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Voluntary transparency is a superior self-regulatory mechanism that could substantially enhance consumer protection and prudential oversight.
On a panel called ‘What Keeps Regulators Up at Night’ held at the Money Transmitter Regulators Association conference in Boston last November, three experienced state examiners from Virginia, Wisconsin and Texas laid out in clear terms the key issues they face when vetting money transmitters in their states. Their primary concern: the accuracy and integrity of a license holder’s financial and accounting reports, which are the basis for ascertaining a company’s true financial condition and for ensuring there is sufficient liquidity to meet “transmission obligations.” That’s right, we’re in the second decade of the 21st century, and regulators still rely on after-the-fact, paper-based reporting. Further, regulated financial institutions seem incapable of providing unimpeachable transactional and financial reports to ultimately demonstrate their solvency.
It is a widely known fact that regulation always lags behind technological innovations, especially in the realm of financial service design and delivery. How to bridge that gap is one of my ongoing research interests, and my goal here is to focus on an (up-to-now overlooked, but critical) approach to financial oversight that could address the core purpose of prudential financial regulation.
The Current Oversight Paradigm
The main mission of a financial services prudential regulator is to ensure the safety and soundness of service providers, thus maximizing to the extent possible the protection of consumers’ rights. This includes the right to have their funds delivered to the intended beneficiary in the promised timeframe, or the right for funds to be stored safely. In other words, the primary purpose of regulatory oversight is the protection of consumer funds against loss and mismanagement by financial intermediaries. How do regulators go about accomplishing this goal today? The traditional mechanism whereby regulators execute their mission is licensing, a rigorous due diligence process whose purpose is the “credentialing” of the entities and individuals seeking to engage in a particular financial service activity that has been deemed risky enough to warrant this vetting process. Continue reading
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Interview with Aaron Greenspan, Harvard graduate, original creator of “The Facebook,” payments innovator, and autodidact non-lawyer. (PART ONE)
Having been a teen tech entrepreneur, during college at Harvard in 2003 Aaron created the predecessor to Facebook, Inc., which also happened to be called “The Facebook.” In 2009, he entered into a settlement agreement with Facebook, Inc. as well as his classmate Mark Zuckerberg, and then had the opportunity to figure out what he wanted to do next, so he followed a long-standing interest in payment systems and decided to try and tackle mobile payments. From 2008 through early 2011, he invested essentially every piece of time, energy and capital at his disposal into making his payments initiative, called FaceCash, widely regarded as a success—until he was told that he would be thrown in federal prison by a state bureaucrat.
As you will soon see, to say that Aaron does not mince his words is the understatement of the century, so I am aware of the risks I am taking by presenting his strong point of view here. However, even Continue reading
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A few months ago, a Latin American advisory group asked me to comment on the Digital Sucre and the potential impact of a country adopting a digital or crypto-currency as legal tender. It never occurred to me that I should post the surface-scratching responses I came up with, until American Banker‘s Bailey Reutzel asked the question (here). With the upcoming release of AuroraCoin in Iceland, and the adoption of a bitcoin clone by the Oglala Lakota Native American nation, this seems to be a good time to poke the discussion. So here go my two cents in the hope that a few extra thoughts will be triggered.
In concept, is bitcoin more currency or payments system?
Bitcoin is both. In addition, and most importantly and fundamentally, it’s also a protocol on top of which additionally functionality can be built. The fact that Bitcoin (with a capital B) is multiple things at once is what creates most of the confusion about it. Bitcoin is a sophisticated globally distributed asset register that, at this moment in time, is mostly being used to register value in USD or other fiat currencies. Hence the fact that it’s mostly construed as a commodity, or a digital asset class with a corresponding value in fiat Continue reading