The Leftover Bits 6/5/15: Ripple Gets Fined, BitStamp Looks To Canada, Andresen Responds To Peter Todd

I had to take a break from talking about the Russian Mafia to give you good folks your daily dose of Bitcoin news. Sorry for the delay.

Ripple Settles Fine With FinCEN, Admits Wrong Doing

Ripple Labs has agreed to a settlement of USD $700,000 to FinCEN for “willfully [violating] several requirements of the Bank Secrecy Act (BSA) by acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN, and by failing to implement and maintain an adequate anti-money laundering (AML) program designed to protect its products from use by money launderers or terrorist financiers.”

The report notes that FinCEN issued guidance to virtual currency exchanges in March 2013, which should have let Ripple Labs know what they had to do in order to secure compliance. Instead, Ripple Labs allegedly created subsidiaries to perform the same functions, XRP II, which FinCEN says took the place of Ripple Labs as a currency exchange and sold XRP without FinCEN licensing for a month, from August 4th 2013 until September 4th 2013.

“23. By on or about August 4, 2013, XRP II was engaged in the sale of XRP currency to
third-party entities.
24. On September 4, 2013, XRP II registered with FinCEN as an MSB.”

But even after registering with FinCEN, XRP II failed to meet its requirements, according to the document.

“[…]XRP II failed to have an effective, written AML program.
For example:
a) It was not until September 26, 2013, that XRP II developed a written AML
program. Prior to that time, XRP II had no written AML program;
b) It was not until late January 2014 that XRP II hired an AML compliance officer,
some six months after it began to engage in sales of virtual currency to third
parties;
c) XRP II had inadequate internal controls reasonably designed to ensure
compliance with the Bank Secrecy Act;
d) XRP II failed to conduct an AML risk assessment until March 2014;
e) XRP II did not conduct training on its AML program until nearly a year after
beginning to engage in sales of virtual currency, by which time Ripple Labs was
aware of a federal criminal investigation; and
6
f) XRP II did not conduct an independent review of its AML program until nearly a
year after it began to engage in sales of virtual currency, by which time Ripple
Labs was aware of a federal criminal investigation.”

Ripple and FinCEN eventually came to the USD $700,000 settlement, so things seem to be okay at the present moment. What is interesting to me personally, is that the authorities seem to be aware of the differences between pre-mined and fairly distributed, truly decentralized currencies. While they do not explicitly state Ripple’s pre-mine as a reason Ripple was fined, it is the third fact mentioned in the background information.

“The currency of the Ripple network, known as “XRP,” was pre-mined. In other
words, unlike some other virtual currencies, XRP was fully generated prior to its
distribution. [. . .]” 

Ripple had just announced discussions for a pilot program with Western Union, an announcement that may have come prematurely. We will have to wait and see if this bit of bad press will have a negative effect or not. We have contacted them asking if they know Western Union was aware of the settlement or not and were given this statement.

“While we are pleased to have resolved this matter and to move forward with our business, we would like to address the nature and outcome of the investigation, and our company’s historical and present-day conduct with regards to compliance. An early company in an emerging, undefined fintech category, Ripple Labs was one of the first to proactively build out a compliance and risk program. We’ve been consistent in our message of supporting a compliant and healthy Ripple ecosystem. We have not willfully engaged in criminal activity, nor has the company been prosecuted.

We couldn’t agree more with Chief Weber’s observation that a ‘Wild West environment’ is untenable in financial services. To that end, and as the government has recognized in today’s agreement, Ripple Labs has cooperated extensively with the government during its investigation and has taken a number of important steps over the years to build and strengthen our compliance programs. These measures include: registering a subsidiary, XRP II, LLC, as a money service business to handle XRP sales for the company in 2013, in response to and in an attempt to comply with the March 2013 Guidance by FinCEN; hiring a chief compliance officer in January 2014, a general counsel, and a BSA officer in February 2015; and continuously enhancing an anti-money laundering program.

Ripple is infrastructure technology for banks to build compliant payment networks. The settlement announced today does not impede our ability to execute on those bank integrations. We’re continuing to focus on working towards an Internet of Value.”

It should be noted that in situations such as these, companies often pay fines without admitting any fault.

BitStamp Is Looking Towards US and Canada

BitStamp appears to have recovered relatively well after the high profile, almost 19,000 BTC hack that occurred early this year. With that incident seemingly behind them, they are looking at new markets.

BitStamp has partnered with Vogogo for “with risk management and payment processing services” while quickening its move into North America. Vogogo will also help “enhance” Bitstamps’ European offerings, according to the Press Release.

Hat tip to CoinTelegraph’s Diana Ngo, who I found this story though.

Gavin Andresen Responds To Peter Todd’s Criticisms

This is a bit of a battle between two crypto heavy weights. Like Andresen, Todd was once a Bitcoin Core Developer. He was hired by the Viacoin team in 2014, but remains a respected member of the Bitcoin community. He has also had his programming hands in Colored Coins, MasterCoin and CounterParty, basically a who’s who of Bitcoin 2.0 technologies.

I want to note that despite this looking like a heavy weight fight between two giants of the crypto world, they seem to like each other just fine and I do not mean to imply there is any bad blood between the two.

In the post, which is one of several that Andresen is releasing to respond to critics of the 20MB plan, Andresen addressed Todd’s complaint that increasing the block size limit could potentially lessen Bitcoin privacy.

“[E]ngineering is about tradeoffs, so how much more likely is somebody to get noticed by their oppressive government if they are using a Bitcoin system that supports twenty, rather than three, transactions per second?

Well, if they are just transacting with Bitcoin using a lightweight wallet, there is no difference. Lightweight wallets (meaning any wallet except for Bitcoin Core or Armory) only download transactions relevant to them. They are unaffected by changes to the maximum block size.

But what if you want to be a miner in some oppressive country?

Well, if you have good connectivity to a mining pool outside the country you should be able to connect to it over Tor. And, again, you will be unaffected by changes to the maximum block size, because you just need 80-byte block headers.”

He does admit that it would have an effect on users in an oppressive country who wish to run a full node or solomine, but states that problem can be solved with a VPN and Tor. Peter Todd did retweet the article with a somewhat snarky reply, but did not really address the points made by Andresen.

As mentioned in my previous post, I am more than happy to sit back and let these two giants of the industry debate each other.