Thursday, May 14, 2015

Cyber Currency Ripple Draws $700,000 Fine

The problems that cyber currencies will have with regulators is something we have covered here on the blog. In this case a well known cyber currency called Ripple runs into trouble. Here is the news release from FinCen (Financial Crimes Enforcement Network). It lays out the reasons for the fines being issued. Here are a couple of quotes from the release:

“Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws," said FinCEN Director Jennifer Shasky Calvery. "Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”

. . . . 

“Federal laws that regulate the reporting of financial transactions are in place to detect and stop illegal activities, including those in the virtual currency arena,” said Richard Weber, Chief, IRS Criminal Investigation. “Unregulated, virtual currency opens the door for criminals to anonymously conduct illegal activities online, eroding our financial systems and creating a Wild West environment where following the law is a choice rather than a requirement.”

The release has a link to the detailed statement of facts and violations which you can read here. Basically the company operated for a period of time without registering properly as a money service business (MSB) and also failed to report some suspicious transactions as defined by the regulations. Note that all the violations listed happened prior to March 2014 when Ripple hired an ex Federal Reserve employee to head up its regulatory compliance efforts.

As we might expect, some believe these regulations on virtual currencies like Ripple are an intrusion by the government on individual freedoms. Simon Black of Sovereign Man writes this article from that point of view.  Here is quote from that article that gives you a feel for the tone of the article:

"As you can imagine, Ripple Labs failed to register with FinCEN as an MSB, nor did it submit suspicious activity reports.
In its complaint, FinCEN describes several of the oooooh-so-nefarious violations.
According to FinCEN, “In January 2014, a Malaysian-based customer sought to purchase XRP from [Ripple Labs], indicating that he wanted to use a personal bank account for a business purpose.” HOLY JIHAD BATMAN!!!! Someone wanted to use a personal bank account for business purposes?!?! NUKE THE SON OF A BITCH!
I mean, seriously. This is the complete nonsense that keeps financial bureaucrats up at night: some guy in Malaysia wants to buy digital currency with his personal funds.  Whoop-dee-doo."
It should be noted that if you look on page 6 of the statement of fact and violations linked above, it also lists another violation that the Simon Black article did not mention:

"On September 30, 2013, XRP II negotiated an approximately $250,000.00 transaction by email for a sale of XRP virtual currency with a third-party individual. XRP II provided that individual with a “know your customer” (“KYC”) form and asked that it be returned along with appropriate identification in order to move forward with the transaction. The individual replied that another source would provide the XRP virtual currency and did not “require anywhere near as much paperwork” and essentially threatened to go elsewhere. Within hours, XRP II agreed by email to dispense with its KYC requirement and move forward with the transaction. Open source information indicates that this individual, an investor in Ripple Labs, has a prior three-count federal felony conviction for dealing in, mailing, and storing explosive devices and had been sentenced to prison, see United States v. Roger Ver, CR 1-20127-JF (N.D. Cal. 2002)"

My added comments:

This situation illustrates the ongoing conflict between those who think these kinds of regulations are important to prevent criminal activity and those who see them as an infringement of individual freedom and property rights. I always favor a full and open discussion on issues like this because they are important. I do think you should be aware of all the facts. Notice that the article against the regulations left out the case that was less supportive of its point of view for example. I do think its good for individual rights issues to be raised and for people to listen to each other with an open mind rather than devotion to an agenda.

Here are the key takeaways for me from this situation:

1- Cyber currencies like Ripple and Bitcoin are going to be regulated 

2- People should not think they can avoid financial transaction regulations (or taxes) by using them

3- Companies that work with the regulators within the system to provide money transfer and real time currency exchange services are much less likely to run into these kinds of problems

4- We can expect that there will be an ongoing debate on how much regulation is appropriate and when does it cross the lines of individual property rights. 

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