CoinDesk does an excellent job of pointing out the very different standards that entrenched TBTF financial institutions are held to as compared to those outside the system. Those choosing to operate alternative financial businesses are going to face many challenges. In fact, if you’re considering running a digital currency exchange you have only 3 choices…
- Find some damn good security experts and operate anonymously
- Forget about privacy for yourself or your customers and jump through any and all regulatory hoops
- Go to jail
Indeed it is time for digital currency businesses to grow up and make some tough choices.
The relationship between big banks and their regulators is pretty dubious, to put it mildly. But expecting federal investigators to give Bitcoin exchanges the same free ride is childishly naive.
When HSBC got caught laundering money for drug dealers and terrorists, it promised regulators it would improve controls.
Senate investigators found the bank had failed to monitor $60 trillion in transactions for money laundering and had a backlog of 17,000 dodgy account alerts which it failed to investigate. Which dwarfs LibertyReserve’s alleged laundering of $6 billion.
HSBC shipped $7 billion in actual paper dollars from Mexico back to the US during 2007 and 2008. Because of controls on big cash deposits at US banks, the money had been smuggled into Mexico so HSBC could ship it back to the US.
Mexican and US authorities told the bank that deposits so massive clearly raised red flags that they included drug money. Between 2006 and 2009, HSBC simply did not bother to monitor transactions from Mexico for money laundering and defined the country as low risk.
HSBC was so favored by drug cartels that the organizations began transporting their dollars in cash boxes specially designed to fit through the standard HSBC teller’s window.
If dodgy drug dealing isn’t against your moral code, what about terrorism? HSBC sent dollars to Saudi and Bangladeshi accounts with known links to al Qaeda. (See the Senate report below.)
It also sent $19.4 billion to accounts linked to Iran … in breach of the Trading with the Enemy Act.
Most of this wasn’t even secret: regulators knew about it and were gently pushing HSBC to clean up its act. The Senate Committee criticized regulators for doing so little:
“yet during the six-year period from 2004 to 2010, OCC officials did not take any formal or informal enforcement action to compel HBUS (HSBC’s US arm) to strengthen its AML (anti-money laundering) program, essentially allowing its AML problems to fester.”
HSBC was deemed “too big to fail” so a deal was done. It paid a relatively small fine — $1.9bn — and promised, again, to improve its processes.
But that doesn’t mean that a new bank or exchange in this market can expect to be given the same free ride as HSBC.
Actions this week against Liberty Reserve show that the US takes money laundering seriously … when it’s not carried out by a big bank.
If you want to run an exchange which offers alternative coins for dollars, or vice versa, then you’d better get real about regulation.
It might be expensive and it might go against your libertarian beliefs but if you want to stay in business, and out of prison, you need to be talking to the regulators. You need to know who your customers are, or at least have evidence that you’ve tried hard to find out. Or you need to take your business, and yourself, properly into the shadows.
If you want to launder money — choose dollars and use a bank. They’ve been caught before and they’re still in business.
But raiding Bitcoin exchanges wins headlines for investigators, which helps them get bigger budgets for more investigations next year.
Bitcoin can stay immune from regulation but only if it stays online only. If you want to transfer it into fiat currency or put its value into a traditional bank account, then it comes under the remit of regulators.
We might not know what future Bitcoin regulation will look like, but we know it is coming fast.
Read the post in its entirety here.