ING and Other Top Banks Join R3 to Take the Next Step with Blockchain Technology

Bitcoin Magazine
ING and Other Top Banks Join R3 to Take the Next Step with Blockchain Technology

In September Bitcoin Magazine reported that nine global banks were pooling resources to fund R3, a next-generation global financial services company focused on applications of cryptographic technology and distributed ledger-based protocols within global financial markets.

R3 will seek to establish consistent standards and protocols for this emerging technology across the financial industry in order to facilitate broader adoption and gain a network effect, according to an R3 press release.

Several other top banks joined R3 soon thereafter.

Now, five more banks – ING, BNP Paribas, Wells Fargo, MacQuarie and the Canadian Imperial Bank of Commerce – are joining R3, Reuters reports. R3, now supported by most of the world’s major banks (with notable exceptions in China), represents the first high-profile collaborative project to find out how blockchain technology can be used in finance.

Thirty banks across the world are now partnering with R3, signaling a significant commitment to collaboratively evaluate and apply this emerging technology to the global financial system.

“The combined strength of our technology team and the diverse global footprint of our member banks clearly differentiates us and puts us in a unique and exciting position within the distributed ledger space,” said R3’s CEO David Rutter. “The R3 collaborative model is the best way to quickly, efficiently and cost-effectively deliver these new technologies to global financial markets. We look forward to welcoming more players to our growing team as the initiative continues to develop and evolve.”

Richard Gendal Brown, IBM’s former executive architect of banking innovation, joined R3 in September as chief technology officer. In a recent post on his personal blog, he introduced his senior leadership team, which includes James Carlyle, formerly chief engineer at Barclays Personal and Corporate Bank, who joined R3 as chief engineer, and Bitcoin code developer Mike Hearn, who joined R3 as lead platform engineer. Ian Grigg joined R3 as architecture consultant, and Tim Swanson joined R3 as head of research.

Gendal Brown’s team will focus on the basics of fintech applications for banks and financial firms: “[W]hat properties does a technology platform need to possess if it is going to enable the world’s banks – and other firms – to deploy shared platforms to record, manage and report on their contractual agreements with each other and with their customers? What is the irreducible set of functional requirements we must provide? What are the non-negotiable non-functional requirements?”

A press release on ING Bank’s website announced that, by joining R3, ING is taking the next step with blockchain technology to collaborate on research, design, and engineering that will advance innovative solutions for clients that meet banking requirements for security, reliability, performance, scalability, and auditing. ING Group, a Dutch multinational banking and financial services corporation headquartered in Amsterdam, had more than 48 million individual and institutional clients in more than 40 countries in 2013.

“We are very excited about joining the R3 consortium and taking an important step forward in our payments innovation strategy,” said Mark Buitenhek, ING Global Head of Transaction Services. “We want to make the most of what blockchain technology has to offer our customers and the best way to achieve this is through global collaboration. Working together, we will develop innovative banking solutions for our clients with consistent standards and protocols guaranteeing widespread adoption. We are convinced that this initiative brings together unique sets of expertise and experience in electronic financial markets, distributed ledgers and blockchain technologies.”

The rapid rise of R3 shows that the adoption of blockchain technology in the financial sector is reaching a point of no return. On the other hand, it can also be interpreted in the context of the ongoing trend toward appropriation of blockchain technology by the mainstream financial world, which many early adopters and Bitcoin purists consider a disturbing trend.

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Law Enforcement and Regulators Agree: Bitcoin Not Useful for Terrorists, Already Regulated Appropriately

In the aftermath of the Paris attack on November 13, the European Union (EU) is looking to crack down on bitcoin with the hope of preventing the financing of future attacks. Regulators and advocacy groups agree, though, that kneejerk regulation is not what is needed; rather, it’s an increase in education.

“There’s nothing wrong with Bitcoin, it just means it’s another part of our financial system,” said Dana Syracuse, managing director and a member in the Anti-Money Laundering (AML) and Regulatory Compliance Practice at K2 Intelligence, in an interview with Bitcoin Magazine.

K2 Intelligence is an investigative, compliance, and cyber defense services firm. Prior to joining K2 Intelligence, he worked in the New York State Department of Financial Services and was the author of BitLicense.

“As time goes on, Bitcoin’s place is going to grow,” Syracuse said. “One of the things that I talk about is, if you look at the story of bitcoin and the kind of enforcement and prosecutorial action, it shows the evolution and growth of the space.”

“Bitcoin is not the problem, and further restrictions on it are not the solution. Criminals and terrorists are using all sorts of technology to try to hide their activities over the Internet, but those who turn to bitcoin as part of that effort are making a big mistake,” said Jason Weinstein, director of the Blockchain Alliance, in an interview with Bitcoin Magazine.

Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network (FinCEN) explained at a Digital Currency Summit held by the Department of Justice that $4 million worth of bitcoin is circulated through regulated entities. Outside the regulated entities, $10 million worth of bitcoin is circulated. At the event, Calvery made clear that her agency didn’t regulate bitcoin; instead, it regulated the financial institutions.

Perianne Boring, the founder and president of the Chamber of Digital Commerce, echoed those thoughts. In an interview with Bitcoin Magazine , she said, “Virtual currency is already highly regulated, especially within the G7 nations. Despite the high degree of regulation, the majority of bitcoin transactions are taking place outside regulated entities, which are mostly outside the G7 nations.”

“Increasing regulation within the G7 would only increase burdens on the companies that are working hard to comply with the Bank Secrecy Act and related regulations and could potentially push more bitcoin into the unregulated entities,” Boring said.

“What is needed is rolling out regulations in a rational, thoughtful, and constructive way,” said Syracuse. “When you regulate in the face of a crisis, there is often a temptation to overcorrect, which you want to guard against. We have to be careful on the back end of a travesty like this not to overregulate.”

Regulation is not the problem; it is education

Fundamentally, it is education that is problem, not regulation. Once regulators have sufficient education, they tend to come to the same conclusion that many others do: Bitcoin is not the problem.

“I’m a little skeptical of what new regulation would exist that would help,” said Vincent D’Agostino, associate managing director in the U.S. Cyber Investigations and Incident Response practice at K2 Intelligence, in an interview with Bitcoin Magazine.

Before joining K2 Intelligence, he was the FBI’s trial agent for Silk Road 1 and the case agent for Silk Road 2.

“If more people on the counter-terrorism side took the time to educate themselves on blockchain technology, so when they did a raid and the first thing they did was take that seized data and identify the public keys so they could start to make links,” he said. “They could go, we didn’t know who this linked to, but now we know everything they’ve done. It attaches that person to those wallet files.”

“Every financial innovation, every new form of value transfer brings with it its own unique challenges,” Syracuse explained. “Bitcoin is not unique in that. Terrorism is a major concern of major financial systems. The use of bitcoin in those kinds of activities is no different than what goes on in the traditional banking system. Education in this space is key, and that is what will lead to rational and productive regulation and communication between the regulators.”

According to a report by the U.K. Treasury, “there is little evidence to indicate that the use of digital currencies has been adopted by criminals involved in terrorist financing, whether as a means by which to raise funds (crowd funding etc.), to pay for infrastructure (e.g. server rental), or to transfer funds.”

The report also explains, “The money laundering risk associated with digital currencies is low, though if the use of digital currencies was to become more prevalent in the U.K. this risk could rise.”

That is because bitcoin is actually an inefficient method for transferring value for illicit purposes since it is a completely public ledger.

“It would be far easier to launder euros or dollars than it would be to launder a decentralized, blockchain-based currency like bitcoin,” said David Long, the principal and senior consultant at the Northern California Fraud Prevention Solutions, in an interview with Bitcoin Magazine . “Though from an initial investigative standpoint, bitcoin might present more of a challenge due to the necessity of uncovering who is actually responsible for a given transaction or transactions. However, once the actor’s identity is uncovered, the blockchain makes it possible to uncover most, if not all, of a person’s transactions. This capability is without parallel when the subject is dealing in euros or dollars.”

Weinstein further confirmed that point, saying, “Reports of bitcoin’s anonymity are greatly exaggerated. Criminals or terrorists who use bitcoin to facilitate their activities are foolish, because bitcoin is traceable in a way that other payment methods, including cash, are not.”

Bitcoin is pseudonymous in that all that is shown is on the public ledger is a public address. However, once a law enforcement officer is able to identify who owns that public address, he would then be able to track every transaction that went to and from that address. If the Islamic State of Iraq and the Levant (ISIL) were to transfer bitcoin, and a law enforcement officer knew that it was their address, he could track each transaction and start building a case accordingly.

Cash, on the other hand, is completely anonymous. An individual in ISIL could take envelopes of cash across state borders and easily pay for the necessary assets for committing an act of terror. A law enforcement official would have no way of verifying how the funds were used. Long gave an example where a trade-based money-laundering scheme using dollars or euros conducted by professionals could be virtually undetectable.

The problem with this is that more people don’t realize it.

“They [law enforcement] are not using bitcoin as much as they should,” D’Agostino said. “As long as there are human beings involved in the transfer of bitcoin, the creation and maintenance of those wallets, and the movement of that digital code, they are going to make a mistake at some point. If it’s a group of people like a terror network with moving money in both directions, they’re going to make a mistake. They’ll forget to encrypt their wallets or leave their keys on an old wallet. That’ll give you an opening, a door crack, to give you [law enforcement ] a chance to exploit that information.”

The key is educating law enforcement and national security authorities about how the technology works, so they can enhance their ability to use it to follow the money and protect public safety, Weinstein said. “We need more education, not more regulation.”

Jerry Brito, the executive director of Coin Center, explained in a recent blog post why more education is needed: “Overreaction by jittery policymakers in the wake of a crisis is always a concern, which is why education before such crises is so important. We’ve been engaged in just such education for over a year, and we’re hopeful policymakers understand that an overreaction would be counterproductive, whatever the headlines may say.”

Brito echoed the point made clear by Boring and Weinstein: “The fact is that regulators understand that digital currencies do not pose the greatest risk for terrorist financing, and to the extent digital currencies pose some risk, a ‘crack down’ on their use would likely only serve to drive out legitimate players, which in turn would only serve to limit governments’ visibility into illicit uses.”

Bitcoin financial institutions already follow many of the same money transmitter laws that traditional institutions have to follow. Creating further regulation over them will not help prevent further acts of terrorism. Instead, educating law enforcement on the ways in which it can use the blockchain to seek and capture terrorists is one way to prevent future catastrophes.

Photo StockMonkeys.com / Flickr(CC)

Jacob Donnelly is a freelance journalist and a consultant in the bitcoin/blockchain space. He runs a weekly digital currency and blockchain newsletter called Crypto Brief.

The post Law Enforcement and Regulators Agree: Bitcoin Not Useful for Terrorists, Already Regulated Appropriately appeared first on Bitcoin Magazine.