Facebook’s Cryptocurrency Needs to Prove Itself, Expert Says

Published on Lifewire

Written by Michelai Graham – Interview with Joseph Raczynski

Facebook is scaling back its ambitious plans to move into the cryptocurrency sector while users on the platform aren’t showing much confidence in the site’s new addition.

The media giant will likely launch its smaller scale Libra cryptocurrency project as soon as January. Libra was originally supposed to be a new currency backed by fiat money (a currency established as money by the government) and securities (tradable financial assets). Libra will now work as a stable coin, meaning it won’t fluctuate in value as it’s pegged to something like the US dollar or a basket of currencies.

“It was only a matter of time before a private company went down the road of their own cryptocurrency,” Joseph Raczynski, a technologist and futurist for Thomas Reuters told Lifewire in an email. “I was very excited to hear this was going to happen last summer, but skeptical to see how it would transpire.”

What Exactly Is Facebook Trying to Do With Cryptocurrency Anyway?

Cryptocurrency is the private industry’s brand new way to exchange value over the internet, Raczynski said, and Facebook wants to take advantage of that. 

Raczynski has been working with cryptocurrency since the creation of Bitcoin in 2011 and has even created his own cryptocurrencies before. He said the most appealing aspect of cryptocurrency is the security and ease of use. Unfortunately, cryptocurrency is still just an idea of the future for some people, which may be a struggle for Facebook as it plans to launch soon. 

“At its most basic, cryptocurrency is the representation of value on the Internet,” Raczynski explained. “The first stage that people should be cognizant of is that a cryptocurrency will be similar to a digital dollar.”

“It was only a matter of time before a private company went down the road of their own cryptocurrency.”

Facebook plans to launch a single dollar-backed coin, and eventually a wallet called Novi, to send and receive Libra currencies. Digital wallets are encrypted, Raczynski explained, so only the user would have access to it. With Novi, Facebook users can manage their digital coins within Facebook’s apps, including Messenger, WhatsApp, browsers, and other connected apps. With the use of a single currency, Raczynski thinks it will make the barrier to do things much easier to manage.

“Anyone using Facebook around the world could exchange their local currency for the Facebook currency,” he said. “Anything you want to buy, services rendered, or simply exchanging money could happen across the world with a unified Facebook currency.”

Are Facebook Users Ready for Libra? 

With all of the changes to Facebook’s cryptocurrency plans, users may be skeptical of its efficacy, yet the appeal of being able to easily send and receive money digitally may (eventually) trump those doubts. The social media giant is no stranger to discussing privacy, so it better be prepared to talk about its plans to track cryptocurrency usage on its site.

“Facebook is a lightning rod for controversy,” Raczynski said. “What they do or don’t do with users’ personal data and tracking user habits is a constant in the news and most people’s minds. It really is a broadening of what Facebook can do to trace and track habits and data patterns.”

Facebook users are probably already using digital wallets like PayPal and Venmo, and Facebook’s Novi will work similarly to those. What they all have in common is the fact that the platforms own and manage users’ digital wallets. 

https://www.facebook.com/plugins/video.php?href=https%3A%2F%2Fwww.facebook.com%2Fnovi%2Fvideos%2F859686647872438%2F

In the “real” cryptocurrency world, users have full ownership of their digital wallets, which are protected by private keys—a public address to share with anyone to make transactions with and a private one that shouldn’t be shared and essentially makes the wallet yours. So, while your money would still be yours via Facebook’s digital wallet, you don’t “own” the system it runs on.

Another important aspect to note is that while Libra is slightly more decentralized than a country’s own monetary system, like the US dollar, it’s still centralized around a number of companies serving as validators. While it might be a better system to use, according to Raczynski, it’s still susceptible to hacks because there are relatively small sets of attack points.

Why Is This Important?

This new currency Facebook is creating won’t rely on the government, and will instead be backed by an extensive portfolio of companies, including those in the Libra Association. 

“They have developed a governance where mega companies run computer nodes/servers that verify transactions between people or companies,” Raczynski said. “Now, in concept, this is similar to what Bitcoin established 11 years ago, only Facebook is run by upwards of 100 companies and their servers, rather than tens of thousands of computers which are not influenced by those private companies.”

In the not-too-distant future, Raczynski said, every asset people have will be represented by a cryptocurrency, from cars to real estate and beyond. This reach could also help people around the world who don’t have access to physical banks.

“Anything you want to buy, services rendered, or simply exchanging money could happen across the world with a unified Facebook currency.”

“There are few things that will be as technologically transformative in the world as cryptocurrency over the next ten years,” said Raczynski. “I am most excited about how it has the potential to help the unbanked, and [help] people living in developing countries rise up and take ownership of their own assets and build wealth.”

Despite Raczynski’s confidence in the growth trajectory of cryptocurrency over the next decade, people will have to learn more about crypto to believe using it on Facebook is a real thing, just as online shopping prompted much skepticism across the world when it first became reality. That, however, is on Facebook to prove.

Podcast: The Hearing – Doug Pepe – Partner – Joseph Hage Aaronson LLC

From the producer: You may have watched as Mark Zuckerberg explained the internet to Congress in a way that felt a bit unnecessary. Well, this episode is sort of the opposite of that. Joe Raczynski is joined by legal and mathematical macroeconomics genius Doug Pepe, to take us through blockchain, tokens and cryptocurrency in a way that’s genuinely enlightening.

The legal industry is sometimes accused of not keeping up, but we know that’s not true. Lawyers are occupying this space now. Their clients are very active and they have a crucial role to play in the serious policy issues being debated.

Doug, a partner at Joseph Hage Aaronson, started his blockchain journey by building gaming computers with his young children, and then teaching them how to mine bitcoin. Fast forward and Doug is now an expert on blockchain privacy, smart contracts and digital identity.

Apple: https://podcasts.apple.com/us/podcast/ep-68-doug-pepe-jha/id1389813956?i=1000503066806

Google/Android: https://podcasts.google.com/feed/aHR0cHM6Ly9wb3J0YWwtYXBpLnRoaXNpc2Rpc3RvcnRlZC5jb20veG1sL3RoZS1oZWFyaW5n/episode/aHR0cDovL2F1ZGlvLnRoaXNpc2Rpc3RvcnRlZC5jb20vcmVwb3NpdG9yeS9hdWRpby9lcGlzb2Rlcy9FcDY4X0RvdWdfUGVwZV9taXhkb3duLTE2MDgzMDQxMDgzMzgzNDc3MDctTXpFMk9UVXROelF6TVRNME16WT0ubXAz?sa=X&ved=0CAUQkfYCahcKEwjo-ObCpN_tAhUAAAAAHQAAAAAQAw

Find out more at tr.com/TheHearing

Will COVID-19 Make Cash Obsolete?

Originally published on the Legal Executive Institute.

By Gina Jurva – Joseph Raczynski

Is the COVID-19 pandemic more quickly moving the world to a cashless society? One where almost all financial transactions are not conducted with physical banknotes or coins, but rather through the transfer of digital information via a smartphone?

Thomson Reuters technologist and futurist Joe Raczynski explains why cash may no longer be king and how the fear of banknotes carrying and passing the coronavirus itself may help get us there more immediately.

Legal Executive Institute: The World Health Organization (WHO) recently indicated that washing your hands after handling money, especially if handling or eating food, is a “good hygiene practice” but they stopped short of issuing any formal warnings. How can technology help guide this conversation?

Joe Raczynski: Sooner than we thought, we will be moving away from the possibility of literal dirty money, meaning legal cash tender. Believe it or not, the United States was on the cusp of issuing a digital dollar on at the end of March. As part of the early draft for the COVID-19 stimulus package, bold and powerful policy makers vied for the creation of a Digital Dollar.

Having presented on this topic for the last four years, I was ecstatic to see this development. The concept was to have the US Department of Treasury issue FedAccounts to everyone in the country. Normally, FedAccounts are only issued to qualified banks.

In essence, these accounts would create digital wallets for everyone. Once released, stimulus money could be sent directly to each person in moments. Ultimately, the concerns around logistics and privacy became too significant a barrier, but clearly it is only a matter of time before we have a digital wallet issued by the US government.

Legal Executive Institute: China has taken measures to sanitize their cash. Is this really a path forward for global payment systems?

Joe Raczynski: Yes and no. Multiple news reports claimed that China was burning their paper currency to prevent passing bank notes infected with the virus. Based on the scientific evidence for how long the virus can stay on surfaces, it is logical to reduce the risk by avoiding paper or metal currency.

Fortunately, China had already transitioned to a nearly cashless society. With AliPay and WeChat Pay, nearly everyone in China is using QR Codes to exchange money digitally in person and through digital wallets online. From what I understand, payments via these two platforms make up roughly 80% of all payments in China. That’s huge! The next step will be the People’s Bank of China issuing a Digital Currency Electronic Payment (DCEP) sometime in the next six months. More than likely this will utilize the benefits of blockchain technology — immutable, secure, and transparent.

cash

This last benefit is potentially problematic for the Chinese people. When their digital currency is used, China will have direct insight into the finances of everyone in the country, and beyond, as China’s plan is to roll this out globally, especially in Asia and Africa. The Chinese government has stated that this will help them fend off money laundering, as suspicious transactions can be immediately audited and examined with ease.

Legal Executive Institute: Prior to COVID-19, how close were we to moving to contactless payments?

Joe Raczynski: Most countries in Europe and Asia currently have available some sort of contactless payment system. In the UK and the rest of Europe, the popular payment method is hovering your debit or credit card over the terminal and the payment is processed immediately. They have been doing this for years. The US is just beginning to use the contactless card payment system. Apple Pay, Samsung Pay, Android Pay, all have been around for years now, and are popular with a younger demographic.

With the virus outbreak, more establishments have been pushing for these transactions, which still use banks and credit card processers like Visa, Mastercard, and American Express.

Legal Executive Institute: How feasible it is for retailers use contactless payments as a primary payment method?

Joe Raczynski: We are at a point where most, if not all transactions could be contactless. Many startups, semi-casual restaurants, and small businesses aim to only use contactless payments — for example, like Square does.

Similarly, individuals transacting with others can send money to each other via private bank enabling systems like Zelle, Venmo, Apple Pay, or Google Pay. Clearly credit cards and virtual gift cards have been popular with online merchants for years.

The primary setback for pure contactless and credit card transactions are the unbanked — US adults who do not have a checking, savings, or money market account. According to the Federal Reserve, about 6% of US adults fall into this category.

Legal Executive Institute: Are mobile payments the answer?

Joe Raczynski: Unequivocally yes! Most semi-modern mobile devices have the capability to add credit or debit cards by mapping them to your mobile app payment system of choice. This is a partial solution, for those with access to the banking system, which is the majority in the US. However, to cover all, the idea of the Digital Dollar in a government-issued wallet would be ideal.

Legal Executive Institute: In the US, major mobile payments apps had adoption rates of less than 10%, according to the Pew Research Center. What are the major hurdles for adopting mobile payments as a primary payment method?

Joe Raczynski: While smartphone use is at roughly 81%, according to Pew, the primary hurdle for contactless payment in the US is actually habit. We are accustomed to swiping cards or inserting them into a device for chip reading.

Education is also key — many people are unaware they can hover their card over a payment terminal to do the transaction. (Look for the wireless symbol on your card to see if this is feasible.) Clearly migrating to app-based transaction on your smartphone will grow in popularity too. And with the pandemic, the push to contactless payments is a given.

Legal Executive Institute: What might payments look like in the future, and how can we protect against fraudulent activity?

Joe Raczynski: I honestly believe some dramatic shifts are about to take place with our primary forms of money. With the advent of blockchain technology, there will be a fission between state-sponsored fiat money and privately-run currencies. The philosophical and theoretical concerns, challenges, and opportunities are innumerous, but not insurmountable.

Facebook’s Libra project, for example, is an effort by a private company to issue a global currency. The idea is to create a permissioned blockchain where a set number of trusted participants (100 or so) control the rules and define total circulation of the coin. While Libra has met with significant headwinds, this is very likely our future, in some incarnation. Facebook, or more likely, a large private company outside of the US will succeed here. If Facebook perseveres, it could create a global currency usable by half the world population overnight, which is extremely powerful, albeit a bit threatening to sovereign nations.

What will be fascinating to watch is the push by governments around the world to issue their own digital currency in the next few years to counter the private company coins. According to the International Monetary Fund, 50 countries are now exploring issuing their own digital currency.

The major dilemma for state-sponsored digital money, however, is the question of whether they pursue blind payments or clear payments. That means, will they allow people to use the digital currency like paper currency by concealing private information through cryptography? Or will they wander down the Chinese model and make it all traceable by the government, which would certainly help curtail nefarious transactions but could ebb civil liberties.

LegalWeek 2020: Leveraging AI to Combat Financial Crimes

Originally published in the Legal Executive Institute.

By Joseph Raczynski

NEW YORK — With increasing data flow among global financial institutions expanding, compounded by newly minted hybrid financial organizations in FinTech, managing these highly regulated transactions is progressively more complicated.

A panel at last week’s LegalWeek 2020 explored the anti-money laundering (AML) trends in 2020, discussed the state of legal artificial intelligence (AI) solutions in AML compliance and screening, and described a case study where AI has been successfully deployed in combating financial crimes.

Panelist Cassie Lentchner, Senior Counsel at Pillsbury Winthrop Shaw Pittman, kick-started the discussion by bringing up the topic of regulatory expectations. The premise she offered stated that those institutions which contemplate or currently use AI for compliance functions must employ a risk management fundamentals model. “Scoping is critical to assess the regulatory requirements and expectations,” she said.

Currently, AI can be used to automate repetitive tasks, aggregate information, cluster information into groups, and confirm or monitor information. Clearly, we are not at the point where this technology can surplant institutional judgement and decision making, just yet, Lentchner added.

Now, more regulators are wading in on how compliance departments use AI. In fact, we are at a point where some of these algorithmic applications require financial institutions to get prior written approval from regulators, said Tim Mueller, Partner in Global Investigations & Compliance at Guidehouse. During exams, Bank Secrecy Act (BSA) and AML programs are being examined, and financial institutions are expected to demonstrate the AI functions being use, explain how they work, and even defend the work product to the regulator. Some defenses have withered from the regulator’s findings and from AI bias.

Using Intelligent Segmentation

The panel further discussed an Intelligent Segmentation case study, diving into the pitfalls of current approaches to AML compliance and how AI solves for it. Frequently, normal banking behavior is identified as suspicious, and this includes large bank deposits and rapid money movement from one bank to another. Despite billions of dollars spent on traditional monitoring (which often ends with a human internal investigator), 95% of system-generated alerts are “false positives,” said Mueller.

The AI approach involves three phases: machine intelligence, subject matter expertise, and increased efficiency & effectiveness. In this new model, Intelligent Segmentation leverages AI and identifies segments using a collection of related datapoints beyond additional identifiers. This allows the machine to better identify groups that should be monitored together and those that should be split. Ultimately when parsing the data, the machine can see patterns or white space, thus eliminating false positives like rapid bank-to-bank transfers by trusted organizations which would have been triggered in pre-AI models and have been difficult to identify previously by human investigators.

Another AI-enabled AML compliance case study that Mueller cited is Behavioral Network Analysis. With most compliance departments, the typical approach is to monitor suspicious activity by deploying rule-based detection scenarios, for example, collecting if-then-else logical statements. These new AI-generated systems make it possible to create a “contextual monitoring” approach that leverages Behavior Network Analysis and allows it to review entities and their interconnected relationships and transactions. This has proven to be very effective, especially in trade and financial market businesses, explained Mueller.


Now, more regulators are wading in on how compliance departments use AI. In fact, we are at a point where some of these algorithmic applications require financial institutions to get prior written approval from regulators.


Another panelist, Dr. Sam Small, Chief Security Officer of ZeroFOX, said that based on his background in academic security research, he had uncovered the ease in which social media can be co-opted through impersonation, account takeover, piracy, threats of violence, fraud, and misinformation. Fortunately, he added, there are ways to counter it. Small’s AI approach dissects social media accounts by parsing the information within these accounts at large scale. In this way, the model can break down and characterize social media accounts into the following components: media content, avatars, name and username, text content, hashtags, dates, actions, and URLs.

Then, the model delves into each component: Are URLs safe? Are hashtags benign or seemingly suspicious? Each piece can be poured over, using highly tailored algorithms to uncover dubious activity and allowing the account users a way to fight back, Small explained.

The thrust of the panel’s conversation proved that AI will be omnipresent for compliance with AML and fraud amid the explosion of global financial data. The universal agreement among the panelists was that the guiding principles to need to gain acceptance from regulators, internal audit, and compliance department leadership include using proven, defendable technology, being transparent, and augmenting processes that you have in place.

The rapidly changing landscape of financial data compels compliance organizations to adopt these tenants or be willing to incur real risks for their company if they do not.