Three ways Facebook must address illicit financing risks, implement AML compliance defenses with its new cryptocurrency
In 2020, Facebook’s new subsidiary, Calibra, will begin operating a blockchain-based marketplace ecosystem, fueled by the new Libra digital token.
The Calibra digital wallet is supposed to enable users around the world to purchase all types of goods and services across borders. Criminals, terrorists, and rogue state governments have also been using social media platforms for years now; they will migrate quickly to the Calibra ecosystem if it proves successful.
Here is what Facebook needs to do to address the Pandora’s box of unintended consequences it is about to open:
Create a Financial Intelligence Unit (FIU) for Calibra. Many large international banks and payment companies have FIUs to investigate financial crime and regulatory violations that may occur through their institution.
FIU staff typically are experts in anti-money laundering, counter-terrorist financing, sanctions, law enforcement, and/or intelligence analysis. If Calibra ends up as the massive global operation Facebook intends, there will need to be teams in multiple time zones addressing suspected illicit finance cases.
FIUs respond to outside inquiries from law enforcement, but they also initiate investigations based on internal analysis of customer transactions. However, unlike such units in banks or credit card companies, the Calibra FIU will need to analyze blockchain transactions.
The pool of professional blockchain analysts in the world is relatively slim, but it appears Facebook is already seeking out this expertise. A month before announcing the Calibra project, Facebook posted a job announcement for a Blockchain Threat Investigator.
The Libra is positioned to become a crypto-asset for the mainstream, more liquid and accessible than any other token thus far. Its deployment could be the rising tide that lifts all crypto boats. However, Calibra and financial authorities should know that some of that rising use may trend toward darknet markets.
The Calibra FIU should take the lead in tracking Libra money laundering even outside the Calibra platform. Facebook might argue that it cannot be held responsible for illicit actors using libras outside the Calibra network or for libras that get exchanged for other tokens later used in illicit transactions.
However, financial authorities are going to view the Libra as Facebook’s “baby.” Although anyone can track the Libra blockchain, Calibra will have the most intimate understanding of the token, so law enforcement will often end up at its door.
Calibra is already registered as a Money Service Business with U.S. regulators, which means it will have to onboard its users through rigorous Anti-Money Laundering (AML) and Know-Your-Customer procedures.
Like major cryptocurrency exchanges, Calibra will have to verify the identity of people using Calibra wallets, which should mitigate some illegal use of the Libra.
The loophole in Calibra’s AML controls is that the Libra will be interoperable with other cryptocurrency wallets. Thus, anyone will be able to send libras to noncustodial wallets that hold other cryptocurrencies.
There will likely be decentralized exchanges that allow people to anonymously trade Libra for privacy coins and vice versa. One can imagine a cottage industry of money launderers who specialize in brokering privacy coins for Libras.
Calibra should embrace a blockchain policing role. While displeasing to many ultra-libertarian crypto idealists, this would actually help maintain the integrity of the cryptocurrency ecosystem. For a long time, I have argued that the private sector needs to build structures to self-police illicit activity on the blockchain. New global regulatory standards will bring more law enforcement scrutiny on money laundering risks arising from cryptocurrencies.
Facebook should set clearer criteria for who will govern its blockchain network. Facebook is creating a Swiss-registered foundation, the Libra Association, to coordinate the various organizations that will run the computer nodes that validate Libra blockchain transactions.
The association will include businesses, nonprofits, universities, and multilateral institutions. At first, running a node will be restricted to selected organizations. But eventually, membership will become “permissionless” and nodes with the most Libra will be eligible to sit on the Libra Association Council. The council will govern the Libra blockchain and manage the reserve of real-world currencies that will back the Libra token. It will make decisions by majority vote.
The Libra’s decentralized and stateless governance model could be exploited by savvy authoritarian regimes seeking leverage in the global economy. While Facebook wants the Libra governance structure to be apolitical and geographically diverse, there currently do not seem to be safeguards to prevent hostile political takeovers of the Libra Association Council.
Legal complications could arise regarding sanctions. Will North Korea, Iran, or other nations under U.S. sanctions run nodes on the Libra network? If the dollar is part of the Libra reserve, the U.S. Treasury Department will try to block anyone on its blacklist from benefiting from it.
Calibra’s blockchain-based marketplace might expand commerce, benefiting newcomers to global finance, as well as incumbents. But blockchain technology does not eliminate criminality, terrorist funding, sanctions evasion, or nation-state authoritarianism.
For Facebook’s blockchain venture to succeed in the long term, customers will need to be confident that their cryptocurrency transactions will not link them to illegal activity. Thus, Calibra must prepare to enter the world of countering illicit finance, (via Bloomberg).