The Breakdown - Is FinCEN going after Telegram around money laundering? / The new, lighter Libra Association

Episode Date: October 15, 2019

The fallout continues from the crazy last week in Libra, as the Association moves forward without any of its payment partners, all of whom have withdrawn at this point. Still the Association is now officially live and has a board of 5 members, only one of whom is from Facebook's Calibra subsidy. Over in the other major social network that wants its own crypto, BlockTV today reported that Telegram isn't just beset by the SEC but is dealing with a FinCEN inquiry around money laundering.  Watch: https://www.youtube.com/nathanielwhittemorecrypto

Welcome back to another crypto daily three at three. What's going on, guys? It is Tuesday, October 15th. We're just doing a couple. It should be a quick one, actually. We're going to do a couple quick recaps updates on major stories from the end of last week, specifically around Telegram, with some crazy new news that's just being reported by one outlet so far, but that I think is really interesting.

And then second about the new, sleeker, slimmer Libra Association. But let's start on Telegram. So if you'll remember last week, Telegram, the SEC had an emergency action to stop the telegram, basically distribution of Telegram ton tokens. And it was big news. It happened just at the very end of the day on Friday. And there was a lot of commentary about what it meant, particularly for SAFs. So what I want to talk about is this kind of interesting news being reported by Block TV that maybe the SEC. isn't telegram's only problem. But first, let's talk a little bit about the analysis of the filing

against telegram in the first place. So Abishal from Electric Capital did a great thread on this, and I'm just going to go through some of the key highlights. Basically, his theory, his conclusion after reading this, is that the SEC is actually being consistent with their application of the Howie test, and that it looks to him that like this doesn't. particularly threaten the idea of the SAFT. So first, for those who don't know what the Howie test is, it's the kind of the legal rubric or framework by which the SEC judges whether something is a security or not. It comes from an old court case. And the criteria include A, an investment of money, B, a common enterprise, C, the expectation of profit, and D, based on the efforts of

others, right? So you have to have all four of those. So you can't just have an investment of money in a common enterprise with the expectation of profit, but it's your work that's going to make it successful or not that wouldn't qualify, and so on and so forth. So when it comes to the Howie test is applied to Telegram, A, the investment of money, that's an obvious one, and C, expectation of profit, that's also kind of an obvious one because its VC is being invested. So the question is about common enterprise and the efforts of others. And so basically, over and over and over again, Garg claims that the SEC keeps coming back to the idea that Telegram is, like, they're the only people who are doing this.

This is basically a private enterprise building a product, right? So you see Pavel and Nikolai Durov will be or are the sole members of the TAN Foundation's board depends solely on Telegram's ability to create and launch the network. estimating that Telegram would spend $520 million on Messenger alone between 2019 and 2021. Defendants would use the offering proceeds to proceeds to finance defendants businesses. Telegram intends to use proceeds for the continued development of Telegram Messenger, and also to invest in Messenger itself. Blah, blah, blah, blah, blah.

Basically, the idea here is, this is really the key thing, he says. The SEC went to town on the assertion that Telegram actually raised money to benefit telegram messenger. Telegram controls the Ton Foundation and the only people building ton are Telegram employees. Thus, it is a common enterprise. So again, his point is he keeps coming back to this idea. It seems to me that the SEC is being quite consistent for the same reason. ETH is not a security. Ethereum is sufficiently decentralized, so there's no common enterprise. Grams are a security. Telegram is a clear common enterprise with clear managers driving gram value. And this is the point that I think it makes it really important. No, this is not the depth of,

of the SAFT. They barely mention it. They consistently have focused on Howie, regardless of SAFT, or other mechanisms. So, you know, again, not a lawyer, but I think that it does, I think that his points are really interesting. I love this part too. So some issues, the SEC highlights that other projects will try to avoid in the future. A, don't have the company and foundation control by the same people. B, don't use funds to finance an existing company. C, don't have only company employees committing code. So the point here is that there's actually some consistency that has to do with the how he test itself, not the idea of SAFT. And so effectively, what he's saying is that they might have done everything right in terms of,

in terms of the way, the mechanism for the fundraise, but at the end of the day, it was a security because it's just Telegram building this product, and which means that the people who are investing in it aren't, are expecting the Telegram community to build it for, the telegram company, rather, to just build this thing and get the value from it. So really interesting stuff. Another interesting kind of piece of follow-up on this point is where the information came from. So CoinBiDestk reported that the SEC had drawn on a lot of investor communications. They had been going out and interviewing the people that had been involved.

So that's kind of where a lot of this information came from. But then I saw this this morning. Block TV basically is reporting that they got news that there, is there's effectively a FinCEN investigation. So this is a different regulator that deals with financial and money crimes around the world case or probe with regard to Telegram around money laundering. So I'm just going to play a little bit of this clip. And I think that they say that this is just from a single source inside Telegram. It has not, as of the time of producing this video, been validated or verified by other journalists.

outlets that I've seen, but I think that it's worth, if you take that caveat that is just a single source, it's interesting and worth checking out. So I'm going to meet myself, turn this on, and I'll be back in just a second. Sources inside Telegram have exclusively told Block TV of some latest developments coming inside Telegram in relation to all this regulatory news that we're hearing. So first, the notable point that according to this source, spoken to us, inside the Telegram, a SEC is not such a big concern for Telegram at the moment. They're saying that the SEC, they've made this ruling and it has created this temporary injunction,

they'd be willing to cop the fine, pay it, and move forward. That's not their biggest headache. That's not the biggest headache. What is their biggest headache? FinCEN. For those who don't remember, FinCEN, the Financial Crimes Enforcement Network, a Bureau of the US Treasury Department that collects information about financial crimes, money laundering, terrorism, all the things related to do with the US dollar and financial crimes. All right, so what they say is FinCEN has put telegram under investigation, they've been investigating telegram over money laundering

suspicions with particular concerns demanding that telegram implement full KYC, know-your-c customer requirements on all token holders once Graham launches. Something that is an antithesis of telegrams overarching, sort of ethos on privacy and not. It just completely knocks, it defeats the purpose of the whole time. Exactly. The whole operation, the way that they run their business from get-go. Pavel Diro famously has refused to work with Russian regulators even just on a privacy and

data front, let alone on this monetary front to implement full KYC. Now, per sources, as we said, FinC, investigating supposedly telegram, but FinC investigations are crucial for a corporation. Exactly, certainly right. FinCin has some pretty serious teeth they can bite with. This isn't just empty threats. They have the capacity to block the European banks that are currently holding a lot of telegrams finances and block them from being able to access those finances, effectively

shutting down large swaths of telegram's operations. And they say that these same sources have told us that they are concerned inside telegram. Although they've been attempting to cooperate with FinCEN, they not, FinCEN themselves are not satisfied with Telegram's answers that they've responded to so far and that at any moment they could come out and effectively block Telegram from being able to move forward financially. So obviously this is a pretty big deal if there's teeth to this. So we'll find out more about what that's like, I guess, over the coming weeks. But for now, let's move over to a quick update on the Libra Association. So last week, when everything happened with Libra, which quick update is that beginning of the week, two U.S. senators sent letters to the CEOs of Visa MasterCard and Stripe telling them that they should get out because effectively Facebook

Messenger enabled child sex predators. And if they didn't, they would come and get them from a regulation standpoint, even outside of the business that they had with Facebook. So that was the beginning of the week. By the end of the week, big surprise, those companies had, in fact, left the Libra Association. And along with them, others including eBay and then later Mercado Global and bookings holdings and a couple others were gone as well. And so that was last week. And what I thought at the time is, obviously, this is really bad for Libra. There's no way of getting around it. It basically constitutes the entire kind of payment rail section of the association. But the question was how many more members were going to leave and evacuate, which as we just mentioned, a few did, versus how many

were going to rally around the flag? Was there going to be that which does not kill us makes a stronger kind of thing. Well, the Libra Association has formalized its first groups. So in Geneva, 21 organizations, this is CoinDest Reporting, have signed a Libro Association charter. This includes Coinbase, Zappo, Anchorage, Bison Trails, Creative Destruction Lab, Indrisen Horowitz, Thrive Capital, River Capital, Union Square Ventures, Breakthrough Initiatives, Iliad, Vodafone, Farfetch, Uber, Lyft, UB, MercyCorp, World Banking, Spotify, and Pay You. So that, that, is all previously announced members and no unknown members were listed. They also announced a five-person board for Calibra. So David Marcus from Facebook, obviously, will have one of those

seats. The other board members will include Katie Juan from Andrewsson Horowitz, Wences Cesares, who's the CEO of Zappo, Patrick Ellis, who's the General Counsel at Payu and Matthew Davie, who's the CSO at Kiva. So we're finally starting to see some, some basically some of that decentralization that the kids all like these days. And so the question is, what's the spin on this, right? And so David Markets obviously is excited. So he says, awesome day to day at our inaugural Libra Association member council. It was energizing to see reps from many different industries and interests come together with one mission at heart,

improve access and lower cost to digital money and financial services for everyone. And he reemphasized, and this is important, we're now one out of 20, official members and many more to come, and I've been honored to have been voted in alongside four awesome board members. Fred Wilson from Union Square Ventures also wrote about this. He said it's fashionable to be negative about the Lieber Project right now, and it is equally fashionable to call it Facebook's cryptocurrency project, both are understandable under the circumstances, but yesterday was the beginning of an independent effort, one that Facebook does not control, one where Facebook is one founding member among many, and one where Facebook has one board seat

out of five. Catherine from Andrews in Horowitz, who is on this board now, says, even though some of the original members have changed, we remain committed to Libra's mission and continue to believe what we were in June. Today we signed the association's charter and I was elected to the board, and she goes on to reinforce their goal, a simple global payment system and financial infrastructure that can borrow billions of people by making sending money as easy as sending an email.

Imagine all the services and products that could be locked if this were so. It's also important to look at the project in a global context by attempting to block Libra even before it's built. U.S. policymakers risk seeding leadership over one of the most important emerging technologies. So this is the carrot and the stick from them as well, right? The carrot is, hey, be a part of this big important thing. The stick is China's going to do it, as we've seen over and over and over again. Now, Josh Constine over from TechCrunch reported on how many different, basically Facebook touting or Libra touting, how many different partners want to be involved.

So they say it has interest from 1,500 partners and of those something like 180 are eligible based on their criteria, which includes a lot of different things. And they actually, I think they did make the criteria public, although they're not necessarily going to make the criteria of how the decision gets made to admit people. So what are the takes from crypto?

I mean, I think that on the one hand, there's just the surface take. Like, these guys are clearly moving on, right? They're not going to stop at what we saw last week. they're going to shift the narrative to make sense. I would be shocked if they didn't talk about how all of those kind of old world financial services weren't necessarily really the right fit anyways and that this group of people has a better alignment with the mission.

They already started to do that. Some people aren't buying it, right? So Preston Byrne says Libra lost every member that could have given it preferential access to payments. Now it's just another high-risk merchant and one with a weird organizational structure. and he goes on to talk a little bit more about that. But I think that the question is really, does this change anything from a U.S. regulatory standpoint

to the extent that U.S. regulators are the biggest hurdle? Does it signal a shift in strategy from Facebook? I mean, it doesn't seem to, right? Like Facebook has said that they wanted to have this B.D. centralized and, you know, off their books in terms of control earlier rather than later. But, you know, next week we have Mark Zuckerberg testifying in front of Congress. And so I'm sure that we'll be able to preview and see the new narrative and the new spin on this, you know, live and inaction. Meanwhile, one thing that's for sure is that the

addition of Libra to the world stage has created a fire under the butts of every central bank. Haley Lennon comments on a coin desk article quoting the head of Sweden Central Bank. She says, ah, the power of innovation. The head of Sweden Central Bank says Libra has been an incredibly important catalytic event, forcing central bankers to reconsider their primary product, money. It's weird, man. This is happening. This is going down.

I mean, some of the reports from China have been that the digital yuan would be ready as early as next month. they've backed off those numbers in official comments, or those dates rather in official comments, but we are in a brave new world. And I can't see, you know, like people keep saying that Libra is still born, but I can't see it not being a continued player in this conversation. Now, it's not impossible to me that after Facebook's or after Mark Zuckerberg's testimony, things continue to shift again. You know, it's not impossible to me that Facebook is forced to effectively pretty aggressively abdicate its role in the Libra Association and really shift all of the onus on getting this thing up and running to other people. And maybe that's sufficient

for the U.S. government. But I still think personally that we're at the beginning of the Libra story. And even if I'm wrong about that, I'm quite sure that we're just at the very beginning of the central bank digital currency story. And I think that the introduction of Libra had a skip about six chapters. So I'm going to be watching it. I'll be telling you what I think about it. So as always, guys, thanks for hanging out. Thanks for listening. If you're listening, thanks for watching. If you're watching, and I will see you tomorrow. Peace.