Where Banks are Failing, A Closer Look at House Resolution 835 | dinbits



On July 14th 2016 the United States House of Representatives introduced Resolution 835 which in summary would call for a national policy on virtual currency and blockchain technology.

For the intents and purposes of this article lets clarify what blockchain technology means. We mean public networks used for establishing an electronic trust, not private networks behind closed doors or database systems all of which are irrelevant for this topic of conversation. In the use of the term "the blockchain" we also refer to the bitcoin network.

On September 12th, 2016 the Resolution passed. 

Key Points of House Resolution 835

The resolution states specifically that the 114th Congress 2d session H. Res. 835 is "expressing the sense of the House of Representatives that the United States should adopt a national policy for technology to promote consumers’ access to financial tools and online commerce to promote economic growth and consumer empowerment.". 

The resolution was submitted by Representative Kinzinger of Illinois (Rep. Adam Kingzinger) which was referred to the Committee on Energy and Commerce .

The first very interesting point is this one.

....the growth of consumers’ use of mobile devices and the deployment of broadband access has supported the growth of financial technology products and services outside of traditional products and services offered by banks and other financial institutions in the United States increasing commerce and job growth

The two point of this particular resolution item is the acknowledgement of increased commerce and job growth. One of the most under-reported aspect of the industry is how banks and traditional financial institutions (eg. PayPal, Western Union, Square, etc...) contribute heavily to unemployment. 

An anti-money laundering compliance firm servicing the blockchain sector recently had its agreement with processing provider Square recently terminated after charging a payment for services rendered (AML training) to a technology startup company. The startup client was offering services related to the virtual currency and blockchain space and as a result the firm was told that Square (which uses Chase Paymentech) will not support services rendered in that industry. This was a financial compliance firm and one that had never had an issue with Square prior to this charge. 

This is one small example among hundreds, if not thousands, across the blockchain landscape where companies have gone out of business resulting in unemployment and financial loss due to the traditional financial service industry and banks freezing funds and closing accounts of businesses related to virtual currency or blockchain technology. 

They typically state Federal or state level compliance as the core issue and whereas that is sometimes accurate in isolated incidents for the most part this is a fallacy. There are various reasons for the behaviors stemming from fear of the technology to poorly trained and/or understaffed compliance teams but allot this activity comes down to money. The business model of this industry (blockchain) necessitates increased monitoring from risk and compliance teams at these institutions and organizations simply determine internally that its going to cost too much and that results in less money to present on quarterly reports. 

If the "compliance" excuses were accurate in the manner in which they present them, companies like Coinbase, Circle, and others wouldn't be operating. Note the aforementioned companies are all federally registered and/or licensed financial institutions in the United States. They manage to operate under the federal regulatory landscape, why can't the banks? The short answer is they can, they just choose not to.

It's not a matter of "they cannot" it is a matter of "they don't want to".

...identity theft is a rising concern for people in the United States as their personal information is targeted by criminal enterprises for monetization on the black market ... cyberattacks against domestic and international financial institutions and cooperatives continue...

It may not be intentional, however, banks and other traditional financial institutions should exercise more caution and understand that certain activity that many of their compliance teams are currently engaged in inadvertently contributes to money-laundering and supports cyberattacks and identity theft by blocking the use of more secure technology like the blockchain and virtual currency.

With the blockchain you have the most secure method of value transfer and transaction recording currently known to mankind. There is nothing in comparison and nothing as secure. These organizations are not embracing the use of this technology but rather they are trying to build internal systems similar to blockchain while harming the companies working on innovative technologies in an effort no greater than self-enrichment and at the complete disregard to the safety of consumers and businesses alike.

...emerging payment options, including alternative non-fiat currencies, are leveraging technology to improve security through increased transparency and verifiable trust mechanisms to supplant decades old payment technology deployed by traditional financial institutions; and .... blockchain technology with the appropriate protections has the potential to fundamentally change the manner in which trust and security are established in online transactions through various potential applications in sectors including financial services, payments, health care, energy, property management, and intellectual property management

First of all in regards to the above excerpt from H. Res. 835 the phrasing of "alternative non-fiat currencies" cannot be ignored and how the word "currencies" was used rather than the typical "virtual currency" moniker used by United States government officials. Secondly to further strengthen the previous statement about security of blockchain technology, specifically with networks such as the blockchain underpinning bitcoin, the later portion of the paragraph states the supplement of old technology which is increasingly becoming further outdated.

Even with this knowledge banks and tradition financial service organizations continue to cause harm to innovative companies by shutting off access to banking and traditional financial services while promoting unsecure environments currently used for financial transactions. The word unsecure is emphasized since traditional security has been breached multiple times and appearing almost effortless at times. Earlier this year a theft of nearly 90 million was the result of cyber-criminals exploiting vulnerabilities within the Federal Reserve and the SWIFT network (a private network used by banks).

The bitcoin blockchain's security has never once been breached.

Resolution

To resolve these issues the House of Representatives have called for a national policy of which will encourage the further development of blockchain technology and its use. 

United States should prioritize accelerating the development of alternative technologies that support transparency, security, and authentication in a way that recognizes their benefits, allows for future innovation, and responsibly protects consumers’ personal information

The above appears to be just about the exact opposite of what banks are doing with initiatives such as the R3CEV consortium. They (R3/banks) are trying to continue along the lines of stale technology in use currently by internalizing networks and any related technology in an effort to eliminate transparency, reduce security by hosting a network rather than make use of a secure technology such as bitcoins blockchain, and worst of all they are trying to continue on with a fundamental flaw in traditional system technology in the persistence of attaching identities to transactions. All things which are in direct contradiction of H. Res. 835 and the exact opposite of blockchain technology. 

 the United States should support further innovation, and economic growth, and ensure cybersecurity, and the protection of consumer privacy

Another interesting point is the protection of consumer privacy which again is about as exact opposite of financial institution practices today. One issue with this is regulation and how this can be accomplished exactly as there are some legitimate hurdles however, the practices of today are not in line with what the federal regulation requires.

For example, Paypal does not need your social security number. They need a tax identifier such as an EIN or TIN of which an SSN can suffice but is not required by any stretch of the imagination. Additionally they only need this under certain conditions. It's not that they need this information, they want this information for their own business reasons. The Social Security Administration (SSA) advises against giving anyone your social security number unless it is for a large cash purchase in excess of $10,000 USD in which case it is federal law or an employer where this information can be delivered discreetly. 

Federal BSA reports many businesses are familiar with such as FinCEN Form 8300 are not what financial institutions such as PayPal are required to file. The Paypal's of the world file a streamlined version of  CTR, which is FinCEN Form 104. Form 104 does not require social security numbers unless no other form of tax ID is available and even then the report can be filed without it. Identification such as your drivers license or other federally acceptable documentation along with a tax identifier is sufficient. In fact this is written on Item 6, of Section A, of Part I of the currency transaction report Form 104.

The only time a social security number should be (emphasis on should) given is under one of three conditions.

  1. If you are involved in a transaction in which the IRS requires notification, or; 
  2. if you are engaged in a financial transaction subject to federal CIP rules.

An example of the first item would be buying a car with cash in excess of $10,000 and in this case it would be federal law. The second being financial institution account transactions that fall within a reporting or other regulated activity that requires a social security number, however this does not mean opening an account.

Banks are not required to obtain your social security number just to open an account, they are required to make a reasonable effort to obtain a tax payer identification of which they may certainly refuse to do business with you if you refuse to give it but there is no law stating that they must obtain your information and in fact the regulations at 31 CFR § 103.34 specifically states that they are not liable if they cannot obtain this from you.

Despite all of this, consumers are required to provide this information online to obtain certain financial services and that activity has to be discontinued in its entirety. 

It is certainly recommended to present your tax payer information, such as your social security number, in the event of obtaining a bank account for your own ease of opening the account but the point being that it is not required and presenting this information online for any reason whatsoever is never recommended.

Note there are some other cases such as in the insurance industry where it is also acceptable to obtain SSN information.

Blockchain Technology

Blockchain tech has the ability to help change allot of these stale practices and that is certainly not gong to be done without a fight from the financial industry using the traditional methods in place now. Effort such as those from R3-CEV and organizations like it are trying to force old practice and methodology into new technology like blockchain and it fits about as well as a square peg in a round hole. 

The national policy that will be the ultimate result of H. Res. 835 may help clear the path for innovative public initiatives and companies to continue down the path of enabling blockchain technology to further permeate the financial industry as well health care, automotive, and others. This will allow consumers and companies opting for security and privacy to avoid the stale "R3Cev-type" efforts and current traditional technologies that have proven an inability to provide adequate environments.






Article by Dale Henry
Banner Image by dinbits staff

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