BitReserve Compliance Chief: Cryptocurrency and new virtual payment platforms are the future

Along with getting easy access to trivia answers, movies, music and geospatial coordinates, consumers now have significantly more options to move money around the world online. With increasing frequency, this has meant transmuting deposited cash into virtual currencies not backed by authorities, the most popular example in recent years being Bitcoin.

In that system, individuals can deposit or wire their own money to a person or exchange already holding bitcoins, who will then allot the depositor a corresponding chunk of bitcoins. The individual can then spend the money in venues that accept Bitcoin, send it to other individuals or hold it, in hopes the value will go up.

Transactions are logged through a public and transparent “blockchain” ledger, though the humans behind the coded names buying and selling bitcoins are not necessarily visible.

The volatility tied to Bitcoin – in the past year it has gone as high as nearly $700 to below $200 – is a concern for individuals and a barrier to entry. Additionally, the currency’s cachet has been dampened by its connections to highly publicized cybercrime cases like Silk Road.

Even so, the technology underlying Bitcoin is something other savvy firms can piggyback upon to gain the benefits of cheaper transfers, with fewer barriers than the formal money transfer networks, says Juan Llanos, chief of transparency and compliance at San Francisco-based BitReserve.

The company borrows the cryptocurrency platform to provide people with a way to hold and use Bitcoin as stable, real world money, move between currencies, and send it and receive it instantly. The company profits on the exchanges between their digital Bitcoin card and currency.

“Without Bitcoin, we wouldn’t be talking about other virtual emerging payments – it was the catalyst for the conversation about the cost of moving money,” said Llanos in an interview with ACFCS.

“There are risks and costs to the traditional payment system, so emerging virtual payment platforms are both a challenge and an opportunity,” he said. “Digital money and cryptocurrency is a genuine invention, and we can no longer ignore it.”

But while these mobile payment systems are on the rise and online transfer systems are now a universe accessible by the phone in your pocket, other emergent payment systems  utilizing cryptocurrency protocols, such as the controversial Bitcoin, are still in their relatively nascent stages and represent risks tied to financial crime as well as opportunities for innovative payment companies, Llanos believes.

These platforms, however, are attractive for providing an alternative to traditional currency – centralized, controlled by an authority, and subject to fees – by providing an at times anonymous, decentralized, and free, or significantly lower cost, method to hold and send money domestically or internationally at the push of a button

The benefits of that sector’s most desired and despised denizen, Bitcoin, are just starting to be discovered and understood by the consumer world as the technology is simultaneously examined for efficiencies and vulnerabilities by public and private sector entities.

National governments, regulators, and startups are hoping to virtually cash in by leveraging the attributes of Bitcoin’s technology for their own gain, but also adding the requisite financial crime counterpoint checks to better weed out criminals and fraudsters, the stratagem of Llanos’ firm.

Traditional banking and payment services have strived for decades to develop robust policies and teams dedicated to fighting risks such as money laundering, terrorist financing, data breaches and fraud.

But as Bitcoin and other similar platforms emerge, the question also rises to the fore regarding how compliance can have a role in a virtual world.

Typically, compliance duties would have to be borne by the individuals or exchanges selling the bitcoins or at the physical nexus of the real and virtual worlds – the banks holding the accounts for the exchanges, which recently became subject to formal anti-money laundering rules after a US Treasury ruling.

Thus far, though criminal groups have turned to Bitcoin to move money and purchase illicit goods anonymously, the technology itself has been  surprisingly resistant to being infiltrated by financial criminals.

So far no one has been able to hack into the fundamental system.

Llanos, though, believes that with the right leverage, Bitcoin can become a more convenient, more secure way for the world to hold and move money, and, if the companies involved take compliance seriously, can be less alluring to organized crime groups.

In his role, Llanos takes a risk-based and data-driven approach to compliance, avoiding what could be a vacuum of dismissing innovation to satisfy risk prevention.

One of the major distinctions with the cryptocurrency model from the traditional banking and payment model is the separation of value from ownership, he said.

In the traditional banking sector, your personal information and identification are connected to funds – without authentication and verification of your identity, it’s almost impossible to access the financial system.

In that paradigm, know-your-customer due diligence, is a  central pillar of financial compliance, and a requirement under anti-money laundering rules, which forces  institutions to bar potentially risky clients from holding accounts and subsequently conducting transactions that may be crime-related.

Critical to Bitreserve’s business strategy is understanding more about potential customers by asking them compliance-related questions to get a sense of their business throughput, assigning them a risk score and monitoring transactions to determine if the funds are too high or regions too risky, Llanos said, steps that some companies in this space may be skipping.

“We’re very aware of the risks and we’re very knowledgeable about the compliance obligations and operational deterrent and detective techniques that need to be implemented,” he said.

“We’re working on all components of a sound AML and Sanctions Compliance program: customer identification, reporting and record-keeping, suspicious activity detection, and we’re also taking a holistic view of risk management, with a view to achieving both effectiveness and efficiency in our work,” Llanos said.

The virtual currency world, though, is a bit of an anomaly, as its purpose is to separate identity from the transaction.

Though Bitcoin uses a ledger system that is open to the public, personal information is essentially private. Privacy has become a rarity in the modern world, Llanos said. That’s why virtual currency presents a unique opportunity in financial autonomy and secrecy.

Companies like BitReserve, which create a link between bitcoin technology and real world currencies are in demand, and can be the key to mitigating risks that may arise from an unmanned digital network, though it’s critical that any third-parties .

“Every single website requires a personal ID and we authorize a merchant to subtract funds from our account. It’s uncontained and unchecked. The reason why there’s hacking incidents is there’s a broad opportunity for attacks,” Llanos said.

While it is important to look at virtual currency through a risk-based approach, it is equally important to recognize the advantages to a system that exists apart from the traditional hierarchy and authority of the financial system.

Llanos said that evolution of the financial services industry is inevitable, though it can be hindered if new technologies are dismissed as only “risks” and not opportunities for development, accessibility and convenience.

The learning curve and knowledge gap is the main obstacle to financial inclusion, Llanos explains.

“Let’s accompany the evolution with caution and the permission to innovate. The world condemns people to be poor by not allowing them to access the financial system,” he said.