FinCEN Director Ken Blanco is Crystal Clear on Virtual Currency Risks & Requirements

FinCEN Director Kenneth A. Blanco, delivered Prepared Remarks at the Consensus Blockchain Conference on May 13, 2020. They are available at Prepared Remarks and reproduced in full below.

Borrowing a page from Federal Reserve Chairman Jerome Powell, Director Blanco’s remarks are a clear tell-it-like-it-is message to the virtual assets/blockchain community.[1]

It is a refreshing change from many senior people in the public and private sectors who, coached by consultants and tamed by lawyers, are unwilling or unable to provide clear and concise guidance. Director Blanco’s remarks were clear and concise. Well done!

Below is the text of Director Blanco’s prepared remarks. My comments appear in blue italics.

Text of Director Blanco’s Prepared Remarks, Consensus Blockchain Conference (Virtual)


Good morning, everyone.  Thank you so much for that very kind introduction.

It is great to be with you today, a bit ironic, via this virtual technology to discuss FinCEN, its mission, and how we—government and the virtual currency industry (all of you)—can work together to shape the virtual currency environment to combat criminal exploitation of this space, including the tech industry, to better ensure our national security and protect our financial system, our communities, and our families from harm.

This is truer today than ever before given the global situation we now find ourselves in—the need for our collaboration is clear and undeniable.

Joining this conference today are many financial institutions, including virtual currency service providers.  As I have said many times before, you are the backbone of the financial system and are on the front lines of the anti-money laundering (AML) and countering the financing of terrorism (CFT) framework—protecting people from harm.  I also know that many of FinCEN’s government partners are joining today too, experts and key leaders from the Department of Justice and other law enforcement agencies, fellow regulators, and many other government partners with whom we work on a daily basis to protect people from harm.

JRR Comment – I applaud Director Blanco’s statement that the front line of the AML/CFT regime is protecting people from harm (“the front lines of the anti-money laundering (AML) and countering the financing of terrorism (CFT) framework—protecting people from harm”). The front lines, or main focus of an AML/CFT regime has to be on protecting people from harm, and that is done by providing timely, actionable intelligence to law enforcement. The focus of financial institutions’ BSA, AML, and CFT programs must be on providing timely, actionable intelligence to law enforcement, and prudential regulators must examine and judge those programs solely on that basis … and not on whether they are complying with the technical requirements of documenting compliance with regulatory requirements for BSA/AML compliance programs..   

Both the public and private sectors are critical to combating exploitation of virtual currency, and when working together, our national security and citizens are safer.  There is no substitute for the private sector’s visibility into and ability to prevent criminal exploitation of virtual currency products and platforms—particularly those of you who are organizing, developing, and administering these products and platforms.  Our work together plays a significant role not just in advancing financial transparency, inclusion, and the development of the future of payment systems, but also in identifying, tracking, and stopping criminals including terrorists and other bad actors from harming others, particularly the most vulnerable.  It is our shared responsibility to ensure that this technology does not get hijacked by criminals and bad actors—we cannot let innovation become the conduit for crime, hate, and harm—it is a national security issue.

As many of you know, FinCEN plays two roles in the U.S. national security apparatus:

First:  FinCEN is the primary regulator and the administrator of the Bank Secrecy Act, or BSA, part of the comprehensive legal architecture in the fight against money laundering and its related crimes, and terrorism and its financing.  FinCEN, through its administration of the BSA, is a global leader in both regulating convertible virtual currency activity and taking action against its illicit use.

Second:  FinCEN is the Financial Intelligence Unit, or FIU, of the United States—the world’s largest and most powerful economy.

Today, I would like to share with you some of our recent work in the virtual currency space and use my brief time today to clarify a few misconceptions.

I will address three things:

  1. FinCEN’s efforts to provide guidance and combat money laundering and its related crimes, and terrorism and its financing, involving virtual currency related to the COVID-19 pandemic;
  2. The Travel Rule and trends FinCEN is seeing with respect to compliance; and
  3. Opportunities for collaboration in the fight against the illicit use of virtual currencies and key challenges.


These are, without a doubt, unprecedented times.  The last few months have had a profound effect on the world as we know it or knew it, including in the area of illicit finance threats and related crimes.  With businesses and individuals in our country and across the globe facing new and challenging circumstances, along with the rollout of major new Federal, State, local, and foreign government initiatives to combat the COVID-19 pandemic and its economic consequences, the entire AML community has been adapting in real time.

Over the last couple of months, FinCEN has pursued several important public-facing and strategic lines of effort relevant to your institutions:

  • First, AML Resources:  FinCEN has issued two Notices—one on March 16 and another on April 3 of this year—to financial institutions advising them to stay alert for malicious or fraudulent transactions, with examples of similar indicators that we have seen in the wake of natural disasters.  These Notices also provide financial institutions with information regarding AML operations during the COVID-19 pandemic and a direct contact mechanism for urgent COVID-19-related issues.  Please reach out to us proactively if you anticipate challenges fulfilling your BSA reporting obligations due to the pandemic.
  • Second, Criminal Typologies and Investigative Support:  FinCEN is also continuously monitoring criminal activity exploiting the current pandemic.  We are supporting law enforcement investigations into COVID-19-related cybercrime, scams, and fraud.  FinCEN also plans to publish multiple advisories highlighting common typologies used in the pervasive fraud, theft, and money laundering activities related to the pandemic to better help the financial sector detect and report this activity.  The mission for all of us in the financial space is to get badly needed funds to the intended recipients who need it—some for their financial survival—not to exploitive criminals and fraudsters.


I want to spend a few moments covering various forms of cybercrime that criminals continue to pursue and adapt during the pandemic.  FinCEN has observed that cybercriminals predominantly launder their proceeds and purchase the tools to conduct their malicious activities via virtual currency.  Your institutions have the opportunity, and obligation, to help identify these illicit criminal networks in your suspicious activity reporting to FinCEN, so that FinCEN can aggregate and analyze this information to identify red flags, permitting industry to spot risks.

JRR Comment: Director Blanco couldn’t be clearer: “FinCEN has observed that cybercriminals predominantly launder their proceeds and purchase the tools to conduct their malicious activities via virtual currency.”

To be clear, this obligation goes much deeper than to FinCEN or the law or to regulations—it is an obligation to others, your families, your loved ones, your friends, your neighbors, and fellow citizens who are victims or potential victims of these crimes.  During this time of crisis where our people could be more at risk and more vulnerable than ever, we, all of us, have a duty and  responsibility to use our abilities, tools, and talents to protect others and ensure the stability of this ecosystem that we are creating and that depends on trust.

Here is some of what we are seeing:

  • COVID-19 as Lure:  FinCEN and U.S. law enforcement have seen reports of cybercriminals leveraging COVID-19 themes as lures, often targeting vulnerable individuals and companies that seek healthcare information and products or are contributing to relief efforts.  This type of cybercrime in the COVID-19 environment is especially despicable, because these criminals leverage altered business operations, decreased mobility, and increased anxiety to prey on those seeking critical healthcare information and supplies, including the elderly and infirm.
  • Adapting to Opportunities Because of increased remote work by many companies and government institutions worldwide, many distinct threat vectors, risk considerations, and mitigation strategies are being used by criminals and bad actors.  FinCEN is aware that cybercriminals are targeting vulnerabilities in remote applications—including virtual private networks and remote desktop protocol exploits—to steal sensitive information and compromise transactions.  Whether with COVID-19 lures or not, cybercriminals and malicious state actors are using wide-scale phishing campaigns, malware, extortion, business email compromise, and other exploits against remote platforms to steal credentials, conduct fraud, and spread disinformation.
  • Scams:  Many prevalent scams involving virtual currency payments exploit COVID-19, from extortion, ransomware, and the sale of fraudulent medical products, to initial coin offering investment scams, which will likely continue to grow during the pandemic.
  • Undermining Due Diligence:  Criminals are also working to undermine “know your customer” processes in the remote environment.  Virtual currency businesses should remain vigilant against attacks targeting their onboarding and authentication processes, for example “deepfakes” manipulating digital images and account takeovers facilitated by credential stuffing attacks.  Financial institutions should consider the risks of the current environment in their business processes, and the appropriate level of assurance needed for digital identity solutions to mitigate criminal exploitation of your products and platforms.  Even financial institutions that typically manage their lines of business remotely, such as some virtual currency exchangers, may find themselves more exposed given the changing threat environment.

JRR Comment – Director Blanco has set this out in a way that makes it easy to understand and manage through the COVID-19 pandemic: lures, opportunities, scams, and fakes.


I now want to turn to another major topic, and the primary theme of today’s discussions, the Travel Rule.  The United States has long maintained an expectation that financial institutions identify counterparties involved in transactions for a variety of purposes, including AML/CFT and sanctions, even for transactions in virtual currency.  Any asset that allows the instant, anonymized transmission of value around the world with no diligence or recordkeeping is a magnet for criminals, including terrorists, money launderers, rogue states, and sanctions evaders.

As a result, we applaud steps taken by the Financial Action Task Force (FATF) last June to establish a consistent approach to the position we have taken when it adopted, as an International Standard, Interpretive Note to FATF Recommendation 15, which included, among other things, FATF’s interpretation that countries should apply FATF Recommendation 16’s Travel Rule to virtual asset service providers such as virtual currency exchanges.

We are encouraged that so many creative solutions are being developed by industry to address these Travel Rule obligations.

In particular, FinCEN is optimistic about the growth of various cross-sector organizations and working groups focusing on developing international standards and solutions addressing the Travel Rule.  I know those efforts involve many of you here today.  FinCEN will continue to monitor your developments, whether as observers in working groups, learning about your efforts in forums like this, or meeting with you under the FinCEN Innovation Hours Program, where fintech and regtech companies present to FinCEN new and innovative products and services for potential use in the financial sector.

While we are glad to see the increased emphasis on compliance, I must emphasize again that the United States has maintained this expectation to understand who is on the other side of a transaction for years.

JRR Comment – Director Blanco could have been more specific than “the United States has long maintained an expectation that financial institutions identify counterparties involved in transactions for a variety of purposes, including AML/CFT and sanctions, even for transactions in virtual currency” or “the United States has maintained this expectation to understand who is on the other side of a transaction for years.” The Travel Rule has been part of the BSA/AML regime for more than 20 years; and virtual currency exchanges and administrators have been subject to the BSA/AML regime since at least 2013.

As I mentioned at the Chainalysis conference in November, recordkeeping violations are the most commonly cited violation by our delegated Internal Revenue Service (IRS) examiners against money services businesses (MSBs) engaged in virtual currency transmission.

JRR Comment – Director Blanco was clear in remarks he made at a November 2019 ChainAlysis Blockchain Symposium, where he said the travel rule “applies to CVC, and we expect you to comply, period.” And CoinBase reported at that same symposium that Director Blanco said “you can’t build a car that only goes 150 miles per hour and ask us to change the speed limit. That’s not happening. Build your car to meet the requirements.”

We have also previously highlighted our confidence that industry can absolutely carry out this requirement.  We know technologies exist to support compliance with all recordkeeping obligations.  Most challenges we see across the sector relate to governance and process rather than technologies, and many solutions in both governance and technology models could ultimately comply.  FinCEN takes a technology neutral approach and we encourage the virtual currency sector to continue collaborative efforts to develop and implement these solutions and to keep FinCEN apprised of their progress, including by considering participating in FinCEN’s Innovation Hours Program.


Finally, I would like to briefly highlight some of our key opportunities for collaboration in combating illicit virtual currency use and the top remaining challenges we see, which hopefully those of you here today can help address.

Our partnerships across regulators, supervisors, law enforcement, and industry are the cornerstone of our efforts to disrupt the illicit use of virtual currency and illicit cyber activity.  FinCEN has worked alongside law enforcement initiatives like the National Cyber Investigative Joint Task Force (NCIJTF) and the Joint Criminal Opioid Darknet Enforcement (J-CODE) to investigate criminal networks exploiting virtual currency for the purchase of fentanyl, narcotics, cybercrime tools, and child pornography on darknet marketplaces.  We also work with international partners bilaterally or through multilateral forums like the Egmont Group of 164 FIUs, the Heads of FATF FIUs Symposium, of which we are a founding and leading member, and separately with FATF itself, with Europol, and with our FVEY partners as well, to enhance international capacity to investigate and prosecute criminals using virtual currencies for illicit purposes.

And of course, our partnerships with industry are paramount in the virtual currency space.  FinCEN has provided priority information on typologies of illicit virtual currency use to financial institutions through our advisory and FinCEN Exchange programs.  FinCEN is also sharing cyber indicators of compromise to help the financial sector detect, report, and defend against cyber activity that may be connected with illicit financial activity.

JRR Comment – Director Blanco is spot on with his comments. Effective Public/Private sector Partnerships, or PPPs, are the only way to combat AML and CFT, whether in the crypto space or fiat space.

The information we are able to share with industry is built on top of high quality information we receive in BSA reporting.

Since 2013, FinCEN has received nearly 70,000 Suspicious Activity Reports (SARs) involving virtual currency exploitation.  Just over half of these reports come from virtual currency industry filers, likely many of you participating today.  We also get valuable reporting from more traditional financial institutions that also have a unique window into illicit financial flows involving virtual currency, such as banks that may see ransomware payments made by customers or MSBs that see funds transfers derived from account takeovers.

This reporting is incredibly valuable to FinCEN and law enforcement, especially when you include technical indicators associated with the illicit activity, such as Internet Protocol (IP) addresses, malware hashes, malicious domains, and virtual currency addresses associated with ransomware or other illicit transactions.

JRR Comment – I would encourage Director Blanco to provide more information on the trends and patterns. There were 70,000 SARs filed: how many of those provided tactical or strategic value to law enforcement (I have called these TSV, or Tactical or Strategic Value, SARs)? Reporting financial institutions tune and enhance their monitoring and surveillance systems using an Alert-to-SAR analysis: the tuning and enhancing of those systems would be more effective, and the institutions more efficient, if they were able to use an Alert-to-TSV SAR analysis. Only the public sector can provide TSV information.

However, there remain significant issues that concern us in the virtual currency space.  Many of these are issues some of you may have heard me address before:

  • Risks associated with anonymity-enhanced cryptocurrencies, or AECs, remain unmitigated across many virtual currency financial institutions.  We expect each financial institution to have appropriate controls in place based on the products or services it offers, consistent with the obligation to maintain a risk-based AML program.  This means we are taking a close look at the AML/CFT controls you put on the types of virtual currency you offer—whether it be Monero, Zcash, Bitcoin, Grin, or something else—and you should too.  To be sure, FinCEN and our delegated examiners at the IRS are focused on this.

JRR Comment – I agree with Director Blanco that anonymity-enhanced cryptocurrencies are a key risk. Just as anonymity-enhanced legal entities are a key risk: lack of a federal standard that legal entities disclose their beneficial ownership, and provide that information to a publicly-available central registry, remains the biggest risk facing the American AML/CFT regime. 

  • We are also increasingly concerned that businesses located outside the United States continue to try to do business with U.S. persons without complying with our rules.  These include registering, maintaining a risk-based AML program, and reporting suspicious activity, among other requirements.  If you want access to the U.S. financial system and the U.S. market, you must abide by the rules.  We are serious about enforcing our regulations, including against foreign businesses operating in the United States as unregistered MSBs.  We take this very seriously and encourage you to include detailed information about such businesses in your SAR filings when you identify suspicious activity.  If you are going to avail yourself of the U.S. financial system from abroad, you cannot do so without engaging in the financial integrity practices that make this financial system so powerful, stable, trusted, and desirable.


As I conclude, I want to thank you all again for giving me this time today.  FinCEN is committed to enhancing our capabilities and understanding of virtual currencies and to encouraging and fostering responsible innovation.  We look forward to continuing our efforts with all of you in this regard.

Thank you.

JRR Conclusion – In an article I wrote and posted on July 11, 2019 – see RegTech Consulting Article July 11, 2019 – I wrote that “I have followed four Federal Reserve chairs (Greenspan, Bernanke, Yellen, and Powell), and have found that Chairman Powell is the only one of the four that I could consistently understand! In fact, Alan Greenspan’s infamous line – ‘Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said’ – seems to have been the modus operandi of his successors, also … except for Chairman Powell.”

FinCEN Director Ken Blanco is another public official who is not only easy to understand, he makes it crystal clear what he and FinCEN expect of financial institutions when it comes to their AML/CFT obligations. It is refreshing, courageous, and essential as we all fight through the global pandemic of 2020 and try to emerge on the other side better and stronger. 

FOOTNOTE [1] On July 10, 2019, Federal Reserve Chairman Jerome Powell appeared before the House Financial Services Committee for his semi-annual report to Congress. Ranking Member McHenry’s opening statement included that Chairman Powell’s “candor is welcome and encouraged, and we thank you for attempting to speak like a normal human being …”.

Cryptocurrencies – A New Crypto Rating Council Tries to Handicap the Likelihood a Cryptocurrency is a Security

Crypto Rating Council

A group of crypto financial services firms and exchanges have formed the Crypto Rating Council, or CRC “to create a framework to consistently and objectively assess whether any given crypto asset has characteristics that make it more or less likely to be classified  as a security under the U.S. federal securities laws.” See their website at https://www.cryptoratingcouncil.com/#about-us

The founding members of the Crypto Rating Council are Anchorage, Bittrex, Circle Financial, Coinbase, Cumberland, Genesis, Grayscale, and Kraken.

‍According to the website:

“The important question of whether any given digital asset is a security—as opposed to a commodity, a currency, or something else—informs critical licensing, registration, and operating obligations for financial services firms that support cryptocurrency. The U.S. Securities & Exchange Commission has issued guidance that some crypto assets may be securities while others may not be.”

That guidance began with a Report of Investigation the SEC released in 2017 – https://www.sec.gov/litigation/investreport/34-81207.pdf and continued with Guidance on Initial Coin Offerings published on April 3, 2019 – https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets

As the CRC notes:

“While the SEC’s guidance has been helpful in alerting the industry to complex legal issues, determining whether any particular token is a security remains highly circumstantial and difficult to resolve even with the help of leading legal and technical experts. This complexity has led to expensive, redundant, and frequently inconsistent compliance analysis among financial services firms and has generally slowed the launch of new cryptocurrency assets in the U.S.”


“The question of whether a crypto asset is a security—as opposed to a currency, a commodity, or something else—may trigger registration, licensing, and other operating obligations for financial services firms that offer digital asset services like exchange, investment management, and trading. Under federal U.S. law, this important question is generally answered by applying the four-factor Howey test, which requires painstaking “facts and circumstances” analysis which often leads to judgment calls, inconsistent results, and can lead to disagreement among legal experts (and government officials). The founding members formed the CRC to create a compliance tool which, in partnership with securities law experts, allows the members to consistently review assets supported in the ordinary course of their respective businesses.”

In addition to slowing the launch of new cryptocurrency assets in the US, there have been dozens (hundreds) of digital asset/ICO enforcement actions filed by the SEC. A list of those actions is available at https://www.sec.gov/spotlight/cybersecurity-enforcement-actions

So, as a result of this confusion, the Crypto Rating Council was formed “to create a framework to consistently and objectively assess whether any given crypto asset has characteristics that make it more or less likely to be classified  as a security under the U.S. federal securities laws.”

The Securities Rating Framework

According to the CRC, its securities rating framework is “a points-based rating system built upon a set of factual questions that assess each element of the legal test to determine whether an asset is a security. Our framework is derived directly from case law and SEC guidance and has been structured to emphasize objective, repeatable, and fact-driven responses that can be answered more consistently across different assets and across the same asset over time.”

‍In its FAQs section, the CRC described its securities rating framework as follows:

“At the core of the Council’s work is a points-based rating system centered around a set of factual questions. Working with legal and technical experts and members of the community, the CRC distilled a set of yes or no questions which are designed to plainly address each of the four, Howey test factors: (i) whether crypto purchasers invested money, (ii) in a “common enterprise”, (iii) with a reasonable expectation of profit, (iv) based on the efforts of others. The questions are tailored to assess the characteristics most likely to impact any given crypto asset’s treatment under the securities laws. These characteristics include circumstances of the asset’s issuance, governance features, third-party contributions to the project, and practical use of the asset by the general public. The questions are also structured to allow for objective, repeatable, and fact-driven responses that can be answered consistently across different assets and across the same asset over time.”

The Rating Explained

Again, according to the FAQs:

“Each question in the framework is assigned a points-based weighting to reflect its relative importance, the sum of which create scores for each Howey factor. Those scores are then scaled into a final rating between 1 and 5. A score of 5 results when an asset appears to have many characteristics that are consistent with the Howey-test factors. It is probably more likely, relative to lower-scored assets, to implicate the U.S. securities laws. A score of 1 results when an asset appears to have few characteristics that are consistent with the Howey-test factors. It is probably less likely, relative to higher-scored assets, to implicate the U.S. securities laws.”

How Did The Cryptocurrencies Fare Under the Rating System?

A useful graph published online (is “published online” necessary in 2019, or will “published” suffice?) by TheBlockCrypto.com provides the results of the CRC’s first efforts:

We can spotlight three of these to see how the scores were determined at a high level: Bitcoin at 1.00 (definitely not a security), Ethereum at 2.00 (probably not a security), and XRP at 4.00 (likely to be a security).


Facebook’s Libra – The Fed has “serious concerns” about Libra and warns that their process to address these concerns will not be a sprint

Speaking like “a normal human being”, Fed Chairman Powell says Libra raises “many serious concerns regarding privacy, money laundering, consumer protection, and financial stability.”

For comments on the Libra White Paper, see RTC Article on Libra White Paper

On July 10, 2019, Federal Reserve Chairman Jerome Powell appeared before the House Financial Services Committee for his semi-annual report to Congress. Although his prepared remarks and opening statement did not touch on Facebook’s Libra, Committee Chair Maxine Waters (D. CA) opening question was on Libra and Facebook’s Calibra wallet and her concerns about both (as expressed in the Committee’s July 2nd letter to Mark Zuckerberg, Facebook COO Sheryl Sandberg, and Calibra CEO David Marcus). The question and Chairman Powell’s answer are at the 20-minute mark of the CSPAN video ( Congressional Video ). The Chairman’s answer:

“We do support responsible innovation in the financial services industry as long as the associated risks are appropriately identified and managed. And as we’ll discuss, while the project sponsors hold out the possibility of public benefits, including improved financial access by consumers, Libra raises many serious concerns regarding privacy, money laundering, consumer protection, and financial stability. These are concerns that should be thoroughly and publicly addressed before proceeding. And that’s why at the Fed we’ve set up a working group to focus on this set of issues. We are coordinating with our colleagues in the government in the United States, the regulatory agencies and Treasury; we’re coordinating with central banks and governments around the world to look into this. I’ll just add that the process in addressing these concerns, we think, should be a patient and careful one, and not a sprint to implementation.”

Chairman Powell’s language is particularly interesting. He sees “a possibility of public benefits” but he appears to have no doubt that Libra raises “many serious concerns regarding privacy, money laundering, consumer protection, and financial stability.” He is also telling Facebook and the Libra/Caibra project sponsors that regulatory approval will be at the regulators’ pace (“patient and careful”), not the usual fintech pace (“a sprint to implementation”).

And I echo Ranking Member McHenry’s statement that Chairman Powell’s “candor is welcome and encouraged, and we thank you for attempting to speak like a normal human being …”. I have followed four Federal Reserve chairs (Greenspan, Bernanke, Yellen, and Powell), and have found that Chairman Powell is the only one of the four that I could consistently understand! In fact, Alan Greenspan’s infamous line – “Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said” – seems to have been the modus operandi of his successors, also … except for Chairman Powell.

Libra Decentralized Blockchain and Cryptocurrency … and Digital Identity?

Facebook, PayPal, Visa, Lyft, Uber et al are launching “Libra” … and a global digital identity?

The Libra Association wants to give billions of people access to financial services through their new decentralized blockchain, Libra. And a prerequisite of this goal of financial inclusion is (apparently) the creation of an open identity standard: a decentralized and portable digital identity, or global digital identity. I found it interesting that they only mention this need for a global ID in passing and buried on the ninth page.

Below is the text of the Libra White Paper with my embedded comments. The link to the White Paper is Libra White Paper

Title: White Paper From the Libra Association Members – An Introduction to Libra

Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people.

This document outlines our plans for a new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform that together aim to create a new opportunity for responsible financial services innovation.

Problem Statement

The advent of the internet and mobile broadband has empowered billions of people globally to have access to the world’s knowledge and information, high-fidelity communications, and a wide range of lower-cost, more convenient services. These services are now accessible using a $40 smartphone from almost anywhere in the world.1 This connectivity has driven economic empowerment by enabling more people to access the financial ecosystem. Working together, technology companies and financial institutions have also found solutions to help increase economic empowerment around the world. Despite this progress, large swaths of the world’s population are still left behind — 1.7 billion adults globally remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone and nearly half a billion have internet access.2

JRR Comment: The Libra Association’s Founding Members (which include PayPal, Stripe, Visa, eBay, Facebook, Lyft, and Uber) begin with a positioning statement: the problem – notwithstanding the technology innovations of the last decade, billions of people have been left behind – is one that few can argue with. And it deserves a noble solution – Libra. The nobility of their solution is set out in the “Opportunity” paragraph, below.

For too many, parts of the financial system look like telecommunication networks pre-internet. Twenty years ago, the average price to send a text message in Europe was 16 cents per message.3 Now everyone with a smartphone can communicate across the world for free with a basic data plan. Back then, telecommunications prices were high but uniform, whereas today, access to financial services is limited or restricted for those who need it most — those impacted by cost, reliability, and the ability to seamlessly send money.

All over the world, people with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges. Payday loans can charge annualized interest rates of 400 percent or more, and finance charges can be as high as $30 just to borrow $100.4 When people are asked why they remain on the fringe of the existing financial system, those who remain “unbanked” point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation.5

Blockchains and cryptocurrencies have a number of unique properties that can potentially address some of the problems of accessibility and trustworthiness. These include distributed governance, which ensures that no single entity controls the network; open access, which allows anybody with an internet connection to participate; and security through cryptography, which protects the integrity of funds.

JRR Comment: Having established the two problems to overcome – accessibility to, and trustworthiness of, the mainstream financial system – the Founding Members have set out the three main attributes needed to overcome those problems. Those attributes are (i) distributed governance, (ii) open access, and (iii) security through cryptography. But those are the same three attributes that existing blockchain systems have, and those existing blockchain systems haven’t solved those two problems. So they continue their pitch in the next paragraph …

But the existing blockchain systems have yet to reach mainstream adoption. Mass-market usage of existing blockchains and cryptocurrencies has been hindered by their volatility and lack of scalability, which have, so far, made them poor stores of value and mediums of exchange. Some projects have also aimed to disrupt the existing system and bypass regulation as opposed to innovating on compliance and regulatory fronts to improve the effectiveness of anti-money laundering. We believe that collaborating and innovating with the financial sector, including regulators and experts across a variety of industries, is the only way to ensure that a sustainable, secure, and trusted framework underpins this new system. And this approach can deliver a giant leap forward toward a lower-cost, more accessible, and more connected global financial system.

JRR Comment: Here is where the Founding Members lay out why existing blockchain systems haven’t addressed the problems of accessibility and trustworthiness: volatility, lack of scalability, and ignoring mainstream regulatory protections. So between these two paragraphs that have three solutions and three problems, the Founding Members have assembled the six attributes of Libra: distributed governance, open access, security through cryptography, stability, scalability, and adoption of mainstream regulatory protections.

What they don’t include here – but bring up for the first time on page 9 of the original paper – is (perhaps) a seventh attribute of Libra. The Libra Association wants to create an open identity standard: a decentralized and portable digital identity, which they describe as a prerequisite to overcoming the problem they are trying to solve – financial inclusion.

The Opportunity

As we embark on this journey together, we think it is important to share our beliefs to align the community and ecosystem we intend to spark around this initiative:

  • We believe that many more people should have access to financial services and to cheap capital.
  • We believe that people have an inherent right to control the fruit of their legal labor.
  • We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce across the world.
  • We believe that people will increasingly trust decentralized forms of governance.
  • We believe that a global currency and financial infrastructure should be designed and governed as a public good.
  • We believe that we all have a responsibility to help advance financial inclusion, support ethical actors, and continuously uphold the integrity of the ecosystem.

JRR Comment: This is good marketing. It begins with “as we embark on this journey together” and continues with six bullets beginning with “we believe” instead of “it is our position that …”.

Introducing Libra

The world truly needs a reliable digital currency and infrastructure that together can deliver on the promise of “the internet of money.”

JRR Comment: Does the world truly need a digital currency and infrastructure? And what is “the internet of money”? Again, this is a great marketing document.

Securing your financial assets on your mobile device should be simple and intuitive. Moving money around globally should be as easy and cost-effective as — and even more safe and secure than — sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn. New product innovation and additional entrants to the ecosystem will enable the lowering of barriers to access and cost of capital for everyone and facilitate frictionless payments for more people.

Now is the time to create a new kind of digital currency built on the foundation of blockchain technology. The mission for Libra is a simple global currency and financial infrastructure that empowers billions of people. Libra is made up of three parts that will work together to create a more inclusive financial system:

  1. It is built on a secure, scalable, and reliable blockchain;
  2. It is backed by a reserve of assets designed to give it intrinsic value;
  3. It is governed by the independent Libra Association tasked with evolving the ecosystem.

The Libra currency is built on the “Libra Blockchain.” Because it is intended to address a global audience, the software that implements the Libra Blockchain is open source — designed so that anyone can build on it, and billions of people can depend on it for their financial needs. Imagine an open, interoperable ecosystem of financial services that developers and organizations will build to help people and businesses hold and transfer Libra for everyday use. With the proliferation of smartphones and wireless data, increasingly more people will be online and able to access Libra through these new services. To enable the Libra ecosystem to achieve this vision over time, the blockchain has been built from the ground up to prioritize scalability, security, efficiency in storage and throughput, and future adaptability. Keep reading for an overview of the Libra Blockchain, or read the technical paper. [the 29-page technical paper is available at  https://developers.libra.org/docs/assets/papers/the-libra-blockchain.pdf]

JRR Comment: The technical paper is the key. So far, all of this is simply puffery and marketing.

The unit of currency is called “Libra.” Libra will need to be accepted in many places and easy to access for those who want to use it. In other words, people need to have confidence that they can use Libra and that its value will remain relatively stable over time. Unlike the majority of cryptocurrencies, Libra is fully backed by a reserve of real assets. A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value. The Libra Reserve will be administered with the objective of preserving the value of Libra over time. Keep reading for an overview of Libra and the reserve, or read more here.

JRR Comment: Although Google isn’t a Founding Member of the Libra Association, you might want to Google “stable coins”. A crypto or virtual currency tied to a fiat currency (i.e., the US dollar or Euro), is known as a “stable coin” to distinguish it from the unstable crypto currencies that drift and move through un- and under-regulated, or regulated and un- or under-supervised hype, hubris, and FOMO.

The Libra Association is an independent, not-for-profit membership organization headquartered in Geneva, Switzerland.

The association’s purpose is to coordinate and provide a framework for governance for the network and reserve and lead social impact grant-making in support of financial inclusion. This white paper is a reflection of its mission, vision, and purview. The association’s membership is formed from the network of validator nodes that operate the Libra Blockchain.

JRR Comment: On May 6, 2019, Facebook Global Holdings II, LLC registered Libra Networks in Geneva, Switzerland. The English translation of the “purpose” statement was “Provision of services in the fields of finance and technology, as well as the development and production of software and related infrastructure, in particular in connection with investment activities, the operation of payments, financing, identity management, data analysis, big data, blockchain and other technologies (see states for full purpose).” There was no mention of social impact grant-making.

Members of the Libra Association will consist of geographically distributed and diverse businesses, nonprofit and multilateral organizations, and academic institutions. The initial group of organizations that will work together on finalizing the association’s charter and become “Founding Members” upon its completion are, by industry:

JRR Comment: Notice that this paragraph speaks to the future membership of the Libra Association as including nonprofits, multilateral organizations, and academic organizations. But the current members include the planet’s biggest payments, ride-sharing, telecom companies, and venture capitalists. 

  • Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
  • Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.
  • Telecommunications: Iliad, Vodafone Group
  • Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
  • Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
  • Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

We hope to have approximately 100 members of the Libra Association by the target launch in the first half of 2020.

Facebook teams played a key role in the creation of the Libra Association and the Libra Blockchain, working with the other Founding Members. While final decision-making authority rests with the association, Facebook is expected to maintain a leadership role through 2019. Facebook created Calibra, a regulated subsidiary, to ensure separation between social and financial data and to build and operate services on its behalf on top of the Libra network.

Once the Libra network launches, Facebook, and its affiliates, will have the same commitments, privileges, and financial obligations as any other Founding Member. As one member among many, Facebook’s role in governance of the association will be equal to that of its peers.

JRR Comment: This suggests that the twenty-seven Founding Members will have different commitments, privileges, and financial obligations than the next (approximately) seventy-three other members. We do know from a paragraph below that one of those privileges is that the members of the Libra Association are going to receive dividends for providing capital to “jumpstart the ecosystem”.

Blockchains are described as either permissioned or permissionless in relation to the ability to participate as a validator node. In a “permissioned blockchain,” access is granted to run a validator node. In a “permissionless blockchain,” anyone who meets the technical requirements can run a validator node. In that sense, Libra will start as a permissioned blockchain.

To ensure that Libra is truly open and always operates in the best interest of its users, our ambition is for the Libra network to become permissionless. The challenge is that as of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network.

JRR Comment: This is a key statement. Bitcoin is a permissionless blockchain: anyone or any entity can participate as a “validator node”. But as the Founding Members note, permissionless blockchains like Bitcoin are not scalable, stable, nor secure, so Libra will launch as a permissioned blockchain, with the direction and promise that it will consider going permissionless … if the problems of scalability, stability, and security of a permissionless system can be overcome.

One of the association’s directives will be to work with the community to research and implement this transition, which will begin within five years of the public launch of the Libra Blockchain and ecosystem.

Essential to the spirit of Libra, in both its permissioned and permissionless state, the Libra Blockchain will be open to everyone: any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services. Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers. This is foundational to the goal of building more inclusive financial options for the world.

JRR Comment: “Open to everyone” could be the sales pitch of the current mainstream financial sector, where with APIs, any consumer, developer, or business – fettered somewhat by regulators’ insistence that the financial sector have some rules of the road – can access and use the financial system.

The goal of the Libra Blockchain is to serve as a solid foundation for financial services, including a new global currency, which could meet the daily financial needs of billions of people. Through the process of evaluating existing options, we decided to build a new blockchain based on these three requirements:

  • Able to scale to billions of accounts, which requires high transaction throughput, low latency, and an efficient, high-capacity storage system.
  • Highly secure, to ensure safety of funds and financial data.
  • Flexible, so it can power the Libra ecosystem’s governance as well as future innovation in financial services.

The Libra Blockchain is designed from the ground up to holistically address these requirements and build on the learnings from existing projects and research — a combination of innovative approaches and well understood techniques. This next section will highlight three decisions regarding the Libra Blockchain:

  1. Designing and using the Move programming language.
  2. Using a Byzantine Fault Tolerant (BFT) consensus approach.
  3. Adopting and iterating on widely adopted blockchain data structures.

JRR Comment: Here is where the Founding Members will lose 99% of their readers. The following paragraphs on a new programming language, a play on the age-old Byzantine General’s Problem (once again, Google it), pseudonymity, and the LibraBFT consensus protocol, will be lost on most readers.

“Move” is a new programming language for implementing custom transaction logic and “smart contracts” on the Libra Blockchain. Because of Libra’s goal to one day serve billions of people, Move is designed with safety and security as the highest priorities. Move takes insights from security incidents that have happened with smart contracts to date and creates a language that makes it inherently easier to write code that fulfills the author’s intent, thereby lessening the risk of unintended bugs or security incidents. Specifically, Move is designed to prevent assets from being cloned. It enables “resource types” that constrain digital assets to the same properties as physical assets: a resource has a single owner, it can only be spent once, and the creation of new resources is restricted. The Move language also facilitates automatic proofs that transactions satisfy certain properties, such as payment transactions only changing the account balances of the payer and receiver. By prioritizing these features, Move will help keep the Libra Blockchain secure. By making the development of critical transaction code easier, Move enables the secure implementation of the Libra ecosystem’s governance policies, such as the management of the Libra currency and the network of validator nodes. Move will accelerate the evolution of the Libra Blockchain protocol and any financial innovations built on top of it. We anticipate that the ability for developers to create contracts will be opened up over time in order to support the evolution and validation of Move.

JRR Comment: I’ve read the technical paper once, and didn’t fully understand it (and never will). But it appears that Move appears focused on, or at least addresses, smart contracts perhaps more elegantly than other blockchain-based applications.

To facilitate agreement among all validator nodes on the transactions to be executed and the order in which they are executed, the Libra Blockchain adopted the BFT approach by using the LibraBFT consensus protocol. This approach builds trust in the network because BFT consensus protocols are designed to function correctly even if some validator nodes — up to one-third of the network — are compromised or fail. This class of consensus protocols also enables high transaction throughput, low latency, and a more energy-efficient approach to consensus than “proof of work” used in some other blockchains.

In order to securely store transactions, data on the Libra Blockchain is protected by Merkle trees, a data structure used by other blockchains that enables the detection of any changes to existing data. Unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, the Libra Blockchain is a single data structure that records the history of transactions and states over time. This implementation simplifies the work of applications accessing the blockchain, allowing them to read any data from any point in time and verify the integrity of that data using a unified framework.

The Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity. This approach is familiar to many users, developers, and regulators. The Libra Association will oversee the evolution of the Libra Blockchain protocol and network, and it will continue to evaluate new techniques that enhance privacy in the blockchain while considering concerns of practicality, scalability, and regulatory impact.

JRR Comment: First, note that those using various blockchains to conduct transactions are not anonymous at all – their names are masked (like a pseudonym), but traceable (therefore, pseudonymous). Transactors are very trackable and the immutability of the blockchain makes those tracks permanent.

For more details, read the technical paper on the Libra Blockchain. Detailed information is also available on the Move programming language and the LibraBFT consensus protocol. We’ve open sourced an early preview of the Libra testnet, with accompanying documentation. The testnet is still under development, and APIs are subject to change. Our commitment is to work in the open with the community and hope you will read, build, and provide feedback.

The Libra Currency and Reserve

We believe that the world needs a global, digitally native currency that brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance, and fungibility. The Libra currency is designed to help with these global needs, aiming to expand how money works for more people around the world.

Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra. That means anyone with Libra has a high degree of assurance they can convert their digital currency into local fiat currency based on an exchange rate, just like exchanging one currency for another when traveling.

JRR Comment: Note what the Founding Members are not writing. The term “such as”, and the descriptors “stable” and “reputable” are little more than suggestions. They are not writing that Libra will be backed by Federal Reserve bank deposits and short-term US- and UK-government currencies. And, who is going to hold these guarantees? See below …

This approach is similar to how other currencies were introduced in the past: to help instill trust in a new currency and gain widespread adoption during its infancy, it was guaranteed that a country’s notes could be traded in for real assets, such as gold. Instead of backing Libra with gold, though, it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.

It is important to highlight that this means one Libra will not always be able to convert into the same amount of a given local currency (i.e., Libra is not a “peg” to a single currency). Rather, as the value of the underlying assets moves, the value of one Libra in any local currency may fluctuate. However, the reserve assets are being chosen to minimize volatility, so holders of Libra can trust the currency’s ability to preserve value over time.

The assets in the Libra Reserve will be held by a geographically distributed network of custodians with investment-grade credit rating to provide both security and decentralization of the assets. The assets behind Libra are the major difference between it and many existing cryptocurrencies that lack such intrinsic value and hence have prices that fluctuate significantly based on expectations.

JRR Comment: Just as we don’t know what “low-volatility assets” are backing Libra, we don’t who will be holding those assets.

Libra is indeed a cryptocurrency, though, and by virtue of that, it inherits several attractive properties of these new digital currencies: the ability to send money quickly, the security of cryptography, and the freedom to easily transmit funds across borders. Just as people can use their phones to message friends anywhere in the world today, with Libra, the same can be done with money — instantly, securely, and at low cost.

JRR Comment: Let’s see how instant and cheap it is to quickly send money once 200+ countries’ regulatory bodies apply their regulatory standards.

Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jumpstart the ecosystem (read “The Libra Association” here), and support further growth and adoption. The rules for allocating interest on the reserve will be set in advance and will be overseen by the Libra Association. Users of Libra do not receive a return from the reserve. For more on the reserve policy and the details of the Libra currency, please read here.

The Libra Association

To make the mission of Libra a reality — a simple global currency and financial infrastructure that empowers billions of people — the Libra Blockchain and Libra Reserve need a governing entity that is comprised of diverse and independent members. This governing entity is the Libra Association, an independent, not-for-profit membership organization, headquartered in Geneva, Switzerland.

JRR Comment: So the investors who provided capital to jumpstart the Libra ecosystem, described as “the Libra Association”, will receive dividends from the interest on the reserve assets. And the Libra Association is a not-for-profit membership organization. Lawyers will need to figure this out because I can’t: receiving dividends sounds like for-profit to me …

Switzerland has a history of global neutrality and openness to blockchain technology, and the association strives to be a neutral, international institution, hence the choice to be registered there. The association is designed to facilitate the operation of the Libra Blockchain; to coordinate the agreement among its stakeholders — the network’s validator nodes — in their pursuit to promote, develop, and expand the network, and to manage the reserve.

The association is governed by the Libra Association Council, which is comprised of one representative per validator node. Together, they make decisions on the governance of the network and reserve. Initially, this group consists of the Founding Members: businesses, nonprofit and multilateral organizations, and academic institutions from around the world.

JRR Comment: I didn’t see any academic institutions listed as Founding Members.

All decisions are brought to the council, and major policy or technical decisions require the consent of two-thirds of the votes, the same supermajority of the network required in the BFT consensus protocol.

Through the association, the validator nodes align on the network’s technical roadmap and development goals. In that sense, it is similar to other not-for-profit entities, often in the form of foundations, which govern open-source projects. As Libra relies on a growing distributed community of open-source contributors to further itself, the association is a necessary vehicle to establish guidance as to which protocols or specifications to develop and to adopt. The Libra Association also serves as the entity through which the Libra Reserve is managed, and hence the stability and growth of the Libra economy are achieved. The association is the only party able to create (mint) and destroy (burn) Libra. Coins are only minted when authorized resellers have purchased those coins from the association with fiat assets to fully back the new coins. Coins are only burned when the authorized resellers sell Libra coin to the association in exchange for the underlying assets. Since authorized resellers will always be able to sell Libra coins to the reserve at a price equal to the value of the basket, the Libra Reserve acts as a “buyer of last resort.” These activities of the association are governed and constrained by a Reserve Management Policy that can only be changed by a supermajority of the association members.

JRR Comment: Here is another difference with Bitcoin: the ability to destroy (burn) Libra. This reads a lot like what a central bank does in controlling the money supply. And it will be interesting to see how regulators across the globe classify and regulate the Libra Association.

In these early years of the network, there are additional roles that need to be performed on behalf of the association: the recruitment of Founding Members to serve as validator nodes; the fundraising to jumpstart the ecosystem; the design and implementation of incentive programs to propel the adoption of Libra, including the distribution of such incentives to Founding Members; and the establishment of the association’s social impact grant-making program.

An additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.

JRR Comment: This appears on page 9 of the original paper. This is a big deal. The Libra Association wants to create an open identity standard: a decentralized and portable digital identity. It is odd that they didn’t write in the opening paragraphs that a prerequisite of financial inclusion – the singular problem that they are trying to overcome with Libra – is a common, open, and decentralized digital identity.

An important objective of the Libra Association is to move toward increasing decentralization over time. This decentralization ensures that there are low barriers to entry for both building on and using the network and improves the Libra ecosystem’s resilience over the long term. As discussed above, the association will develop a path toward permissionless governance and consensus on the Libra network. The association’s objective will be to start this transition within five years, and in so doing will gradually reduce the reliance on the Founding Members. In the same spirit, the association aspires to minimize the reliance on itself as the administrator of the Libra Reserve.

For more on the Libra Association, please read here.

What’s Next for Libra?

Today we are publishing this document outlining our goals for Libra and launching libra.org as a home for the association and all things Libra. It will continue to be updated over the coming months. We are also opensourcing the code for the Libra Blockchain and launching Libra’s initial testnet for developers to experiment with and build upon.

There is much left to do before the target launch in the first half of 2020.

  • The Libra Blockchain: Over the coming months, the association will work with the community to gather feedback on the Libra Blockchain prototype and bring it to a production-ready state. In particular, this work will focus on ensuring the security, performance, and scalability of the protocol and implementation.
  • The Libra Association will construct well-documented APIs and libraries to enable users to interact with the Libra Blockchain.
  • The Libra Association will create a framework for the collaborative development of the technology behind the Libra Blockchain using the open-source methodology. Procedures will be created for discussing and reviewing changes to the protocol and software that support the blockchain.
  • The association will perform extensive testing of the blockchain, which range from tests of the protocol to constructing a full-scale test of the network in collaboration with entities such as wallet services and exchanges to ensure the system is working before launch.
  • The association will work to foster the development of the Move language and determine a path for third parties to create smart contracts once language development has stabilized — after the launch of the Libra ecosystem.

Together with the community, the association will research the technological challenges on the path to a permissionless ecosystem so that we can meet the objective to begin the transition within five years of the launch.

  • The Reserve:
  • The association will work to establish a geographically distributed and regulated group of global institutional custodians for the reserve.
  • The association will establish operational procedures for the reserve to interact with authorized resellers and ensure high-transparency and auditability.
  • The association will establish policies and procedures that establish how the association can change the composition of the reserve basket.
  • The Libra Association:
  • We will work to grow the Libra Association Council to around 100 geographically distributed and diverse members, all serving as the initial validator nodes of the Libra Blockchain.
  • The association will develop and adopt a comprehensive charter and set of bylaws for the association on the basis of the currently proposed governance structure.
  • We will recruit a Managing Director for the association and work with her/him to continue hiring for the association’s executive team.
  • We will identify social impact partners aligned with our joint mission and will work with them to establish a Social Impact Advisory Board and a social impact program.

The association envisions a vibrant ecosyste

How to Get Involved

m of developers building apps and services to spur the global use of Libra. The association defines success as enabling any person or business globally to have fair, affordable, and instant access to their money. For example, success will mean that a person working abroad has a fast and simple way to send money to family back home, and a college student can pay their rent as easily as they can buy a coffee.

Our journey is just beginning, and we are asking the community to help. If you believe in what Libra could do for billions of people around the world, share your perspective and join in. Your feedback is needed to make financial inclusion a reality for people everywhere.

  • If you are a researcher or protocol developer, an early preview of the Libra testnet is available under the Apache 2.0 Open Source License, with accompanying documentation. This is just the start of the process, and the testnet is still an early prototype under development, but you can read, build, and provide feedback right away. Since the current focus is on stabilizing the prototype, the project may initially be slower to take community contributions. However, we are committed to building a community-oriented development process and opening the platform to developers — starting with pull requests — as soon as possible.
  • If you want to learn about the Libra Association, read more here.
  • If your organization is interested in becoming a Founding Member or applying for social impact grants from the Libra Association, read more here. The association will work with the global community in the coming months and continue to partner with policymakers worldwide to further the mission.


This is the goal for Libra: A stable currency built on a secure and stable open-source blockchain, backed by a reserve of real assets, and governed by an independent association. Our hope is to create more access to better, cheaper, and open financial services — no matter who you are, where you live, what you do, or how much you have. We recognize that the road to delivering this will be long, arduous, and won’t be achieved in isolation — it will take coming together and forming a real movement around this pursuit. We hope you’ll join us and help turn this dream into a reality for billions of people around the world.

JRR Comment: Notwithstanding some of my comment, this is an exciting and positive development. Moving blockchain technology, whether permissioned or not, distributed or not, pegged cryptocurrency or not, out to known, accountable people from large companies, associations, nonprofits, and academic institutions has to be a good thing. Giddy up!

End Notes
1 Best Buy. “AT&T prepaid Alcatel CAMEOX device purchase.” Bestbuy.com. Available: https://www.bestbuy.com/site/at-t-prepaid-alcatel-cameox-4g-lte-with16gb-memory-cell-phone-arctic-white/6008102.p?skuId=6008102 (Accessed: May 15, 2019).
2 A. Demirgüç-Kunt, L. Klapper, D. Singer, S. Ansar, and J. Hess. The Global Findex database 2017: Measuring financial inclusion and the fintech revolution. World Bank Group, 2018. Accessed: May 15 2019. Globalfindex.worldbank.org. [Online]. Available: https://globalfindex.worldbank.org/sites/globalfindex/ files/2018-04/2017%20Findex%20full%20report_0.pdf
3 OECD. Mobile phones: Pricing structures and trends. Paris, France: OECD Publishing, 2000, p. 67. [Online]. Available: https://books.google.com/books?id=pcP84M_GBeoC&pg=PA6&lpg=PA6&dq=1999+price+SMS+europe&source=bl&ots=TIbwgZWCmj&sig=ACfU3U2Z_yRawxW78qVSVO_wHCtRupoqoA&hl=en&sa=X- &ved=2ahUKEwjOmeG9tMHiAhVVFzQIHU8eBEMQ6AEwD3oECAkQAQ#v=onepage&q=SMS&f=false
4 Consumer Federation of America. “How payday loans work.” Payday Loan Consumer Information. Available: https://paydayloaninfo.org/facts (Accessed: May 19, 2019).
5 A. Demirgüç-Kunt, L. Klapper, D. Singer, S. Ansar, and J. Hess. The Global Findex database 2017: Measuring financial inclusion and the fintech revolution. World Bank Group, 2018. Accessed: May 15 2019. Globalfindex.worldbank.org. [Online]. Available: https://globalfindex.worldbank.org/sites/globalfindex/ files/2018-04/2017%20Findex%20full%20report_0.pdf

DeepDotWeb – a Major Gateway to Darknet Marketplaces Shut Down

“single most significant law enforcement disruption of the Darknet to date”

DeepDotWeb administrators led hundreds of thousands of users to DarkNet marketplaces

In an indictment dated April 24th and announced publicly on May 8th, the Department of Justice charged  Tal Prihar, 37, an Israeli citizen residing in Brazil, and Michael Phan, 34, an Israeli citizen residing in Israel, with one count of money laundering based on a number of underlying (predicate) criminal acts. The Government also seized the website, http://www.deepdotweb.com (DDW).

From October 2013 through April 2019, Prihar and Phan ran a “gateway” service that made it easy for people to access DarkNet marketplaces. In return, they received “Referral Bonuses” from the marketplaces, based on a percentage of purchases made by those they referred. In total, they received ~8,155 bitcoin worth $8.1 million (based on the value at the time of each transaction) in 40,000 deposits or transactions. They then made 2,700 withdrawals from their wallet (from at least three exchanges – OKCoin, Kraken, and BitPay – based on the forfeiture allegations) valued at $15.5 million, and converted bitcoin to fiat currency in accounts in at least three banks – Baltikums Bank in Latvia, First International Bank of Israel in Israel, and TBC Bank in Georgia (also based on the forfeiture allegations).

According to the DOJ press release – https://www.justice.gov/opa/pr/administrators-deepdotweb-indicted-money-laundering-conspiracy-relating-kickbacks-sales:

“According to the indictment unsealed today, these defendants allegedly made millions of dollars by providing a gateway to illegal Darknet marketplaces, allowing hundreds of thousands of users to buy fentanyl, hacking tools, stolen credit cards, and other contraband,” said Assistant Attorney General Benczkowski. “This is the single most significant law enforcement disruption of the Darknet to date,” said U.S. Attorney Scott W. Brady.  “While there have been successful prosecutions of various Darknet marketplaces, this prosecution is the first to attack the infrastructure supporting the Darknet itself.”

How did the Darknet gateway work?

Darknet marketplaces operated on the “Tor” network, a computer network designed to facilitate anonymous communication over the Internet.  Because of Tor’s structure, a user who wanted to visit a particular Darknet marketplace needed to know the site’s exact .onion address. Prihar and Phan provided a service to make it easier for people to access the Darknet marketplaces. They (allegedly) owned and operated DDW, hosted at www.deepdotweb.com and also accessible on the Darknet at DeepDot35Wveyd5.onion. DDW provided users with direct access to numerous online Darknet marketplaces, including AlphaBay, Hansa Market, and the recently shut-down Wall Street Market (by design, Darknet marketplaces are not accessible through traditional search engines). DDW simplified this process by including pages of hyperlinks to various Darknet marketplaces’ .onion addresses.

Users who visited DDW were able to click on the hyperlinks to navigate directly to the Darknet marketplaces.  Embedded in these links were unique account identifiers, which enabled the individual marketplaces to pay what they referred to as “Referral Bonuses,” to DDW. Through the use of the referral links, DDW received kickbacks from Darknet marketplaces every time a purchaser used DDW to buy illegal narcotics or other illegal goods on the marketplace.

These kickback payments were made in virtual currency, such as bitcoin, and paid into a DDW-controlled bitcoin “wallet.” To conceal and disguise the nature and source of the illegal proceeds, totaling over $15 million, Prihar and Phan transferred their illegal kickback payments from their DDW bitcoin wallet to other bitcoin accounts and to bank accounts in Latvia, Israel, and Georgia they controlled in the names of shell companies.

AlphaBay DarkNet Marketplace

AlphaBay was shut down by the DOJ on July 20, 2017. Its administrator, Alexandre Cazes, was indicted in the Eastern District of California (EDCA 17CR00144). According to that indictment, AlphaBay had 40,000 vendors and 200,000 users. According to the Prihar and Phan indictment, approximately 23.6 percent of all orders completed on AlphaBay were associated with an account created through a DDW referral link, and Prihar and Phan received 3,273 Bitcoin in referral fees or kickbacks.

An inter-agency and international effort

This is another example of the good work being done by the FBI’s Hi-Tech Organized Crime Unit and a multi-agency Joint Criminal Opioid and Darknet Enforcement (J-CODE) Team made up of agents and analysts from the FBI, DEA, US Postal Inspection Service (USPIS), U.S. Customs and Border Protection (CBP), U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI), Department of Defense (DOD), and FinCEN.  International partners included French authorities, Brazilian Federal Police Cyber Division, Israeli National Police, Dutch National Police, Europol Darkweb Team, German Federal Criminal Police (the Bundeskriminalamt), Polizeidirektion Zwickau and Saxon Police in Germany and law enforcement authorities in the United Kingdom.

As the US Attorney reminds us … an indictment contains only allegations.  A defendant is presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

Elvis, Donald Duck, Bittrex, and New York’s “Safe Harbor” for Crypto Exchanges

“… examiners found that a substantial number of aliases (e.g., Give Me My Money, Elvis Presley, abc-abc, Donald Duck, and other clearly false names) and obscene terms and phrases are used to identify accounts at Bittrex …”

Bittrex, Inc., a virtual currency exchange with almost 1.7 million users across the world, applied to the New York State Department of Financial Services for two licenses: a BitLicense to engage in “virtual currency business activity” in the state of New York (that application was filed in August 2015), and to engage in money transmission activity (that application was filed in July 2018).

Both applications were denied on April 10, 2019.

The denial letter reads like a criminal charging document. https://www.dfs.ny.gov/system/files/documents/2019/04/dfs-bittrex-letter-41019.pdf

The BitLicense application didn’t go well from the beginning. The NYSDFS “worked steadily with Bittrex to address continued deficiencies” and issued “several deficiency letters” relating to BSA, AML, and OFAC compliance. Things were going so badly, that in February 2019 the NYSDFS had a number of examiners do a four-week, onsite review of Bittrex’s policies, procedures, practices, and controls, including testing 100 million virtual currency transactions that Bittrex processed in 2017 and 2018. What they found is stunning, and led to their conclusion that Bittrex had an inadequate BSA/AML/OFAC compliance program. Among other things:

  • Bittrex had non-existent or inadequate policies and procedures
  • “a large number of transactions for customers domiciled in sanctioned countries (including Iran and North Korea) had passed through screening and were processed …”
  • Bittrex excludes “corporate and cash customers from its transaction monitoring”
  • the Compliance Officer was inadequate, there was a lack of training, and audit was inadequate

(I’m not an expert in New York licensing, but I haven’t seen anything in the bitlicense licensing requirements that specifically requires a dedicated transaction monitoring system).

I hope – but don’t expect – that New York takes a close look at its “safe harbor” approach for unlicensed crypto exchanges. The Department noted that Bittrex had been operating under the “safe harbor” provision that allowed Bittrex to engage in virtual currency business activity during the pendency of its crypto licensing application. Based on the denial letter, it looks like Bittrex allowed – even encouraged – transactions from its corporate and “cash” customers to go unmonitored, it had customers in North Korea and Iran, and flaunted know your customer controls. The New York harbor may have been a safe place for  Bittrex to safely flaunt AML and sanctions controls for more than two years and 100 million crypto transactions, but it wasn’t a safe place for all the New Yorkers, and others, who may have been, or eventually harmed by the unknown financial activity related to rogue states and actors.

We haven’t heard much from Bittrex. And the NYSDFS has a history of pushing very hard and over-reacting to certain matters and failing to appreciate all the perspectives that a case presents. I expect that there is much more to this matter than has been presented in the public realm. Let’s hope it comes out. One way or another.

Crypto ICOs, Cannabis, Beauty Queens, and Russian Technocrats

On November 16, 2018 the SEC settled an unregistered ICO case with the issuer, Paragon Coin. See https://www.sec.gov/litigation/admin/2018/33-10574.pdf.

It doesn’t get much better than this case … a former Miss Iowa and “Amazing Race”contestant married to a Russian guy who (according to social media) describes himself as a “leading luxury life figure” form a company “to deploy a suite of blockchain enabled products to organize, systematize, and bring verification and stability to the cannabis industry”. To do this, they raised between $12 million (per the SEC) and $70 million (per a separate class-action suit) by offering PRG tokens in an (oops) unregistered securities offering.

The facts as set out in the SEC’s claim and the allegations contained in the class-action law suit are the foundation for an HBO special. In the summer of 2017 Paragon’s website, Telegraph account, email, Twitter, Facebook, and other social media (everything, apparently, except an SEC registration statement) began touting their Ethereum blockchain-based solutions for solving most of the cannabis industry’s business and compliance issues: “to deploy a suite of blockchain enabled products to organize, systematize, and bring verification and stability to the cannabis industry.” In addition, to ParagonChain, ParagonCoin, ParagonOnle, and ParagonAccelerator, they offered ParagonSpace: to purchase and refurbish space for “niche co-working spaces” for cannabis entrepreneurs (called “Paragonians”).

On August 15, 2017 Paragon published a White Paper (again, on its website and social media, instead of a business plan and offering statement on the SEC’s website). In a series of communications, Paragon outlined its PreSale to run from August 15 – September 15, which would offer 70 million of the 200 million PRG tokens at $0.75 – $0.90 each; then a CrowdSale from September 15 – October 15, which would offer 30 million PRG tokens at $1.00 the first day, going up $0.05 each day thereafter (which turned out to be false and perhaps a ruse to get early investors to buy more: in fact, they dropped the prices up to 55% in the CrowdSale period). The PRG tokens could only be purchased with other cryptocurencies, and Paragon told investors that the CrowdSale raised 533 BTC (~$7.3 million at one point) and 8,092 ETH (~$10.2 million). The SEC materials indicate 8,323 investors purchased the equivalent of $12,066,000 worth of PRG tokens. Eventually the SEC weighed in and filed an Administrative Action which Paragon consented to. Paragon will pay a $250,000 penalty, offer refunds, and get their tokens registered. In the meantime, they’ve bought and built out a co-op space just off Sunset Boulevard in Hollywood for what they describe as their “Paragonians”.  But none of this is news. Between the end of the presale and beginning of the crowdsale, Forbes ran a story, “The Iowa Beauty Queen, The Russian Technocrat and their Cannabis Crypto Launch”. According to the SEC, over 8,300 people bought PRG tokens. Caveat Emptor, folks!  


Central Bank Digital Currency?

Christine Largarde, Managing Director of the IMF, introduced the concept of a Central Bank Digital Currency, in a speech at the Singapore FinTech Festival. In her speech she referenced the IMF Staff Discussion Note, “Casting Light on Central Bank Digital Currencies”.


Both the speech (6 pages) and the paper (37 pages) are good reads. Both conclude that challenges remain and “further analysis of technological feasibility and operational costs” is needed. Among a number of concerns Director Largarde has is privacy, which she explains with beer and frozen pizza! Both the speech and paper refer to AML and CTF controls, also.

Director Largarde also compared the FinTech sector to the “Fearless Girl” statue which stares down the Wall Street Bull statute … an interesting visual comparison!

Bloomberg: “Crypto World Rocked After Long-Time Advocate Backpedals … Exchange cites need to navigate the regulatory environment”


The article offers an interesting look at crypto’s version of what the highly regulated (and supervised) mainstream financial industry players have had to negotiate for years: satisfying their customers’ desire for service and privacy, while satisfying their regulatory requirements … however uncertain or fast-changing those requirements may be.

The article begins with:

“It’s a dark day for crypto when one of the best known platforms offering peer-to-peer trading, more in line with the original vision for Bitcoin than centralized exchanges, will start asking users for personal information. Erik Voorhees, chief executive officer of cryptocurrency exchange ShapeShift AG, said in a blog post on Tuesday the platform is launching a membership program, which ‘requires basic personal information to be collected.’ and will ‘become mandatory soon.’”

Bloomberg then reports that:

“ShapeShift is making the move after users requested account-related features such as email notifications, as it’s exploring the ability to tokenize loyalty programs, and as the company recognizes the need to be ‘prudent and thoughtful in our approach as we navigate the regulatory environment,’ according to the blog post. Cryptocurrency watchers have zeroed in on that last item and are speculating Swiss-based ShapeShift has caved to regulators. Asked whether the move was in response to specific regulatory requirements, Voorhees replied, ‘this is a precautionary move to derisk the company amid an ever-changing legal grey area.’ Voorhees did appear to partially side with critics in his blog post, as he said making membership mandatory ‘sucks’ and that ShapeShift still believes individuals deserve the right to financial privacy.”

It has not been a good week for cryptocurrencies. This story, along with reports that Goldman Sachs may be abandoning (or slowing down) its plan to open a cryptocurrency trading desk because of the ambiguous regulatory environment. At last check, Bitcoin was down below $6,500.

Russian Military Officers Indicted – DC District Court, case 18CR00215

Count 1 of the indictment of the 12 Russian GRU officers (conspiracy to commit an offense against the United States) begins with “In or around 2016, the Russian Federation (“Russia”) operated a military intelligence agency called the Main Intelligence Directorate of the General Staff (“GRU”). The GRU had multiple units, including Units 26165 and 74455, engaged in cyber operations that involved the staged releases of documents stolen through computer intrusions. These units conducted large scale cyber operations to interfere with the 2016 U.S. presidential election.”

Mr. Mueller and his team are exceptional prosecutors and lawyers. Every word and phrase in a Special Counsel indictment has meaning. So to begin this indictment with “the Russian Federation” is telling.

And Count 10 – conspiracy to commit money laundering – is a text-book example of using bitcoin to fund criminal activity. Paragraphs 57 to 62 of the indictment provide the details:

“… the Defendants conspired to launder the equivalent of more than $95,000 through a web of transactions structured to capitalize on the perceived anonymity of cryptocurrencies such as bitcoin. Although the Conspirators caused transactions to be conducted in a variety of currencies, including U.S. dollars, they principally used bitcoin when purchasing servers, registering domains, and otherwise making payments in furtherance of hacking activity.  Many of these payments were processed by companies located in the United States that provided payment processing services to hosting companies, domain registrars, and other vendors both international and domestic.  The use of bitcoin allowed the Conspirators to avoid direct relationships with traditional financial institutions, allowing them to evade greater scrutiny of their identities and sources of funds.  All bitcoin transactions are added to a public ledger called the Blockchain, but the Blockchain identifies the parties to each transaction only by alpha-numeric identifiers known as bitcoin addresses.  To further avoid creating a centralized paper trail of all of their purchases, the Conspirators purchased infrastructure using hundreds of different email accounts, in some cases using a new account for each purchase.  The Conspirators used fictitious names and addresses in order to obscure their identities and their links to Russia and the Russian government.”

And the defendants (are alleged to have) not only bought bitcoin, but earned it through mining:

“The Conspirators funded the purchase of computer infrastructure for their hacking activity in part by “mining” bitcoin.  Individuals and entities can mine bitcoin by allowing their computing power to be used to verify and record payments on the bitcoin public ledger, a service for which they are rewarded with freshly-minted bitcoin.  The pool of bitcoin generated from the GRU’s mining activity was used, for example, to pay a Romanian company to register the domain dcleaks.com through a payment processing company located in the United States. In addition to mining bitcoin, the Conspirators acquired bitcoin through a variety of means designed to obscure the origin of the funds.  This included purchasing bitcoin through peer-to-peer exchanges, moving funds through other digital currencies, and using pre-paid cards.  They also enlisted the assistance of one or more third-party exchangers who facilitated layered transactions through digital currency exchange platforms providing heightened anonymity.”

The indictment is US v 12 Russian GRU Officers Indictment DCDC 18CR00215 7-13-18

(An indictment contains allegations that have yet to be proven in a court of law.)