This article in ComputerWorld provides a great snapshot on government adoption of anonymous cryptocurrencies. Technologists here argue that deployment of an anonymous cryptocurrency is in our future, yet none explain how existing anti-money laundering legislation will be addressed.
Arguing that cash is anonymous, and so no obstacles exist for anonymous crypto, is not a very astute observation relative to the current political environment. The US Government has passed seven increasingly restrictive Anti-Money Laundering Acts since 1986 designed to address terrorism and the rise in criminal activity:
“Last year, Garratt worked as a digital currency technical advisor to the Bank of International Settlements (BIS) in Switzerland. The BIS, whose purpose is to foster cooperation between central banks around the globe, has been exploring the role cryptocurrencies could play if nations begin backing them.
While the prospect of a government-backed digital currency that also provides anonymity may seem is far-fetched, Garratt noted that cash, too, is essentially a P2P process.
“It might sound strange to think about the central bank providing something that allows anonymity from itself, but that’s what cash is,” Garratt told attendees at the MIT event. “So, it’s not such a crazy thing.”
A government-backed digital currency could do away with banking fees that often target the poor who make many small, electronic payment transfers via services such as Western Union, while at the same time creating greater efficiencies. For example, the time it takes for to clear and settle funds could be greatly reduced, with cryptography used to ensure privacy. Cryptographic keys controlling funds could be in a consumer’s control; the consumer could be issued a private key associated with their electronic funds and be able to use public keys for payments.”
There is also the observation that anonymous cryptocurrencies would assist low and moderate income families:
“”It might sound strange to think about the central bank providing something that allows anonymity from itself, but that’s what cash is,” Garratt told attendees at the MIT event. “So, it’s not such a crazy thing.”
A government-backed digital currency could do away with banking fees that often target the poor who make many small, electronic payment transfers via services such as Western Union, while at the same time creating greater efficiencies. For example, the time it takes for to clear and settle funds could be greatly reduced, with cryptography used to ensure privacy. Cryptographic keys controlling funds could be in a consumer’s control; the consumer could be issued a private key associated with their electronic funds and be able to use public keys for payments.”
Mercator started its Prepaid Service in 2005 and since then has conducted significant research evaluating the challenges associated with servicing low and moderate income families to bring them into the eCommerce and online banking world. The fact is this: Current AML and other government mandated legislation has made it extremely difficult to properly service this demographic in a sustainable way. Prepaid cards were initially thought to be the answer. Prepaid brought electronic banking to the underbanked by charging only for the transactions the consumer executed. Innovators provided overdraft protection at a cost so low it would make banks blush, yet step by step legislation was introduced that made these prepaid programs unsustainable or illegal. So technology isn’t the primary challenges associated with introducing a cryptocurrency, its politics.
Perhaps the greatest insight came for Robleh Ali, that questioned the basic premise that a cryptocurrency had to be deployed on a blockchain and then described a few logical use cases for a cryptocurrency:
“Robleh Ali, a digital currencies research scientist at the MIT Media Lab, said a government-backed digital currency wouldn’t necessarily have to exist on a distributed ledger, as bitcoin does today. It could be centrally administered by the Federal Reserve and other central banks.
The question central banks need to ask themselves is what are they trying to accomplish, he said.
“Do we want a token that can integrate with this new token economy? Then they may want to use an architecture that’s similar to those [bitcoin] tokens to issue fiat money,” Ali said.
In 2013, Garratt was involved in a multi-bank proof of concept called Project Jasper, which explored the use of blockchain as the basis for a new bank-to-bank digital payments system for large monetary transfers. So, for example, if a homeowner were to sell their house, banks could use the electronic distributed ledger to settle the transfer of funds.
If the Federal Reserve or other central banks were to back digital currency, it could take on many forms. For example, it could be operated as a closed system between banks for large money transfers, such as those used for daily clearance and settlement of thousands of smaller transactions. Or, it could open central bank accounts available for any consumer’s use, a type of virtual bank account.
The Fed could also issue a digital coin, similar to bitcoin, that would represent the stored value of fiat money.”
Or perhaps we need a cryptocurrency that can be easily integrated into the tokens currently being deployed by the card networks. Properly designed this would extend bank control over ownership while also enabling immediate worldwide acceptance. Of course, this bumps smack into the political issue of government control versus the private companies that control existing payment networks.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group
