Credit Unions Fear Collateral Damage from FATCA

By Jon Matonis
American Banker
Thursday, May 23, 2013

http://www.americanbanker.com/bankthink/credit-unions-fear-collateral-damage-from-fatca-1059360-1.html

Last month, I warned that the Foreign Account Tax Compliance Act, an attempt by the U.S. to impose reporting burdens on other countries' banks, would produce blowback for domestic financial institutions. Credit unions, at least, are worried.

The powerful Credit Union National Association has thrown its support behind Senator Rand Paul's bill to repeal the anti-privacy provisions of this heavy-handed law. "We share your concern that FATCA, if left in place, will impose billions of dollars of compliance costs on U.S. credit unions and banks annually," Bill Cheney, CUNA's president and CEO, wrote to Sen. Paul on May 8. "We are also concerned that FATCA and FATCA-related intergovernmental agreements with foreign nations undermine the constitutional privacy rights of U.S. credit union members and bank customers."

Cheney went on to emphasize the fear of reciprocation by foreign governments for Washington's overreaching.
"CUNA is also concerned that the European Union is considering adopting a 'European FATCA' which would regulate U.S. credit unions and banks in the same manner that the United States' FATCA purports to regulate credit unions and banks in the European Union," he wrote. "Unless Congress repeals FATCA, we think that it is only a matter of time before the extraterritorial diktats of a European FATCA and other FATCA-inspired foreign laws become additional compliance burdens on U.S. financial institutions." As the largest credit union advocacy association in the United States, CUNA represents nearly 90% of America's 7,000 state and federally chartered credit unions and their 96 million members.

Sen. Paul has cited the destructive effects of the law and questioned its legitimacy as a tool to combat tax evasion, arguing that "FATCA has had the practical effect of forcing [foreign financial institutions] to relinquish any association with American customers, and to avoid direct investment in the United States. Perhaps even more troubling, the implementation of FATCA has allowed the Treasury Department to make independent decisions with respect to the sovereignty of foreign nations and the privacy of United States citizens."

CUNA's support for rolling back FATCA follows a move on March 27 by the World Council of Credit Unions, which represents member-owned cooperative nonprofit lenders in 100 countries. Michael S. Edwards, the council's vice president and chief counsel, called for full repeal of the law, similarly citing the boomeranging costs of FATCA from foreign institutions to domestic U.S. entities like credit unions.

By comparison, the credit unions' banking brethren have been subdued in their resistance to FATCA. Texas and Florida banks have sued to block a regulation requiring them to tell the IRS when they pay interest to nonresident aliens, and the American Bankers Association has urged the agency to spare certain products and balances from reporting requirements.

Aside from the credit unions, many in Washington are weighing in on the matter. In its 2014 budget, the administration buried a request for Congress to authorize the Treasury Department to issue unprecedented regulations requiring U.S. financial institutions to report information on nonresident accounts for the IRS to share with foreign governments. This plan may be dead on arrival.

According to the White House's "Analytical Perspectives to the Fiscal Year 2014 Budget," "the [budget] proposal would provide the Secretary of the Treasury with authority to prescribe regulations that would require reporting of information with respect to nonresident alien individuals, entities that are not U.S. persons, and certain U.S. entities held in substantial part by non-U.S. owners, including information regarding account balances and payments made with respect to accounts held by such persons and entities."

Without such authority, the Treasury Department will be unable to follow up on its promises that have been a part of the already-negotiated "intergovernmental agreements." The IGAs have been instrumental in persuading foreign governments to enforce FATCA on themselves in exchange for imposing FATCA-like mandates domestically in the United States. But the agreements are an unauthorized creation of the U.S. Treasury Department, according to McGill University law professor Allison Christians, author of a recent Tax Notes International article, "The Dubious Legal Pedigree of IGAs (and Why It Matters)."

James George Jatras of RepealFATCA.com calls Sen. Paul's bill "a major game-changer." He also predicts Congress will fail to legislate the necessary reciprocity authority to rescue the flawed statute. "With the wind in Washington now blowing against FATCA, foreign governments are on notice that Treasury's promises of 'reciprocity' are plain rubbish," according to Jatras.

Though Sen. Paul's bill aims to repeal only certain anti-privacy provisions of the FATCA legislation and a companion version is expected in the House, he has also been holding up Senate approval of all tax treaties since he was elected in 2010.

Jatras encourages all international firms to get involved, adding that "American and non-U.S. firms that stand to lose millions of dollars each complying with FATCA need to help push the repeal bill through. FATCA repeal needs to be part of any tax reform."

With a litany of bipartisan reasons to oppose FATCA, ranging from privacy and sovereignty to U.S. economic competitiveness, it is startling that the legislation has advanced as far as it has. The situation speaks volumes about the opaque process of continually "hiding" the specifics of putting laws into practice in other legislation, resulting in the nearly seven-year implementation timetable.

Patrick Murck Discusses Bitcoin With Financial Crime Specialists

General Counsel at the Bitcoin Foundation and VP of Business Development and General Counsel at CoinLab, Patrick Murck, recorded a podcast on April 26th, 2013 with the Association of Certified Financial Crime Specialists, a group connecting the global financial crime community. The talk was entitled: "Bitcoin’s promise and perils: What financial institutions should know about the new virtual currency."

From the ACFCS website:

Until recently, the virtual currency of Bitcoin may have had almost as many critics, skeptics and naysayers as it had actual users. Much has changed in the past few months. With the value of Bitcoins exploding, its exchanges doing a lively business, and more and more merchants accepting it as payment, Bitcoin now seems close to fulfilling its potential as a widely used, decentralized online currency.

One thing that has not changed, however, are the concerns over money laundering and financial crime risks that have swirled around Bitcoin since its inception. To delve into the mechanics of the online currency and explain how it interfaces with financial institutions worldwide, ACFCS is joined by Patrick Murck, General Counsel of the Bitcoin Foundation, on this Financial CrimeCast. He explains the inner workings of Bitcoin, and describes what steps the currency and its exchanges are taking to mitigate financial crime risks.

He also analyzes the impact of recent guidance by the US Financial Crimes Enforcement Network that lays out suggested regulations for virtual currencies for the first time, and explains what financial institutions should know about doing business with Bitcoin users.

Fincen's New Regulations Are Choking Bitcoin Entrepreneurs

By Jon Matonis
American Banker
Thursday, April 25, 2013

http://www.americanbanker.com/bankthink/fincen-regulations-choking-bitcoin-entrepreneurs-1058606-1.html

More than a decade ago, regulators nearly suffocated PayPal. Now it looks like they’re trying to squelch another disruptive, innovative payments system.

At least three exchanges in the U.S. that traded the digital currency Bitcoin have shut down, apparently as a result of guidance issued last month by the Financial Crimes Enforcement Network. That agency has emerged as the top threat, at least in in the United States, to the decentralized Bitcoin network – moreso than the widely reported price volatility and hacker attacks.

"They've been the single biggest factor for stomping out currency competition," says Bradley Jansen, a former assistant to Rep. Ron Paul and director of the Center for Financial Privacy and Human Rights. Speaking recently on The Daily Bitcoin podcast with Adam Levine, Jansen expressed surprise at how little focus bitcoin business leaders are putting on Fincen, especially considering how regulators thwarted earlier emerging payment systems like PayPal and e-gold. PayPal obviously survived and prospered – but only after selling itself to eBay and agreeing to put restrictions on its service. E-gold was not so fortunate.

"Fincen was able to stop currency competition with technical innovations in the 90s even before their expanded powers under the U.S. Patriot Act. And, what we've got now is a Fincen on steroids without clear restrictions from Congress," Jansen says.

The guidance requires certain intermediaries that handle virtual currency to register with Fincen as money services businesses, which entails recordkeeping and reporting responsibilities. And it says some of those businesses may additionally be money transmitters, which would mean fingerprinting of directors and officers and compliance with a patchwork of state licensing requirements.

Jansen postulates that the recent Fincen virtual currency guidance was issued ex post facto as a way to set the stage for potential prosecutions in the future.

"It's a failure of Congress to do its job. We knew that these guidelines and these prosecutions were in the works even last Congress. Ron Paul was the chairman of the House subcommittee that had jurisdiction over Fincen and he never had a single hearing on this."

In a recent speech, Fincen Director Jennifer Shasky Calvery said the new guidance aims "to protect [digital currency] systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors." She reiterated that the guidance does not apply to everyday users who pay or accept bitcoin for goods and services.

But by saddling startups with compliance requirements, and making them unattractive clients for regulated banks that despair of serving MSBs, Fincen is choking these businesses that facilitate conversion of bitcoins into dollars. Fewer exchanges and more red tape will make it harder for merchants or consumers (who, after all, must still pay the bills with dollars) to take advantage of the Bitcoin payment system’s speed, privacy and competitive costs.

On March 20 – just two days after the guidance from Fincen came out – the bitcoin exchanger bitme.com suspended operations indefinitely. Bitme was a relatively small operation, but it was widely suspected among bitcoin users in online forums that this closure resulted from difficulties related to potential regulatory compliance.

BTC Buy, another bitcoin exchange site, suspended services and closed permanently in early April, specifically citing the legal uncertainty brought up by the Fincen guidance.

Most recently, the largest bitcoin exchange to halt trading was Bitfloor, run by Roman Shtylman, who blamed "circumstances outside of our control." His New York operation had average daily trading volume of about $300,000 (depending on the exchange rate), with U.S. dollar deposits and withdrawals running through a Capital One bank account – which the bank unilaterally closed.  "I had very little time to act between receiving the account closure letter and the account being closed," Shtylman told PaymentsSource.

In this case, the regulatory guidance may have had an indirect effect. Bitfloor was registered with Fincen as an MSB but was not licensed as a state money transmitter. Shtylman surmised that Capital One had judged his business to be "not worth the risk."

Across the Atlantic and presumably unrelated to Fincen, Poland-based Bitcoin-24 suspended trading after the government there froze its bank account. It reportedly did so because a bank in Germany complained of compromised accounts transferring stolen money without identification to Bitcoin-24. Also, U.K.-based TransferWise, a foreign currency intermediary, ceased transfers to any bitcoin exchanges at the request of its banking partners. TransferWise had mostly been servicing customers in the U.K., Poland, and Spain.

It will be interesting to watch how Fincen intends to treat one-way, fixed-rate brokers that either buy or sell bitcoin at a fixed price. Since a two-way exchange market is not involved it could be seen as merely a typical commodity purchase or sale.

Tangible Cryptography LLC, which registered as an MSB this month, operates FastCash4Bitcoins for selling bitcoins and Bitcoins Direct for private off-exchange purchases. The two businesses function independently of each other and neither is technically an exchange. Bitcoins Direct is frequently closed to new clients and its cash deposit feature was recently cancelled.

The fact that bitcoin survives at all with so many powerful forces lined up against it is a testament to its resiliency and tenacity. Now, in addition to the vicious press coverage and persistent denial of service attacks on exchanges, the emerging cryptographic money has to contend with onerous and targeted regulation.

With respect to bitcoin and financial regulation, Jansen warns: "I think the lesson from the 90s was that you either become what Fincen wants you to be or you're not going to be."

Not in the U.S., that is. But jurisdictional competition will kick in and overseas exchanges will gain market share and liquidity. They just may not have U.S. customers.

FATCA Is Far from a Done Deal

By Jon Matonis
American Banker
Monday, April 1, 2013

http://www.americanbanker.com/bankthink/fatca-is-far-from-a-done-deal-1057947-1.html

Largely affecting those banks outside of the U.S., the Foreign Account Tax Compliance Act requires all foreign financial institutions to report the activities of their American clients to the Internal Revenue Service. But given the recent demands from other nations hinting at reciprocity, the overreaching legislation could impact banks and financial institutions in the U.S. as well.

Now, there is the additional element of certain key countries rejecting FATCA outright, and the Asia-Pacific region could end up holding the most sway.

Cited as a hindrance to foreign investment that would ultimately dampen U.S. economic growth and threaten American jobs, the FATCA penalties for noncompliance provide a strong incentive for overseas investors to avoid U.S. depository institutions altogether. Tax Management International Journal cites 11 reasons why FATCA must be repealed. Reason number one is "the height of arrogance."

It is either the reciprocity angle or the cascade effect of China's reluctance that has the greatest potential to derail FATCA.

"The United States should be moving toward full reciprocity," Georgetown Law School Professor Itai Grinberg, a former Treasury official, told Reuters. He added that it would be "deeply hypocritical" for the U.S. to ask for information on American taxpayers "without offering some kind of reciprocity."

Because direct reciprocity may mean foreign banks violating the privacy laws of their own jurisdictions, the Treasury Department has started negotiating bilateral agreements so that foreign governments can aggregate the bank data necessary for the IRS.

Attorney Brian Mahany of Mahany & Ertl, a law firm specializing in offshore reporting and compliance, believes that reciprocity is a bit misleading. "We are one of the few countries that tax based on worldwide income. Reciprocity isn't as important to most other nations," he added.

Also, the U.S. is one of the worst offenders globally when it comes to tax havens and "secrecy jurisdictions." For instance, Mahany said "many people, including Chinese nationals, hide money here." While President Obama has asked Congress for reciprocity, he is dealing from a position of weakness. "The support for FATCA is not very strong," Mahany added.

However, with global financial transparency on the increase and more countries considering taxation on citizen's worldwide income as a way to combat growing budget deficits, reciprocity with U.S. financial institutions starts to look appealing.

On the China issue, Mahany concedes that the U.S. government will never get every nation to join FATCA and the Asia-Pacific countries are heavily influenced by Beijing. He states, "China is certainly an important player. Currently, none of the Asian-Pacific countries are signed up, although Japan will probably be the first. Without Singapore, China, Hong Kong and Macau, FATCA faces real challenges."

James Jatras of the Repeal FATCA campaign claims that Hong Kong, like the People’s Republic of China, is not even on the list of 50 countries the Treasury claims to be negotiating with.

There will probably be so few U.S. citizens holding bank accounts in China that the cost of implementing FATCA outweighs the benefit to China's financial institutions. Also, the Chinese taxpayers with U.S. bank accounts appear to be of minimal interest to the Chinese government, according to Lisa Smith of iExpats.com.

"Before rushing to safe keep all your money in Communist China, remember that even if China elects to ignore FATCA, they may still cooperate with the IRS on a case-by-case basis," according to Mahany. China and the U.S. signed a Mutual Legal Assistance Agreement in June of 2000.

However, none of this potentially disruptive turmoil means that financial institutions should put FATCA-related IT infrastructure plans on hold until China makes its decision, because foreign banks and other financial institutions are currently ill-prepared for FATCA.

According to Mahany, "Implementation has been delayed once but folks should not depend on that happening again. The penalties for not complying outweigh the risks of noncompliance."

Meredith Moss of Finomial believes "that a technology solution is the only way to go, given the tremendous amount of data, PDFs and paper documents to sift through." She says that banks moving forms online and creating a comprehensive FATCA audit trail will demonstrate diligence to the regulators and that "due diligence should be underway by January 2014 and completed by July 2014."

Although experts in the FATCA preparation business tend to agree that moving forward with expensive FATCA compliance plans is the prudent and logical step to be taking now, a comprehensive and worldwide FATCA rollout is far from a foregone conclusion. For those financial institutions and their shareholders offended by the overreaching legislation and lack of respect for mutual sovereignty, the cost savings alone may start to make FATCA's non-compliance penalties look tolerable.

FinCEN Spying Plan Invites Privacy Workarounds

By Jon Matonis
American Banker
Thursday, March 21, 2013

http://www.americanbanker.com/bankthink/fincen-spying-plan-invites-privacy-workarounds-1057728-1.html

The dangers to financial privacy are monumental. Consider an Obama administration plan to give spy agencies unfettered access to data on American citizens and others who bank in the U.S.

Suspicious Activity Reports, filed by financial institutions that operate in the U.S., are the primary documents that the Financial Crimes Enforcement Network intends to share. The reports cover all personal cash transactions exceeding $10,000, suspected incidents of money laundering, loan fraud, computer hacking and counterfeiting.

The Treasury Department proposal, revealed by Reuters last week, aims to consolidate financial data banks, criminal records and military intelligence. This initiative will put intelligence agencies, such as the Central Intelligence Agency and the National Security Agency, on the same footing as the Federal Bureau of Investigation, which currently does not have to make case-by-case informational requests to Fincen.

Also under the new proposal, Fincen's database would be linked to the Joint Worldwide Intelligence Communications System, which U.S. defense and law enforcement agencies use to share classified information.

Money was never meant to be a method of supranational identity tracking. Its use in that way could signal some level of law enforcement desperation. When all other enforcement tactics fail, surveil the finances.

More than 25,000 financial firms, including banks, securities dealers, casinos, and money transfer agencies, routinely file "suspicious activity reports" to Fincen, according to the Reuters article. Banks and other firms tend to over-report some financial details of ordinary citizens since the requirements for filing are so strict they don't want to be accused of failing to disclose activity that later proves questionable.

Increasing encroachment against financial privacy like this Fincen move "raises concerns as to whether people could find their information in a file as a potential terrorist suspect without having the appropriate predicate for that and find themselves potentially falsely accused," Sharon Bradford Franklin, senior counsel for the Rule of Law Program at the Constitution Project, told Reuters.

One protection from becoming scooped up in a fishing expedition and being falsely accused is the use of virtual or alternative currencies. But this week, Fincen issued guidance on virtual currencies and regulatory responsibilities.

Clarifying circumstances where the "money transmitter" definition applies under the law, Fincen classified de-centralized virtual currency as a convertible virtual currency that has no central repository and no single administrator, and that persons may obtain by their own computing or manufacturing effort. Although bitcoin was not singled out by name, the guidance appears directed at cryptocurrencies that operate in a peer-to-peer, distributed fashion such as Bitcoin.

The primary impact of the likely tighter compliance will be felt by the bitcoin-to-fiat exchanges operating in the U.S. and this will lead to jurisdictional competition, as seen in online casino gambling where the more entrepreneurial jurisdictions rose to dominance by embracing the technology early and not overregulating.

Almost serendipitously, discussions about adding privacy extensions to the Bitcoin cryptographic money protocol have been increasing lately.

Bitcoin is nonpolitical money and it falls outside the scope of reporting financial institutions. Since bitcoin does not provide user and transactional privacy by default, multiple bitcoin wallets and Tor, a client software and volunteer server network that enables online anonymity, can enhance privacy without modification to the core Bitcoin code. Nonetheless, code-modifying proposals for augmenting Bitcoin privacy have been introduced. One idea calls for automatic mixing techniques, which would periodically give all users the opportunity to shuffle coins among one another, making the money harder to trace without implicating individuals. Another concept is "coin control," a method for users to select which of their wallet’s multiple addresses to use as the "from address" (currently picked somewhat randomly by the client software).

Various proposals for improving bitcoin privacy include "Patching The Bitcoin Client" (2011), "Automatic Coin Mixing" (2012), "Coin Control" (2012), and "Yet Another Coin Control Release" (2013).

Also, a recent cryptographic bitcoin privacy extension submitted by researchers from The Johns Hopkins University was accepted for presentation to the IEEE Symposium on Security & Privacy in Oakland, Calif. The paper Zerocoin: Anonymous Distributed E-Cash from Bitcoin will be introduced on day two of the May conference.

Having received a preliminary copy of the academic paper, I interviewed Hopkins research professor Matthew Green about some of the details of Zerocoin.

Operating as a decentralized layer of anonymous cash on top of the existing Bitcoin network, "Zerocoin creates an 'escrow pool' of bitcoins, which users can contribute to and then later redeem from," Green explained. Users receive different coins than they put in (though the same amount) and there is no entity that can trace your transactions or steal your money. "Unlike previous e-cash schemes, this whole process requires no trusted party. As long as all the nodes in the network support the Zerocoin protocol, the system works in a fully distributed fashion," added Green.

Zerocoin developers are working on improved efficiency because implementation is impractical today given the space constraints of the “blocks” that make up the Bitcoin public ledger. "For one thing, the transactions are very large (40kb to spend a coin)," Green said. "While this isn't the end of the world – and bandwidth is always increasing – supporting these would put quite a strain on the block chain."

When I asked Green about the possibility of a "back door" for law enforcement that had been floated recently, he clarified, "The back door isn't part of Zerocoin. There's absolutely no need for it, and building one in would take significant additional effort. In fact, we only mentioned it as a brief note in the conclusion of our paper, mostly to motivate future research work."

If someone did try to build a back door for any reason, the open source Zerocoin would quickly become Zero-adoption.

Expect Blowback if KYC Rules Are Expanded

By Jon Matonis
American Banker
Tuesday, February 26, 2013

http://www.americanbanker.com/bankthink/expect-blowback-if-kyc-rules-are-expanded-1057055-1.html

The uncovering of an alleged $200 million credit card fraud scheme has triggered calls to expand know-your-customer rules. Those who prescribe ever-greater surveillance should be careful what they wish for.

In what was described as a sprawling criminal enterprise stretching across dozens of states and numerous countries, fabricated identities were used to obtain credit cards and doctor credit reports to borrow large amounts of money. At the heart of the alleged scheme were the merchant processor accounts used to accept and process the cards with stolen identities, authorities announced on Feb. 5. ATM withdrawals involve video surveillance and direct purchasing of merchandise doesn't yield cash. So the fraud ring allegedly used merchant accounts, mostly those of jewelry stores, since it is easier to obtain cash in a bank account using a fictitious sales transaction.

In some instances, sham companies were created and then those businesses established the direct relationship with the merchant processor and purchased the credit card terminals, the FBI said. Involving 25,000 fraudulent credit cards, 7,000 fake identities, and 1,800 "drop addresses," the conspirators allegedly wired millions overseas to Pakistan, India, the United Arab Emirates, Canada, Romania, China, and Japan.

For the duration of the probe, account information was known about the senders of international wire transfers, but not much was known about the recipients.

That is why experts are now pointing to this alleged scheme as justification for the expansion of Bank Secrecy Act and anti-money laundering regulations to include the identification and scrutiny of the recipients of funds associated with high-risk transactions.

Micah Willbrand, director of AML and compliance for LexisNexis' North American Financial Services Markets, told a trade publication, "Laws and regulations today only require that the bank have KYC [know your customer] in place for the sender, not the receiver of money."

"But card fraud schemes demonstrate why it's imperative to have KYC controls in place for both senders and recipients," he adds. As a result of the Foreign Account Tax Compliance Act, "all countries are realizing we need to know more about who's receiving the money. We need to be more transparent about how money is moving around the world, and that is something everyone is coming around to."

That is a very optimistic assumption, especially since considerable resistance already exists regarding global standardization of information-sharing. Ultimately, compliance would require a lot more legwork and due diligence on the part of banks, and financial institutions have been reluctant to move in this direction. If banks were required to replicate the current KYC controls for recipients as well as senders, the jurisdictional challenges would be complicated and expensive.

Willbrand justifies the investment cost in a subtle Risk.net advertorial “article”: "The implementation of FATCA will guide financial institutions … globally by providing them with a reference on what verification is required of their customers and the level of due diligence required from them based on their asset transfers. FATCA will, therefore, enable FIs everywhere to create a standardised customer onboarding process that will clearly define risk tolerances and accepted practices for engaging with customers."

Expanding KYC guidelines to include the recipient of funds would require a massive uniform international process that is continually monitored and updated. Additionally, the cross-border sharing of customer information could realistically lead to equally determined calls for reciprocity on the part of U.S. financial institutions. U.S. banks that act on behalf of the recipients of international funds could find themselves swarmed with overseas requests for KYC information prior to any funds transfer.

For Willbrand, it's a Big Data problem of not enough domestic and international information available to detect anomalies and potential risks earlier. Automated third-party systems are more efficient than the manual review systems in place at some banks today. Willbrand says, "Data about identities is not combined internationally. The only way to get an accurate profile is by cross-checking public records with utility bills and bank accounts around the world."

Willbrand's call for expansion of money transfer surveillance powers represents an overreach that merely attacks the symptom of the problem. Privacy and data security rules vary, and sometimes conflict, in the many jurisdictions around the world. Big Data might be the answer, but it should be Big Data at the front end, during the credit card account opening process and the determination of spending limits – not Big Data that extends privacy violations worldwide.

Coinbase: Swapping Bitcoin Privacy for Banking Convenience

By Jon Matonis
PaymentsSource
Tuesday, February 19, 2013

http://www.paymentssource.com/news/swapping-bitcoin-privacy-for-banking-convenience-3013278-1.html

I've always had this nagging feeling about Coinbase’s exchange service and I just couldn't quite put my finger on it.

The San Francisco startup receives praise for its simple method of acquiring and selling bitcoins, a digital currency, via one’s U.S. bank account. In fact, Coinbase, founded in June 2012, is now selling over $1 million worth of bitcoins per month. The firm apparently ran out of inventory last week.

Then, it hit me. This is just like buying bitcoins from your bank – or from the Internal Revenue Service. If a bank offered a bitcoin purchasing option from its website, it would look like Coinbase. If Coinbase cut them in on the commission, it could probably white-label the service directly to banks.

Nothing wrong with that, but it means Coinbase fails to leverage the unique financial privacy aspects of the Bitcoin network. I do not fault founder and CEO Brian Armstrong, because he’s launched a much-needed Bitcoin service at a critical point in the digital money's evolution. Here's the rub: to address the fraud and compliance issues around the irreversible sale of a privacy product, Coinbase has simply removed the privacy.

Currently, Coinbase provides its exchange service in the U.S. only and it offers two methods for linking a bank account, “instant account verification” and “challenge deposit verification.” For those who are uncomfortable providing their private online banking usernames and passwords to Coinbase, the alternate method offers a typical challenge deposit process similar to linking a bank account to PayPal. (In challenge verification, a company makes two small deposits to the user’s account, and the user proves she is the accountholder by entering those amounts into the company’s site.) Coinbase does not allow for other less-intrusive payment methods, such as a cash deposit at a bank branch, via an intermediary like TrustCash, or cash bill payment at a retail location, through a network like ZipZap.

(Coinbase also signs up merchants to accept bitcoin and landed Reddit as a client last week.)

Coinbase is not licensed as a money transmitter in any state, nor is it registered as a money services business with the U.S. Treasury’s Financial Crimes Enforcement Network. I applaud the company for dispensing with these formalities because, since it is only selling a cryptographic token and not a financial instrument, such registration and licensure is not legally required.

The company says it has an anti-money laundering program, but it was not listed on their web site, and again, it is not a legal requirement for this business. Besides, the majority of what constitutes an AML program is already covered via Coinbase's strong relationship to the user's financial institution, with one of the exceptions being the identification of aggregated transactions from multiple bank accounts. But even this would be easy enough for Coinbase to determine based on the additional user data collected.

According to its privacy policy, Coinbase collects data about visitors to the site sent by their computer or mobile phone (e.g. IP addresses) and device information including but not limited to identifier, name and type, operating system, location, mobile network information and standard web log information. Those who sign up for the service may have to provide their name, address, phone number, email address, and bank or credit card numbers. Before using the service, customers may further have to give a Social Security number or birthdate, and they are subject to credit checks or identity verification by third parties.

Furthermore, there is no indication that Coinbase deletes the internal bitcoin wallet transfer logs or the associated bitcoin address logs. With more observable data points, the privacy of all bitcoin transactions can become cumulatively degraded.

By criticizing the collection of personal information for the purchase of bitcoin, a harmless cryptography product, I am not simply "letting the perfect being the enemy of the good." Caution is strongly advised when dealing with Coinbase. The potential exists for enhanced surveillance and network traffic analysis enabled by the supreme identity management that comes built-in with Coinbase. For instance, it would not be advisable to play Bitcoin casino games or poker with Coinbase-acquired bitcoins that weren't properly "mixed."

Of course, not everyone requires privacy in their transactions, so Coinbase may suit some users’ purposes just fine. However, Satoshi Nakamoto, the pseudonymous creator of Bitcoin, didn't sit down and code the decentralized protocol because he was upset about banking efficiency and trusted third parties. He wrote Bitcoin as a value transfer system that could survive hostile attacks.

When Armstrong says, "our goal is to make [B]itcoin easier to use, and (longer term) to help bring fast, cheap, international payments to the whole world" and "Bitcoin represents a fundamental leap forward in payment technology and it’s going to bring massive efficiencies to many areas of commerce," he's playing only to the low-fee, frictionless attributes of Bitcoin. He doesn't mean that Coinbase's goal is to facilitate payments for the anonymous and safe purchase of WordPress features in authoritarian countries or to bypass a politically-motivated blockade against WikiLeaks.

When it comes to the financial privacy and censorship-resistant payment attributes of Bitcoin, Coinbase falls short, and that, I think, is likely to impede the startup’s growth. The firm seems not to care. Its privacy policy states, "We may share your personal information with law enforcement, government officials, or other third parties when we are compelled to do so by a subpoena, court order or similar legal procedure."

When that time comes, you better believe that Coinbase will have a lot to share.

EU Court Strikes Down Swift's Blockade Against Iranian Banks

By Jon Matonis
Forbes
Friday, February 8, 2013

 http://www.forbes.com/sites/jonmatonis/2013/02/08/eu-court-strikes-down-swifts-blockade-against-iranian-banks/

Reuters is reporting that a European Union court has ruled against the EU banking sanctions imposed on one of Iran's largest banks, which extends to the payment sanctions imposed by Swift in March of last year. This represents the second such judgment against the banking sanctions and brings into question the legitimacy of using the Swift payments network as an economic weapon.

On Tuesday, the EU's General Court ruled that, in the case of Bank Saderat, there was insufficient evidence demonstrating that the bank was involved in Iran's nuclear program. Last week, the court issued a similar ruling in the case of Bank Mellat, the largest private sector lender in Iran. Boycotted by the EU since July 2010 and blocked out of Swift since March 2012, the two banks had filed suit with the European court to challenge those sanctions. EU governments now have two months to appeal the recent decisions.

The Society for Worldwide Interbank Financial Telecommunication, or Swift, is a worldwide financial messaging network to facilitate the interbank transfer of funds. Speaking after a news conference in Dubai, Swift's chief executive Gottfried Leibbrandt indicated that talks are continuing with European regulators about the appropriateness of requiring Swift to impose sanctions on countries such as Iran.

A global network for the transfer of funds loses some of its effectiveness once its neutrality becomes tarnished, because any member of the network could be similarly targeted without recourse.

Leibbrandt said, "There is a dialogue going on around the trade-off between using us as a sanctions tool for other countries and impeding our role as really serving as a global infrastructure mechanism." He added that "there are lots of alternatives to Swift" and international transactions can still be executed by sending instructions via telephone or email, but such alternatives are "not as secure as Swift and [lack] the convenience factor."

One such alternative is the gold bullion trade. Buyers of Iranian oil and gas must deposit payment in a local bank account and it cannot be transferred abroad. Iran sells natural gas to Turkey and receives payment in Turkish lira, which are then used to purchase gold bars in Turkey. Couriers using hand luggage carry the bullion to Dubai, where it is sold for foreign currency or shipped to Iran.

Turkish Economy Minister Zafer Caglayan said, "We will continue to make our gold exports this year to whoever seeks them. We have no restrictions and are not bound by restrictions imposed by others." Turkey was granted a six-month U.S. waiver that exempted it from financial sanctions against Iran but the waiver is due to expire in July. Also in December, the U.S. Senate passed expanded sanctions on trade with Iran which included restricting trade in precious metals.

Caglayan maintained that Turkey's state-owned Halkbank will continue its existing transactions with Iran but some other banks had pulled back in response to U.S. pressure since those private banks had activities in the U.S.

Also, Washington has warned Moscow on the implications for Russian banks and has sanctioned the parent company of Russia's Mir Business Bank, state-owned Bank Melli Iran, claiming that the Moscow-based bank has become a conduit for Iranian's seeking to keep trade flowing. "Only problem is Russians don't care what we think," according to Jim Rickards, author of Currency Wars: The Making of the Next Crisis.

In the meantime, over 30 cases are still pending at the EU General Court, including cases filed by the Central Bank of Iran and the National Iranian Oil Company.

Egypt Imposes New Cash Controls At Border

By Jon Matonis
Forbes
Thursday, December 27, 2012

http://www.forbes.com/sites/jonmatonis/2012/12/27/egypt-imposes-new-cash-controls-at-border/

Currency controls are now in place and there is a ban on traveling with more than $10,000 in cash. Egyptian officials are becoming worried as savings account withdrawals increase in the face of a depreciating pound and public rumors of central bank confiscation of deposits.

On Tuesday, Presidential spokesperson Yasser Ali confirmed the government's decision which limits all travelers from "bringing foreign currency into the country or carrying it out to only $10,000." Ali added that "any funds over US$10,000 must be transferred electronically" and the decision also forbids sending cash through the mail.

Previously under the original law, any amounts above $10,000 or their equivalent in foreign currencies simply had to be declared to authorities.

With foreign investors and tourists holding back now, the post-revolutionary Egyptian government of Mohamed Morsi is finding it difficult to maintain control over its finances and budget deficit. As a result, Egyptian officials have delayed the high-level talks that are necessary to secure a $4.8 billion loan from the International Monetary Fund (IMF).

New thinking at the International Monetary Fund now accepts that capital controls are sometimes necessary to prevent destabilizing capital flows. It is not clear from the IMF Survey if this new view would apply to the control of outflows from Egypt which has seen its foreign currency reserves fall from $36 billion in 2010 to $15 billion today dangerously close to the IMF's recommended coverage of three month's of imports. Estimates put hard currency reserves at just about $4 billion.

After visiting one exchange office that had run out of dollars, Cairo resident Mahmoud Kamel said, "I want to exchange money because I'm afraid the Egyptian pound will not have any value soon."

Furthermore, due to the cumulative limit of $100,000 in effect from nearly two years ago, many wealthier Egyptians have maxed out and are unable to send money abroad.

The Central Bank of Egypt said Tuesday that the Egyptian pound was trading at 6.20 per U.S. dollar compared to 6.00 during the first half of the year. Without necessary currency reserves to fund imports, it is likely that the pound will fall in value sharply.

Bitcoin’s Greatness Not Realized By Succumbing To Regulation

By Jon Matonis
Forbes
Sunday, December 9, 2012

http://www.forbes.com/sites/jonmatonis/2012/12/09/bitcoins-greatness-not-realized-by-succumbing-to-regulation/

Last Thursday's news that French company Paymium and their exchange division, Bitcoin-Central, partnered with a licensed and regulated Payment Services Provider (PSP) ignited a heated debate within the bitcoin community. Eventually, Bitcoin-Central tempered their overly-enthusiastic initial announcement.

"It feels like these French dudes are bringing saltpeter to a rave," declared Daniel Stuckey, a writer at Motherboard ridiculing the company for dismissing the founding concepts of bitcoin.

Not singling out the Paymium effort, there is a powerful undercurrent rejecting the notion that bitcoin exchange companies should seek approval to operate within the existing regulatory framework at all. That undercurrent has some validity. That is if larger forces at work don't settle the issue before then. However, it is the jurisdictions that they elect to operate within plus the specific exchange types that determine the level of required compliance. Legal counsel willing to challenge the status quo is sorely needed for the days ahead.

Floating-rate, rather than fixed-rate, exchanges are going to require the holding of customer funds in national currencies. Exchanges for actual delivery, rather than cash-settled futures exchanges quoted only in bitcoin, will also require holding customer funds in national currencies. Customers with large balances simply aren't going to use exchanges that don't identify their legal jurisdiction, delineate funds, and adhere to some type of recourse for insolvency and stolen funds. So, certain jurisdictions and their financial regulators tend to get involved. This is also the case with Mt.Gox being based in Japan.

Here's the real issue -- regulation in this context is only a bad thing if it leads to crony capitalism or if it suggests that "still-in-beta cryptographic play money" bitcoin requires regulation similar to a national political currency.

While an individual's bitcoin transactions may still be semi-private, the auditable address links on the block chain and identity requirements for entering or exiting the exchange will remove any doubt as to how much bitcoin was spent or earned. Also, the case can be made that, despite bitcoin's basis in mathematics and being devoid of ideology, graph theory analysis of the block chain can be significantly improved by having more 'regulated' data points thus cumulatively degrading the privacy of all bitcoin transactions. Bitcoin address logs for a bitcoin exchange are like IP logs for a VPN.

Yes, debit cards with a bitcoin logo are cool and they can facilitate easy movement of funds associated with bitcoin balances. But legacy debit cards are institutionalized vehicles of identity and they promote half-way measures. Any role for current financial institutions in the societal wealth transfer to cryptocurrency will come from embracing bitcoin on its terms. If banks want to participate in a meaningful way, they will have to adapt to Tor exit nodes, coin mixing services, escrow provisioning without identity, and underwriting private insurance on balances.

Bitcoin's great promise lies in its potential ability for both income and consumption anonymity. It is this feature alone that allows users to maintain the same financial privacy as physical cash today and it is this feature that will also lead to liberating advancements such as a thriving and interconnected System D, unhampered and undiluted freedom of speech, and superior asset management that can truly be said to be off-the-grid.

Those who support the antithetical overlay of  bitcoin on the current financial system ensure us that it will only be temporary and that we must build bridges. That would be nice but it's a fairy tale. It reminds me of the Marxist theory of historical materialism and the Marx-Engels ideology that if we only tolerate the bourgeois state during the transitional advancement to a higher phase, we will see the complete "withering away of the state."

True revolutionary transformations just don't evolve that way. Linux didn't first co-exist within the Microsoft DOS and Windows environment and then decide to spin-off into a competing operating system. File sharing under the BitTorrent protocol didn't conduct a Hollywood outreach program and explain what the technology would mean for the film and recording studios.

One doesn't request freedom, one claims freedom. As Bitcoin Forum member btcbug stated about bitcoin's acquiescence to legality, "It's kind of like a bunch of slaves breaking out and then running straight back because they were so brainwashed they didn't even recognize freedom." However, the sad reality is that most of the slaves don't really want to be free which is exemplified by voting for ever-increasing State services that have to be funded through confiscatory levels of taxation and inevitably that means diminishing financial privacy.

Get real people! This is about more than just "agreeing to disagree" when it comes to stricter regulation being a good thing. Bitcoin without user-defined anonymous transactions is a neutered bitcoin. Paper cash comes with more financial privacy. In circular logic fashion, the pro-regulation adherents must then answer to their success, "what have we really accomplished?"

For further reading:
"Necessary conditions for the long-term success of Bitcoin", ShadowLife, November 7, 2012
"Problems with State Money Transmission Laws Generally", Letter from Aaron Greenspan, November 7, 2012
"FaceCash Founder Claims New Financial Regulation is Unconstitutional", Elise Craig, February 2, 2012

Prediction Market 'Bets Of Bitcoin' Available To U.S. Customers

By Jon Matonis
Forbes
Thursday, December 6, 2012

http://www.forbes.com/sites/jonmatonis/2012/12/06/prediction-market-bets-of-bitcoin-available-to-u-s-customers/

Launched in August 2011, Bets of Bitcoin is an anonymously-operated prediction market using the cryptographic money bitcoin. Users from anywhere in the world can place bets on the yes or no outcome of future real world events, such as will gold surpass $1,800 per ounce by December 31, 2012 or will the existence of extraterrestrials by confirmed officially by the U.S. government before the end of the year.

The openness and accessibility of the betting site has become more important now that the Commodity Futures Trading Commission (CFTC) has taken legal action against non-anonymous Dublin-based Intrade for unlawfully soliciting and permitting U.S. customers to buy and sell options predicting whether specific future events would occur. Ridiculed as useless and obsolete, the CFTC appears to have raised the bar on doublespeak as they persecute markets with actual integrity and simultaneously reinforce the corruption in the so-called 'officially-sanctioned' markets.

Intrade bowed to pressure from regulators on November 26th and announced that it was closing its doors to U.S. bettors. In a stunning justification of global policing power and indicating a particular annoyance with prediction markets, David Meister, the Director of the CFTC’s Division of Enforcement, explained why even foreign operators can and will be regulated:

"It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt. The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity. Today’s action should make it clear that we will intervene in the ‘prediction’ markets, wherever they may be based, when their U.S. activities violate the Commodity Exchange Act or the CFTC’s regulations."

Prediction markets like Bets of Bitcoin and Intrade have been popular for betting on the outcome of political elections, winners of Hollywood Oscars, winners of sporting events, and even scientific breakthroughs. According to Wikipedia, certain kinds of prediction markets may also create controversial incentives.

Other real-money prediction markets operate in Gibraltar, New Zealand, and the United States. There is also an innovative binary options broker based in Cyprus that was denied U.S. regulation when sought.

Regardless, regulation by CFTC or any U.S. regulatory body should not even be the objective of prediction market sites. Without anyone being victimized, regulating the ability of individuals to play games or trade on predicting future events violates free speech. Prediction markets have become a valuable research tool and "one big thing these markets can do is allow researchers to test the hypothesis of the 'wisdom of crowds'," says Rajiv Sethi, a professor of economics at Barnard College.

The binary option and derivatives trading site Nadex was recently turned down for regulation when it attempted to include political event contracts in its already-regulated range of markets for financial contracts.

Instead of seeking regulatory approval, Bets of Bitcoin focuses on financial privacy and anonymity so that it's irrelevant where the customers are geographically located. Anyone can create a bet statement and new bets are vetted by moderators to eliminate unwanted bets or bets whose outcome can't be easily determined or is easily manipulated.

Granted, Bets of Bitcoin differs from Intrade in several other ways, most notably in the way that the instruments are constructed. Intrade offers a full trading platform so you can get in and out of positions even before the expiration date whereas Bets of Bitcoin offers an allocated payout of losing bets based on weighted time of entry and shares commission with the bet creator. Liquidity is of course better on Intrade since it has been around much longer. The largest bet currently listed on Bets of Bitcoin involves a total of ฿258.55 (equivalent to $3,490.43) on whether the price of gold will or will not exceed $1,800/oz by December 31, 2012.

Online gambling is still illegal in the United States through federal laws and many state laws, but operating with "play money" like Bitcoin rather than "real money" could enable relationships with U.S. players to be cultivated. Due to regulations in the U.S. that restrict what U.S. residents can do with their cards, Intrade would not permit the use of U.S.-based credit or debit cards. However they did require customers to agree that it is legal for them to participate in the prediction marketplace.

Intrade says that non-U.S. customers will continue to have access to the company's real-money prediction markets and they promise that "in the near future we'll announce plans for a new exchange model that will allow legal participation from all jurisdictions - including the U.S."

Why wait? In the meantime, test your predictive skills at Bets of Bitcoin and turn your wisdom into bitcoins.

What’s Your Bitcoin Strategy? WordPress Now Accepts Bitcoin Across The Planet

By Jon Matonis
Forbes
Friday, November 16, 2012

http://www.forbes.com/sites/jonmatonis/2012/11/16/whats-your-bitcoin-strategy-wordpress-now-accepts-bitcoin-across-the-planet/

Best CEO Toni Schneider in 2007

I awoke to incredible news this morning. Leading web publishing service Wordpress.com announced that they will begin accepting the nonpolitical cryptographic money Bitcoin as a payment method for various upgrades.

Then I remembered that WordPress.org powers our online publishing platform. It also powers the blog platform for The New York Times, CNN, Reuters, Mashable, NBC Sports, GigaOm, TechCrunch, ELLE Girl, RealClearPolitics, TED, National Football League, General Motors, UPS, eBay, Sony, and Volkswagen.

Not only does this strategic move bring new unserved customers into the WordPress fold, it paves the way for the online publishing platform run by parent company Automattic not to be restricted by the choices of its payment partners. Companies doing business and accepting payments globally are subject to increasing fees and sometimes arbitrary chargebacks which no doubt impact their bottom line. WordPress would probably not even mind if a large chunk of their mainstream payment processing migrated to bitcoin.

Over 57.8 million WordPress sites are written in 120 different languages creating nearly 32 million new user posts each month.

Criticizing the centralized bankcard associations and citing payment method deficiencies, WordPress spokesperson Andy Skelton said, "Unlike credit cards and PayPal, Bitcoin has no central authority and no way to lock entire countries out of the network. Merchants who accept Bitcoin payments can do business with anyone." And thus the planet becomes immediately open to their products and services.

"PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions," continued Skelton. "Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control." [Note: WordPress.com updated their original blog post which mentioned Cuba and Iraq.]

Vitalik Buterin of Bitcoin Magazine brings up an equally significant reason for accepting payment in Bitcoin, "Another argument which WordPress did not mention is anonymity. Many bloggers that operate in restrictive regimes do so using pseudonyms for their own protection, and traditional payment methods like credit cards and PayPal are unusable for those bloggers because they expose the payer’s physical identity." With user-defined anonymity and identity privacy, bitcoin offers unparalleled safety to dissident bloggers and free speech advocates.

Initially, processing will be managed by payment service provider BitPay, Inc. of Orlando, Florida. BitPay shields WordPress from having to handle actual payments by immediately converting and transferring sales proceeds into a WordPress merchant bank account. This minimizes the currency risk for the accepting merchant. An important configurable option also allows the merchant to retain Bitcoin balances for their own account and subsequent usage.

Although WordPress states that they are not waiting for a sufficient number of confirmations from the bitcoin block chain, it is largely irrelevant for e-services since upgrades can simply be deactivated or reversed due to a failed payment.

WordPress may not stand as the lone giant for very long since Reddit CEO Yishan Wong hinted last week at the social news site's willingness to begin transacting in Bitcoin for Reddit Gold subscriptions. Reddit is a subsidiary of Condé Nast's parent company, Advance Publications.

As the bitcoin juggernaut continues to roll forward absorbing merchants and customers globally it leaves archaic and unsuspecting payment methods in its wake. As one bitcoin forum member articulated, merchants will increasingly be asked: "What's your Bitcoin strategy?"

Department Of Homeland Security To Scan Payment Cards At Borders And Airports

By Jon Matonis
Forbes
Wednesday, November 7, 2012

http://www.forbes.com/sites/jonmatonis/2012/11/07/department-of-homeland-security-to-scan-payment-cards-at-borders-and-airports/

Typical wireless electronic card reader

Travelers leaving or entering the United States have long had to declare aggregated cash and other monetary instruments exceeding $10,000. Now, under a proposed amendment to the Bank Secrecy Act, FinCEN (Financial Crimes Enforcement Network) will also require travelers to declare the value of prepaid cards that they are carrying, known now as "tangible prepaid access devices."

Expected to be finalized by the end of this year, the cross-border reporting modifications stem from a broader October 2011 definition of payment methods and form factors that replaced the term "stored value" with the term "prepaid access" in an effort to more accurately describe the process of accessing funds held by a payment provider.

Enforceability falls to U.S. Immigration and Customs Enforcement and U.S. Customs and Border Protection both within the Department of Homeland Security, which is already developing advanced handheld card readers that can ascertain whether a traveler is carrying a credit card, debit card, or prepaid card. This differentiation is important because only prepaid card balances will need to be added to declaration report forms.

Acknowledging that many questions still remain and that enforcement may not be straightforward, Cynthia Merritt, assistant director of the Retail Payments Risk Forum at the Federal Reserve Bank of Atlanta, had this to say about the handheld readers:

"Furthermore, according to the comments, the enforcement challenge is not new, nor is the concept of a device or document that can be used to access value. The current challenges are similar to those presented in the past with other monetary instruments such as checks, money orders, and traveler checks."

Merritt also stated that, "When law enforcement takes possession of a cash or monetary instrument at the border, they are effectively holding the funds, but not so with a prepaid card or other device. Holding the card does not provide access to the underlying funds."

Other questions to be settled include how to determine mobile phone wallet and key fob balances that can function in a manner similar to card swiping, how to distinguish between reloadable and non-reloadable prepaid cards, how to distinguish between bank-issued and non-bank-issued prepaid cards, should closed loop gift cards be included in the cross-border reporting requirements, what to do about cards that clear customs with a minimal balance but are then subsequently reloaded with an amount in violation of the reportable limits, and what to do about a large number of nonpersonalized, unembossed cards.

Also, would a traveler have legal recourse for damages if agents seized a proper debit card in the mistaken belief that it was a reportable prepaid card?

These complications and others imply that FinCEN's NPRM [Notice of Proposed Rule Making] may yet undergo some revisions in order to bring the regulations in sync with the realities of the prepaid card industry.

In the meantime, travelers with a memorized Bitcoin private key can breathe a sigh of relief, because according to an important April 9th, 2012 letter to FinCEN Director James Freis from Homeland Security Investigations it appears that intangible brainwallets are safe for the moment:

"Should the border declaration apply to codes, passwords and other intangibles as well as to any tangible object that is dedicated to accessing prepaid funds?"

"HSI believes that border declaration should not apply to codes, passwords and other intangibles. Identification and verification of intangibles in the context of border enforcement poses logistical and potential legal issues that are not contemplated by currency and monetary instrument declaration regulations. The structure of the currency and monetary instruments declaration regime, hinges on the existence of a physical object. The language requires something that can be passed from one individual to another in order to be presented to a third party for execution/payment."

Bitcoin Cryptocurrency: Is "Digital Gold" The Future Of Money?

Jim Puplava, President of PFS Group and host of Financial Sense Newshour, welcomes Jon Matonis, an e-Money researcher and Crypto Economist focused on expanding the circulation of nonpolitical digital currencies. Jon explains the definition of "crypto-currency" and discusses Bitcoin, the first true crypto-currency, which he describes as ''digital gold." Jon and Jim discuss the potential of Bitcoin, if it will eventually compete against government monopoly currencies, and if crypto-currencies could in fact become the future of money itself (10/31/2012).

Jon Matonis on Bitcoin CryptoCurrency: Is "Digital Gold" The Future Of Money? The audio file is hosted below or you can download here.

http://www.financialsensenewshour.com/broadcast/insider/fsn2012-1031-1-insider-i8mw5o3.mp3


Articles referenced during the interview:
Bitcoin Foundation Launches To Drive Bitcoin's Advancement (9/27/2012)
Brainwallet: The Ultimate In Mobile Money (3/12/2012)
Key Disclosure Law Can Be Used To Confiscate Bitcoin Assets (9/12/2012)
The Bitcoin Richest: Accumulating Large Balances (6/22/2012)

Generic Viagra Industry Is Pro-Choice In Payments

By Jon Matonis
Forbes
Friday, October 26, 2012

http://www.forbes.com/sites/jonmatonis/2012/10/26/generic-viagra-industry-is-pro-choice-in-payments/

"Right now most affiliate programs have a mass of declines, cancels and pendings, and it doesn’t depend much on the program IMHO, there is a general sad picture, fucking Visa is burning us with napalm," screams one pharmaceutical operator.

Payment intervention is defined as the use of the payment mechanism to detect or prevent certain transactions that are deemed to be politically incorrect or against a particular jurisdiction's law. The latest target is online pharmaceuticals and their affiliates providing medications such as generic or unlicensed Viagra, Nexium, or Lipitor, all of which are illegal for Americans to have mailed into the United States.

In the recent paper "Priceless: The Role of Payments in Abuse-advertised Goods" presented at the 19th annual ACM Computer and Communications Security Conference in Raleigh, North Carolina, five academic researchers outline the methodology behind the aggressive practice known as payment intervention and arrogantly conclude that it is in society's interest.

This is the ugly face of monetary repression. It is shameful! Using the payments system as a repressive tool for or against certain behavior is like using Catholic Church attendance as a way to target illegal immigrants. In a free society, private payments should be covered by merchant-customer privilege just as attorney-client privilege covers confidential legal communication. Like the telephone network used to execute a transaction, the payments network is a neutral actor. Pro-choice means placing the decision of payment type in the hands of the money owner. Grandma wants her affordable generic Lipitor.

Oddly coupling the pharmaceutical sector with the counterfeit software sector in a dual study, researchers acknowledge the fragility of payments and show how an eradication effort can lead to the pursuit of riskier alternative payment methods:

"Overall, we find that reliable merchant banking is a scarce and critical resource that, when targeted carefully, is highly fragile to disruption. As a testament to this finding, we document the decimation of online credit-card financed counterfeit software sales due to a focused eradication effort. We further document how less carefully executed interventions, in the pharmaceutical sector, can also have serious (although less dramatic) impacts, including program closures, pursuit of riskier payment mechanisms, and reduced order conversions. Finally, we document the set of countermeasures being employed now by surviving merchants and discuss the resulting operational requirements for using payment intervention as an effective tool."

Herein lies the problem with the current payments network. It is far too dominated by Visa and Mastercard whose contracts with acquiring banks stipulate that merchants are prohibited from selling goods that are illegal in the purchaser's destination country. Therefore, simply participating in those payment networks inextricably links the law to a voluntary transaction between two consenting parties providing an enforcement mechanism that wouldn't necessarily exist under other payment types.

Access to safe and affordable pharmaceuticals should be a natural right for all Americans and denying it would be unacceptable, unethical, and a threat to the public health. A strong case can be made that uninsured, low-income patients obtaining affordable medications is a morally legitimate activity. "Does legality establish morality?" asks economist Walter E. Williams, who answers, "Legality alone cannot be the talisman of moral people."

In June 2011, Visa (and Mastercard similarly) made a series of changes to their operating regulations and explicitly classified pharmaceutical-related merchant category codes as "high-risk" along with gambling and various kinds of direct marketing services. Kudos must be given to the State Bank of Mauritius for being the only bank that both correctly codes pharmaceutical transactions and supports a large number of affiliate programs.

Leaving aside for the moment the twisted economics of privileged drug manufacturers collaborating with generic manufacturers, the immorality of the patent system, and the case against intellectual property, supranational authority was bestowed upon the IACC (International AntiCounterfeiting Coalition) in 2010 through a series of agreements made between brand holders, payment providers, and the White House’s Intellectual Property Enforcement Coordinator. The agreements streamlined targeted actions against 'rogue' websites and merchant accounts used to monetize counterfeit goods and services.

Bragging about the simplicity and effectiveness of the initiative, the study's researchers reveled in determining who was 'rogue' and then preparing them for 'termination':

"Security interventions should ultimately be evaluated on both their impact in disrupting the adversary and their cost to the defender. On both counts, the payment tier of abuse-advertising appears to be a ripe target. For the few tens of dollars for a modest online purchase, our data shows that it is possible to identify a portion of the underlying payment infrastructure and, within weeks, cause it to be terminated."

Unfortunately, the practice of targeting the payments mechanism is on the rise by governments and sufficiently "chilled" payment network lackeys, but it will backfire in spectacular fashion. Consumers will be driven to more liberated alternatives such as the privacy-oriented and cash-like bitcoin. They certainly don't want VISA, Mastercard, PayPal and the rest of the gang telling them what is and is not an acceptable purchase. Interestingly, the study cited bitcoin among creative alternatives when Visa processing becomes abruptly disabled:

"A few US-based pharmaceutical programs, notably Health Solutions Network (which we did not study in our analysis), enabled Cash-On-Delivery (COD) payments for their customers when their Visa processing was disabled. Ultimately, the effectiveness of such mechanisms depends on their familiarity and overhead to consumers, the readiness of alternative sites offering more traditional payments, and the extent to which consumers are well motivated. Indeed, while we witnessed some programs (notably in the OEM software space) attempt to continue their businesses using alternative payment mechanisms including PayPal and, most recently, Bitcoin, by all accounts this has not been successful."

I expect that to change radically for Bitcoin as the features of decentralized cryptographic money become more widely appreciated. Used properly, bitcoin can have the privacy attributes of paper cash and bitcoin doesn't make morality judgements about what you choose to do with your money. It is a natural fit for the online pharmaceutical industry. Payment providers, especially mobile payment providers, claim to represent the best in consumer-centric solutions, but if they truly care about consumers, why do they block so many important transaction types that consumers want?

Somebody has to say it. Big Pharma is a racket and Americans are being duped by the government and the powerful drug manufacturers that push their overpriced medications while simultaneously hiding behind the veil of protecting patient safety, for your own good of course. But "the little blue pill" will be protected as Pfizer's expiration date for the Viagra patent has just been extended until April 2020 which means no legal "generic Viagra" in the U.S. for several more years.

Perhaps more broadly disturbing is that the five individuals authoring the study seem to tacitly recommend the 'payments network' as the delegated enforcement arm of the justice system and sanctioned brand holders. These complicit payment providers do not practice payment neutrality nor do they recognize the importance of remaining nonpolitical and challenging encroachments that lead to politicalization.

The reason that it has become possible to utilize the payments apparatus in this manner is because society has become too complacent on insisting that our money not be used for identity tracking. The general attitude towards the privacy of cash (both physical and digital) has been eerily nonchalant and too readily conceded. Until that changes, expect evermore diminishing privacy in your transactions.

For further reading:
"Forbes on Viagra, Bitcoin and Intellectual Property", Stephan Kinsella, October 29, 2012
"Rogue Pharma, Fake AV Vendors Feel Credit Card Crunch", Brian Krebs, October 18, 2012
"Pharma vs India: a case of life or death for the world’s poor", Nick Harvey, October 17, 2012
"Fake pharmaceuticals: Bad medicine", The Economist, October 13, 2012
"What Payment Intermediaries Are Doing About Online Liability And Why It Matters", Mark MacCarthy, July 5, 2010