Since the seizure of Liberty Reserve’s operations last month, it has put all alternative payment providers in focus. Specifically under review are firms utilizing e-currency solutions. In these programs, customers create accounts with the payment company. After depositing to an account, funds are converted to an exchangeable virtual currency that is freely transferred between account holders. The value of e-currency units is pegged to the denomination of the account. For an example, if a customer deposits $100 to their USD denominated account, their balance will be 100 units of e-currency which also equals $100. Different providers are offering customers accounts denominated in various global currencies, as well as also in Gold. In the case of Liberty Reserve, account holders were issued Liberty Reserve dollars that had an exchangeable value of one $1.
In the ensuing fallout from Liberty Reserve, multi-currency payment provider Technocash announced that it is closing. According to that company, the closure is due to restrictions enacted on its bank accounts following revelations that it had provided services to Liberty Reserve. Also, Perfect Money, a Liberty Reserve clone that similarly is headquartered in Latin America and provides payment services to shady services such as Ponzi schemes (read more about that here in ‘Crowd Sourced Ponzi schemes‘) has made recent changes in its corporate structure. This includes the termination of US accounts and changing its .COM TLD to .IS, both actions are viewed as methods to further them from US jurisdictions.
Another payment provider using an e-currency solution is Russian based WebMoney. The company offers multi-currency based accounts in what it calls ‘purses’. Purses are available in USD, EUR, UAH, RUB, BYR, VND, gold, and bitcoin denominations. Each purse has a ‘guarantor’ financial institution that receives deposits and issues units of each currency’s WebMoney e-currency. WebMoney has become popular among Russian e-commerce customers. It is a favored funding option among forex brokers targeting the Russian region, with the largest brokers including Alpari and FXopen accepting WebMoney as a deposit option.
Recently, the firm has become the target of government investigations. As reported by RAPSI, Ukrainian tax authorities raided the firms’s Kiev office on June 11th and froze $7.5 million that was being held in local banks. According to RAPSI, WebMoney Ukraine (UA) was being investigated in regards to reporting violations and failure “to coordinate its work with the National Bank of Ukraine”. RAPSI quoted the Ukrainian Ministry of Incomes and Fees as saying “Over 60 million Hryvnas ($7.5 million) held in the bank accounts of companies which were part of in the illegal system have been frozen.”
Countering the allegations, WebMoney UA released a statement that said claims “that the WebMoney system is used for tax evasion, is absurd”. They added that the firm prohibits Merchants from using WebMoney for illegal businesses and “moreover, the system WebMoney is one of the few who opposed the right of anonymity for financial settlement on the Web, in particular, prohibiting withdrawal from purses to unauthenticated users, as well as to third parties.” WebMoney UA also explained that it has been offering services to customers for ten years and in 2010 it had tried to reach an agreement with the National Bank of Ukraine (NBU) to coordinate financial rules between its guarantor banks and the NBU.
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The account freezing led WebMoney UA to suspend activity among account holders. The suspension appears to have been lifted, as earlier this week, WebMoney UA announced on its Facebook page that it was beginning to provide transactions again. WebMoney also published an ‘Open Letter to Ukraine President Viktor Yanukovych‘ about the government actions against them.
During all this time, the focus has been solely on WebMoney’s Ukrainian office and connected financial institutions. Other divisions, including the parent firm, Russian WebMoney Transfer Ltd haven’t been targeted or issued any press releases in regards to the news.
Following the raid, another Russian media site, Hronika, stated that the NBU would be implementing new rules in relation to WebMoney transactions. The proposals would limit the amount and total number of monthly transactions allowed to be conducted by WebMoney account holders.
Overall, the current case highlights the state of affairs for alternative payment providers. On one hand, they provide account holders and merchants a quick and efficient funds transfer solution that resides away from the traditional financial system. On the other hand, WebMoney and firms like it, rely on banks to receive and handle customer deposits. Therefore, while alternative payment solutions provide their own ‘network grid’ for users, getting to the grid still requires using the traditional financial networks. As a result, financial firms and their respective government rules remain the ‘gate keepers’ for the alternative systems.
With the lifeblood of alternative currencies being held by the traditional financial system, this is forcing firms to either comply with global regulatory standards or risk being shut down. On the other hand, payment providers run a counter risk of losing clients when increasing AML monitoring and removing anonymity.
In regards to WebMoney, the firm has grown large enough to attract the attention of local authorities. Specifically, their popularity among e-commerce sites puts local tax collection supervision in the spotlight. As a result, WebMoney’s future most likely resides in its ability to secure relationships with financial regulators and banks. A failure to do so could lead to more than just their Ukrainian division being shut down and their network closed.