Banking and Technology: Looking Past Liberty Reserve

Like many others in the industry, we’ve long been fascinated by the intersection of banking and technology. For example, we’ve wondered why the ‘disruption’ brought about by new financial products causes mayhem in banking circles, when the same characteristics win lavish praise in the tech world. We’ve tried to monitor how new technologies, such as the plethora of mobile apps, or speech recognition, or even hardware and different form factors, are radically transforming routine banking practices. More than anything, we’re always waiting to see how these worlds can come together even more—specifically, how technology providers can become banking industry players.

This brings us to the curious case of Liberty Reserve.

Let’s be clear: Fraud of any kind exacts a serious toll. Investigators say this global currency exchange, which has now been shut down as the result of a multi-agency pursuit, involved the laundering of some $6 billion—all of it real money, some (perhaps much) of it representing real crime, which is never victimless. According to prosecutors, this case apparently involves everything identity theft to violent gangs. Liberty Reserve may even have been the ultimate hub of the criminal underworld.

While this story continues to arouse considerable interest (only a few details have been made public so far), some of the strands are already fascinating. First, this was an enterprise that operated on a massive scale, with the core functionaries working out of sites in far-ranging places such as Malaysia, Russia, Nigeria and Vietnam. It’s alleged that there were 1 million users worldwide, with almost 200,000 in the U.S. alone. Founder Arthur Budovsky , who is now in custody, was a former U.S. citizen who had taken up residence in Costa Rica and was arrested in Spain. However, despite the gargantuan scope, the entire business flew under the radar. It’s hard to find almost any information about this multi-billion dollar network before it came crashing down.

That leads to the second fascinating element in this story. Money-laundering is almost as old as money itself, but almost every aspect of this operation depended on technology. To get in on the action and move money around, users needed nothing more than an e-mail address. Liberty Reserve’s network provided the cloak of anonymity without the threat of oversight or even regulation. Some have compared the ease of conducting illegal transactions to the way “PayPal revolutionized how people shop online.” Announcing the shutdown and arrests, Preet Bharara, the U.S. attorney for Manhattan, called it “an important step toward reining in the ‘Wild West’ of illicit Internet banking.”

Naturally, this has many now pondering other forms of Internet banking, and the first name to come up is Bitcoin. To be clear, that’s a very different business, and it’s widely believed that legally pursuing the network—which doesn’t have an operating hierarchy per se—would only drive it underground and introduce more criminal elements. However, the practice of transmitting funds internationally without needing to offer any identifying information does raise concerns.

These issues take on even greater urgency given the central question: Can companies primarily associated with technology become de facto or even full-on banking institutions?

Just this week, speaking at the Group 100 Congress in Sydney, Australia, Commonwealth Bank chief executive Ian Narev spoke of the potential threat from “the Apples, the Googles, the Samsungs. . .who can pick particular slivers as a result of the application of technology into financial services and compete.”

We’ve all seen some early signs: The introduction of Amazon Coins as a “new currency for Kindle Fire,” the launch of Facebook Credits, and Apple’s announcements that it has more than 400 million active iTunes accounts worldwide, all linked to credit cards. There’s surely more to come.

Technology and banking are now so intertwined that some kind of union seems almost inevitable. The saga of Liberty Reserve should serve as a sobering counterpoint that there’s more to banking than just using technology to move money around.

Written by Staff