Tuesday, June 4, 2013
In a free society with a market-driven economy, payment privacy and payment finality are legitimate and useful features of a currency – physical or digital. To believe otherwise is to submit to the erroneous notion that full, involuntary financial transparency should be the norm and that a cashless society is a noble goal.
By default, Federal Reserve-issued physical cash comes with payment privacy and payment finality. Therefore, cash is a problem to regulators because the flip side to payments privacy is the ability to determine which transactions are seen by the watchful eyes of governments and to store wealth privately.
In a recent BankThink post, American Banker Executive Editor Marc Hochstein points out that "the anonymity-bashing has begun" and that the Feds wrongly demonize privacy in the Liberty Reserve case. Where was the Liberty Reserve government affairs lobbying team and would it have mattered? Also, why did U.S. prosecutors wait 12 years to move on a service provider that had been around since 2001?
These types of enforcement actions can also be viewed as seminal events along the ultimate trail to full cash eradication. Brandished as unnecessary and dangerous, the $100 bill is continually under attack by regulators and in Europe the fabled 500-euro note is more like the monetary unicorn: Many have heard about it but few have seen it.
Once troublesome physical cash is finally eradicated, any digital currency with privacy and irreversibility attributes will be next for scheduled termination. In the case of Liberty Reserve, It's not the individual infractions committed by clients of Liberty Reserve that are worrisome to the regulators, it's the fact that a semi-reliable platform for private payments existed in the first place.
Liberty Reserve provided a service that had a true market demand from legitimate business sectors and from non-criminals, notwithstanding the government’s claim that “virtually all” its business was illicit. If banks and traditional financial institutions still respected basic client privacy and facilitated some form of digital payments that did not always involve harmful reversibility to the merchants, then companies like Liberty Reserve wouldn't even be necessary. In some jurisdictions, the act of not respecting your client's privacy is a punishable event, subject to serious jail time.
In addition to transactional privacy (or anonymity), payment finality is important here. Many users of digital currency systems probably wouldn't object to revealing their identity if they could obtain payment finality.
Otherwise known as irreversible payments, or payments without chargebacks, payment finality is required for a large number of merchant categories that aren't serviced by traditional payment methods. Liberty Reserve satisfied that demand as well.
Naturally, merchants would prefer that all sales were final. But for some merchants, finality is a protection against cardholder fraud. As an industry that suffered a high degree of customer disputes, online gambling is instructive because when certain customers lost in the casino and "changed their mind," it became necessary for these merchants to accept only payment methods with finality.
Gold bullion and coinage is another merchant category that experiences an abnormally high percentage of customer credit and debit card fraud so these merchants are either ignored by the card networks and PayPal or they are charged significantly higher processing fees. To protect themselves, merchants require payment finality or irreversible payment methods. That means using only international wires or services like Liberty Reserve.
Referred to as digital gold, decentralized Bitcoin is also an irreversible payment method. But, bitcoin (small "b") is also the measured unit of account within the overall Bitcoin payment network similar to the LR-USD and LR-EUR units of account within the Liberty Reserve system. The notable difference being that bitcoin is a nonpolitical unit of account whereas LR-USD and LR-EUR were anchored to the respective political units of account.
In the early days of bitcoin, exchangers and sellers of the currency suffered because Visa MasterCard and PayPal blocked any transactions involving the acquisition of bitcoin, and for good reason. The purchasing of an irreversible instrument is simply not a good match for a payments industry that offers transaction repudiation, merchant chargebacks, and also has to absorb losses from counterfeit cards. To get their money to the Bitcoin exchanges, customers were forced to rely on expensive international wires and the services of Liberty Reserve. This was done more for the payment finality reasons than any desired anonymity.
Other business sectors that benefit from payment finality include online casino gaming, sports betting, lotteries, adult services, pawn shops, credit repair services, debt settlement services, and virtual currency exchanges that involve the trade of other negotiable instruments or the loading of prepaid cards. Although operating as legal businesses in many jurisdictions, these merchant categories have typically been labeled as high-risk and subsequently restricted by the payment networks. Liberty Reserve filled the market need left by the larger payment networks.
Liberty Reserve also extended into the foreign exchange trading world, as a means of paying independent brokers who signed up clients for forex trading firms, and in some cases as a deposit option for client accounts. In these cases, the Liberty Reserve payment system acted as an international wire service for regions of the world that were totally ignored or blockaded by SWIFT and the international banking system.
Masroor Ghoori, a foreign exchange broker and analyst in Pakistan, told the website Forex Magnates, "Forex brokers have been benefiting from Liberty Reserve's vast access as a payment provider, especially in countries where traders face difficulties in transferring funds. Liberty Reserve was a 'gift' for several traders, especially after the State Banks' (State Bank of Pakistan) changes to international money transfers."
Widely used by foreign exchange traders where domestic central banks restricted bank transfers to foreign entities, such as in Malaysia, Pakistan, Nigeria, Argentina, and Brazil, Liberty Reserve thrived as the preferred payment method. It offered traders a fast and cost effective funding method.
Clearly, identity is not the entire agenda. Any payment service offering payment finality must be "in the system," because according to the government, payment finality cannot be left to the free market. In the U.S., the government is the final arbiter of what transactions may or may not be reversed and it wants mandatory account identification because it facilitates the targeted enforcement. In the physical world with cash and gold, the power is exercised via seizure and confiscation. In the digital world with electronic accounts, the power is exercised through transaction reversals and account suspensions. At its essence, Liberty Reserve was an electronic value transfer service where payment finality was provided by the operator without judgment.
Choice in currency is a freedom of speech issue. Failing to recognize that fact only serves to strengthen the entrenched payment oligarchies and to undermine personal liberties in the transactions environment.
Today, voluntarily exiting the digital banking system has become a popular method of attaining a relative degree of financial independence and safety. Expect to see a lot more of these voluntary exits especially since the free market has been mostly stripped of digital payment finality and "Cyprus-ed" has become a verb.