Legal Seminar, Denver, CO

071018 Discussion Draft

& Elizabeth Khalil, Nonbank Money Transmitters 47-74, in E LECTRONIC P AYMENT S YSTEMS (2018). a. Federal regulation includes measures designed to address AML issues as well as safety/soundness concerns, including consumer protection measures. In this case, law may help reinforce trust. b. All states but Montana also regulate money transmitters. A flexible approach to identifying money transmitters potentially expands regulatory reach. (See, e.g., cryptocurrency arena, discussed below.) Failure to comply with licensing requirements can trigger not only civil, but also criminal penalties. Caveat venditor . 5. Regulating Payment Networks: Informal Value Transfer Systems (IVTS). Alternative remittance systems have an ancient origin, but they are still used today. Examples include “hawala” (Middle East) and “hundi” (India), as well as others. See a. These systems are also based on trust. But that trust is between relevant parties using them for transmission purposes. That trust does not necessarily extend to governments or relevant financial regulation. Trust can exist apart from law; custom and private ordering are powerful forces to reinforce trust. b. IVTS operators are subject to BSA/AML obligations like other money services businesses. But their tendency to operate in the shadows challenges regulatory effectiveness unless they are somehow connected to responsible, regulated actors in banking/financial services. c. New forms of electronic payments are affecting the way these businesses are conducted and, as discussed below, may raise challenges for these kinds of businesses, as well as new regulatory challenges. Will cryptocurrencies make these businesses obsolete? Or will they simply become another tool used by them to transmit value outside of traditional channels? 6. Peer to Peer Payments. Cash can be exchanged directly between parties without involving an intermediary. Without a regulated intermediary in the transaction, the movement of cash remains undetected by traditional monitoring systems. a. Some electronic payment systems claim to offer peer to peer payments (e.g., Venmo, Zelle, Dwolla), but their system involves intermediaries that are part of the traditional rails of electronic systems, thereby presenting opportunity for disclosure and regulatory review. See Erin Fonte, Mobile Wallets/Mobile Payments and Peer-to-Peer Payments 77, 81, in E LECTRONIC P AYMENT S YSTEMS (2018). b. Here, too, cryptocurrencies may present an electronic approach that challenges existing regulatory frameworks, as traditional intermediaries are avoided except when converting fiat currency into cryptocurrency at a currency exchange. FinCen Advisory, Informal Value Transfer Systems (March 2003), https://www.fincen.gov/sites/default/files/shared/advis33.pdf .

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