r v e i s i n d i c t e d f o r $ l a u n d e r i n g2013-06-22 FAT F R e p o r t o n N e w P a y m e n t M e t h o d s 2013-06-23 B i t c o i n F o u n d a ti o n r e c e i v e s C & D l e tt e r f r o m C A2013-07-22 S E C c h a r g e s Te x a s m a n f o r B T C P o n z i s c h e m e2013-08-12 N Y s u b p o e n a s B i t c o i n fi r m s2013-10-01 L a w s k y : “ S o B e I t ” i f t r a n s p a r e n c y d o o m s B i t c o i n2013-10-26 F B I S i l k R o a d B i t c o i n b u s t2013-12-12 F i n C E N s h u t s d o w n C a s a s c i u s o p e r a ti o n


2 0 1 3

© 2015 Juan Llanos

FinCEN Guidance FIN-2013-G001• “An administrator or exchanger that (1) accepts

and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations […]”

• “Under FinCEN’s regulations, sending “value that substitutes for currency” to another person or to another location constitutes money transmission, unless a

limitation to or exemption from the definition applies. This circumstance

constitutes transmission to another location, namely from the user’s account at

one location (e.g., a user’s real currency account at a bank) to the user’s

convertible virtual currency accoun[…] a person that creates t with the

administrator.”

• “units of convertible virtual currency and sells those units to another

person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.

© 2015 Juan Llanos

Obligations• Effective AML Program (much more than

just registering)

• Potentially licensing in multiple states and other overseas jurisdictions

• Potentially federal consumer protection

• Privacy, confidentiality and information security

© 2015 Juan Llanos

Challenges

Liberty Reserve Indictment[x] A N O N Y M I T Y product has to dissuade the bad element, never attract it.

• “deliberately attracting, and maintaining a customer base of criminals by making financial activity on LR anonymous and untraceable.”

• “designed so that criminals could effect financial transactions under multiple layers of anonymity and thereby avoid apprehension by law enforcement.”

[y] C O M P L I A N C E product and operations cannot be in violation of any applicable laws and regulations (the “form” or “paper” side of compliance).

• “was not registered as a money transmitting business with FinCEN”

• “operated an unlicensed money transmitting business.”

[z] S U B S TA N C E what is written in a policy must actually be implemented. Businesses must be run with integrity, responsibility and control.

• “intentionally …operating LR as a criminal business venture

• “lying to anti-money laundering authorities …

• “created a system to feign compliance with anti-money laundering procedures…

© 2015 Juan Llanos

F A T F R e p o r t o n N e w P a y m e n t M e t h o d s ( 2013)

FATF New Payment Methods Risks

© 2015 Juan Llanos

2014

© 2015 Juan Llanos

2014-01-27 C h a r l i e S h r e m a r r e s t e d , i n d i c t e d 3 m o n t h s l a t e r2014-01-27 ‘ B i l i c e n s e ’ h e a r i n g s a r e h e l d i n N e w Yo r k2014-01-31 F i n C E N d e c l a r e s m i n e r s & i n v e s t o r s n o t M Ts2014-02-07 F l o r i d a t a r g e t s ‘ l o c a l b i t c o i n e x c h a n g e r s ’2014-02-07 M t G o x h a l t s w i t h d r a w a l s 2014-02-24 M t G o x s h u t s d o w n , fi l e s f o r b a n k r u p t c y 4 d a y s l a t e r2014-02-26 S e n a t o r M a n c h i n ( R - W V ) c a l l s f o r B i t c o i n b a n2014-03-25 I R S s a y s B i t c o i n a n d V C t o b e t a x e d a s p r o p e r t y2014-04-08 U S A tt o r n e y G e n e r a l k e e p i n g e y e o n b i t c o i n2014-04-29 F i n C E N d e c l a r e s c l o u d m i n i n g & e s c r o w n o t M Ts2014-05-05 U S g o v e r n m e n t t o s t u d y B i t c o i n ’ s t e r r o r i s t t h r e a t2014-06-06 E u r o p e a n C e n t r a l B a n k c a l l s f o r i n s ti t u ti o n a l c o n t r o l s2014-06-30 F i n C E N e x a m i n e s r i s k s o f d i g i t a l c u r r e n c i e s2014-07-14 N Y S i s s u e s ‘ B i t l i c e n s e ’ p r o p o s a l2014-07-17 E u r o p e a n B a n k i n g A u t h o r i t y e x a m i n e s B T C r i s k s2014-09-23 U S g o v e r n m e n t s h u t s d o w n B u tt e r fl y L a b s2014-10-27 F i n C E N r u l e s p a y m e n t p r o c e s s o r s & b r o k e r s a r e M Ts


© 2015 Juan Llanos

Consumer “Advisories”Lebanon, Germany , Hong Kong,

Belgium , Indonesia, UK , Russia, Estonia , US-WI, Greece , Israel, Brazil ,

Phi l ippines, US-TX , Germany, US-CA , US-NV, Canada , US-ID, US-SEC, US-IN , US-

NM, Europe-CB , Argentina, US-ME , Netherlands, Russia , US-MI, France ,

Japan, Australia , UK, Serbia , Portugal, Norway , France, Canada , I reland

© 2015 Juan Llanos

AnonymousUntraceable

“Invisible to law enforcement and the taxman”

Myths

e n h a n c e d s u r v e i l l a n c e a n d c o n t r o l © 2015 Juan Llanos

permissioned vs. permission lesscensorship-resistant vs.

censorabletoken vs. no token

financial vs. non-financialopen vs. closed

public vs. private © 2015 Juan Llanos

The Blockchain Wars

conservative vs. progressiveaggressive vs. permissive

formal vs. substantialrestrictive vs. expansive

misguided vs. enlightened

© 2015 Juan Llanos

Regulatory Arbitrage

PARADIGMSquestioned

m o n eys o v e re i gn ty

s ecu r i t yregu la t i o n

p ro pe r t yi den t i t y

l awgo v e rn an ce

A M L / C F TTODAY- national security and crime deterrence are top

public policy priorities- unintended consequence → selective inclusion

facilitates fiscal surveillance but creates financial exclusion of underprivileged

- stick over carrot (heavy hand)- Anonymity is anathema

TOMORROW- carrot over stick (lighter hand)- measure proportion and results - layered, zero-knowledge, identity systems could

meet both law enforcement and civil liberties goals © 2015 Juan Llanos

I D E N T I T YTODAY- Countries have the monopoly over a person’s

identity (mostly, for fiscal reasons)- Not all countries have reliable identification

systems- Government-issued IDs are not necessarily

effective in deterring crime/unmistakably identifying humans

TOMORROW- Alternative identity systems that transcend

borders and facilitate identification of previously disenfranchised persons

- Identity systems that balance both transparency and privacy (ID3/Windhover Principles)

© 2015 Juan Llanos

P R I VA C Y

TODAY- Radical transparency jeopardizes privacy- Slowly being eroded via tax compliance

regulations, elimination of secrecy havens, digitization of money

TOMORROW- Leverage zero-knowledge proof technology →

tokenization (Windhover Principles)- Privacy without anonymity = pseudonymity (first

payment; then, identity)

© 2015 Juan Llanos

A successful algorithmic regulation system has the following characteristics:

1. A deep understanding of the desired outcome

2.Real-time measurement to determine if that outcome is being achieved

3.Algorithms (i.e. a set of rules) that make adjustments based on new data

4. Periodic, deeper analysis of whether the algorithms themselves are correct and performing as expected

Algor i thmic R e g u l a t i o n *

* Tim O’Reilly, “Open Data & Algorithmic Regulation” (in Beyond Transparency)

© 2015 Juan Llanos

@JuanLlanos

Muito obrigado!

2015 07-31 São Paulo Presentation

Technology

Transcript of 2015 07-31 São Paulo Presentation