Financial Liberty Currently Reserved. Payment Methods Called Into Question

The impending demise of Liberty Reserve has resulted in a degree of nervousness from industry participants and clients alike as

The effect on the industry as a whole has not yet taken its full toll following the impending demise of Liberty Reserve which came about over the weekend; however perspectives and viewpoints are gradually making themselves present as the speculation surrounding the ever changing dynamic of payment methods continues.

Following Liberty Reserve founder Arthur Budovsky Belanchuk’s arrest in Spain on Friday and the ensuing closure of Liberty Reserve’s website, much silence has emanated from the industry in general. Whilst the alleged perpetrator languishes in custody, there is a myriad of unanswered questions surrounding not just what will happen to the funds held within Liberty Reserve, but also what the future is for this type of payment method industry wide.

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As can perhaps be expected, those companies with no relationship with Liberty Reserve are among the first to begin openly musing over the potential fate of parties using Liberty Reserve for transfer of funds: traders and forex companies alike.

Hole In The Bucket, Or Bottomless Pit?

Currently it is extremely hard to gauge the exact direct financial impact of this company’s demise as the outcome is yet unknown, however in an event in which the worst case scenario takes place and all of the funds currently held by Liberty Reserve go west, it would seem that, as grave as that may appear, that is just the start of the problem for brokers.

Michael Chai - Blackwell
Michael Chai
Co-Founder and CEO
Blackwell Global

In an interview today with Forex Magnates on this matter, Michael Chai, co-founder and CEO of Blackwell Global considers that the initial impact may be that some regulated brokerages may reimburse their clients from their own funds, and take a loss on it in order to protect their interests and maintain credibility with clients.

He did however add that “It depends on the size of the fund. If the amount is small, the brokers may pay the clients from their own money, but it may be a different matter if the fund is large”.

The future effect of this is a potential lack of trust in privately run, unregulated virtual currency payment systems which would have a drastic effect on the net deposit amount from many regions in which this is a popular, sometimes sole, method of payment such as Africa and Asia – both regions of significant client activity among retail brokers.

Certainly at a time when the regulators are looking closely at the security of client funds in Europe, Australia and North America, methods of payment which are not controllable by domestic governments or central banks may end their presence in such regions: “I think it’s hard, because after the regional financial turmoil in Europe, those authorities have been wanting to impose some measures to control the activity of international transactions” believes Mr Chai.

A particular short-term matter to bear in mind is that if a Forex broker has client deposits held in Liberty Reserve and has not drawn this to its own account, and trading has taken place, then an unavoidable deficit will be present.

Safety First! Conservative Approach Adopted

Most acquiring banks which handle credit card transactions are becoming increasingly risk-averse, and have begun returning funds to their origin if the risk is considered too high.

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When asked if this could signal a potential end to this method of account funding, Mr Chai concluded: “There will always be this kind of payment solution provider, the question is, after this incident concerning Liberty Reserve, it might cause the clients to worry about their transactions.” Therefore the conservative approach may be both client and regulator led.

E-wallet providers such as Moneybookers or Neteller, along with the majority of third party merchant account providers, often conduct no due diligence at the outset, nor do they get involved in compliance procedures. It will be interesting to see if this changes as they may be subject to a more cautious client base in future.

Fear among other organizations offering similar facilities is increasing, in some cases leading to announcements to customers being made by such firms preventing US citizens from using their services. An example of this is in a notice which appeared on Perfect Money’s website yesterday to this effect:

“We bring to your attention that due to changes in our policy we forbid new registrations from individuals or companies based in the United States of America. This includes US citizens residing overseas. If you fall under the above mentioned category or a US resident, please do not register an account with us. We apologize for inconvenience caused.”

Affiliate Crunch

IBs could be adversely affected, and in particular those with affiliate relationships with forex brokers. Liberty Reserve, due to its very low fees, has been the payment method of choice as small amounts of money are required to be sent to a lot of destinations, often worldwide in the process of operating as an affiliate. Many affiliates conduct their networking in one country but their clients are non-domestic, making this universal means of transmitting funds attractive.

Some Liberty Reserve users have experienced difficulties in collecting from their accounts over the last few months according information provided to Forex Magnates by a retail forex broker. In this circumstance, often customers were asked repeatedly for documentation and couldn’t withdraw. Whether this was implemented intentionally as part of the alleged money laundering activity, or a pure coincidence is very difficult to substantiate.

Bitcoin a Viable Alternative?

A very timely event is Bitcoin being recognized on exchanges as a tradable currency. This could provoke a shift to Bitcoin for those who wish to use a universal method of unregulated currency to fund accounts, however this still does not immunize Bitcoin from vanishing because it is not a fixed currency overseen by a central bank or government. There is also a degree industry resistance to offering Bitcoin as a method of deposit, as recently displayed by OANDA’s addition of the currency to its Currency Converter, but the company’s VP of Trading Courtney Gibson having categorically stated that it will not be available as a means of funding trading accounts.

This is something Forex Magnates intends to investigate further at this week’s IFXEXPO conference in Cyprus.

Ironically, a blind eye was turned by the entire industry to the investigations being made into Liberty Reserve and the allegations of money laundering that surrounded the investigations, which were instigated two years ago.

Meanwhile, regulators have been increasing capital adequacy requirements, talking about banning credit card deposits and the UK’s FCA introducing client asset (CASS) rules for protecting client funds, and acquiring banks have been strengthening their risk management criteria and returning credit card deposited funds to clients, but this unregulated, non-returnable method of payment continued to be prolific.

On this basis, future developments to take note of include how to continue to attract clients from regions such as Nigeria, Pakistan, Argentina, Russia, Brazil and Malaysia, important regions for most retail forex companies, and now that a further payment method has caught the eye of the authorities, what further strict measures will be taken to protect client funds. Whilst security is paramount, a significant barrier to important markets could arise.

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