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De-Banking Is Spreading: Commonwealth Investigates Using Digital Currencies to Solve Problems

The legacy remittance market is in trouble and the problem is spreading, banks are closing remittance providers' accounts, forcing people to either pay more or turn to underground operators.

At a Commonwealth of Nations meeting last week, with senior finance officials and central bank governors, Digital currencies were a topic of discussion, and this time they were brought up as a possible solution to many existing problems.

The Commonwealth is a voluntary association of 53 independent and equal sovereign states, home to 2.2 billion citizens. Governor of the Central Bank of Bangladesh, Atiur Rahman, chaired the meeting, and London School of Economics (LSE) Professor Dr. Garrick Hileman gave a presentation on the state of digital currencies. This year’s meeting was a two-day event in Lima, Peru, ahead of the International Monetary Fund and World Bank annual meetings.

The discussion quickly focused on the use of digital currencies for remittances, a classic scenario that highlights bitcoin as a cost-effective alternative to current international money transfer channels.

“The use of alternative systems for transferring money, such as block-chain technologies or crypto-currencies, could provide a potential longterm solution to the de-banking of remittances.”
— – Samantha Attridge, Commonwealth Secretariat Head of Finance

There is an increasingly dire global remittance problem. A recent spate of ‘de-risking’ actions, taken by large international banks, has included closing down Money Transfer Operators’ (MTOs) bank accounts, also known as “de-banking.”

“De-banking trends are worrisome because they are hurting remittances. Good intentions can have a negative impact.”
— – Atiur Rahman, Governor of the Central Bank of Bangladesh

This trend has central bank governors deeply concerned about the adverse effects of Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) regulations.

The problem is advancing as more banks try to avoid large fines and sanctions, by de-banking high-risk customers such as MTOs. De-banking is increasing in frequency, “spreading to more countries,” where it did not exist before, and is “driving people to use informal money transfer channels,” warned Attridge.

Last year two major banks in Australia, the Commonwealth Bank and the National Bank, both closed the accounts of several MTOs. Joining them, the Australian banking giant Westpac closed the bank accounts of MTOs specifically offering services for Somalia.

“It also seems that Australian banks are using their market position when closing the bank accounts of MTOs to eliminate competition since these companies operate in the same remittance markets.”
— – Sonia Plaza, World Bank Senior Economist

At the start of this year, Merchants Bank of California, which handles 60 to 80 percent of the remittances sent to Somalia from the United States, also announced account closures to companies that transfer money on behalf of Somali immigrants, this time from the United States.

A similar situation in the United Kingdom, during 2013, prompted a London High Court to order Barclays PLC to re-bank a small service provider called Dahabshiil, which helps transfer money to Somalia from emigres living all around the world.

Barclays wanted to stop the service after seeing competitor HSBC fined billions, for allowing money-laundering to occur within its bank. Dahabshiil’s service was used by more than 100,000 Somalis living in the United Kingdom alone.

Whether to reduce competition, cut costs, or to comply with regulations, closing MTO bank accounts will force these smaller companies out of business. As discussed by the central bank governors at the Commonwealth meeting, reduced competition leads to increased remittance prices, hitting those in need hardest. According to the World Bank, the average global cost of sending remittances is 7.68%, as of June 2015.

Users who rely on remittance providers are left with two option, transfer money through banks at a much higher cost, or turn to underground operators, which are usually more difficult to track and monitor for suspicious activity.

Alongside countries like Somalia, Commonwealth small-island developing states, such as Samoa, suffer the most from de-banking actions. “Maiava Atalina Ainu’u-Enari, the Central Bank Governor of Samoa, informed delegates that all money transfer businesses in her country had been shut down,” states the Commonwealth Meeting Report.

“Samoa is greatly reliant on remittance flows. More Samoan people live outside the country and maintain strong familial, cultural and financial ties. Remittances account for 20 per cent of our GDP. Do developed countries consider the position of developing countries when imposing AML/CTF requirements?”
— –  Maiava Atalina Ainu’u-Enari, Central Bank Governor of Samoa

The chair of the Commonwealth meeting, Bangladesh’s Rahman, called for immediate action to protect legitimate money transfer channels, with international and national policy actions to protect remittance flows to developing countries. Remittances are a significant source of external finance for many Commonwealth developing countries, and a lifeline for millions of families.

According to the World Bank, among developing Commonwealth countries, India is the top receiving country with remittance inflows of over $70 billion. This far exceed overseas development assistance and direct foreign investment.

Remittances are even more important for Commonwealth small states, and can make up a significant proportion of Gross Domestic Product (GDP). In Lesotho, a country in southern Africa, remittance accounts for 41 percent of GDP.

While it may be inevitable that remittance services will always be exploited by criminals, the negative impact of regulations designed to prevent money laundering and terrorism financing was destroying the traditional remittance market long before digital currencies came along.

"The use of digital currencies has increased substantially in the last 12 months, with little evidence thus far that this form of money transfer has been used for terrorist financing or money laundering."
— – Commonwealth Central Bank Governors Meeting report

Commonwealth central bank governors were keen to investigate using new monetary technologies, such as bitcoin and other digital currencies, as a possible cost-effective, alternative to traditional money transfer channels.

LSE Professor, Dr. Hileman updated the governors on the latest developments in cryptocurrencies, concluding that “the technology is still regarded as unconventional.” However, he did put forward an idea which will allow for greater transparency, suggesting that “governments could create their own virtual currency.”

“The main advantage of virtual currencies is that transferring funds is fast and efficient and costs a fraction of traditional money transfers. These transactions are also secure, irreversible, and do not contain sensitive or personal customer information, protecting merchants from losses caused by fraud.”
— – Attridge

Exploring the benefits of digital currencies is not a new topic of discussion among Commonwealth Nations. In a 2014 report, the Financial Action Task Force (FATF) stated that digital currencies could facilitate international remittances and serve the under-banked.

Only two months prior, the new Commonwealth Virtual Currencies Working Group concluded that digital currencies have many benefits, one of which is driving Member States’ development. A clear call to action was “the Commonwealth Secretariat should create a digital repository of best practice and model regulations as part of an online community to assist Member States in developing policy.”

While Commonwealth central bank governors are keen to find a solution to the remittance problem, the concept of using digital currency technology was considered a “futuristic” proposal, but not to be dismissed. Meanwhile, delegates were concerned that there is not enough information about the impact of digital currencies on monetary policy and financial stability.

“The Commonwealth Secretariat has a key role to play in sharing knowledge and developing research on the potential and implications of this new technology. If we decide to regulate virtual currencies, we are unaware of the financial instability risks posed by this currency. This is an area we need to determine carefully.”
— – Jwala Rambarran, Central Bank Governor of Trinidad and Tobago

For now, using digital currency for remittances is considered a long-term possibility for Commonwealth central bank governors, who were focused on a more speedy solution to solve the escalating problem at hand. “Perhaps we should concentrate on low-hanging fruits,” Rambarran conceded.


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