By Andrew Davies on Thursday 9 February 2023
The payment landscape has changed significantly since Elon Musk exited PayPal more than 20 years ago. His plan to democratise payments via Twitter may prove tough to navigate, writes Andrew Davies, global head of regulatory affairs at ComplyAdvantage.
Over the last year, Elon Musk has positioned himself as a champion of free speech, going so far as to spend $44 billion to purchase Twitter because of a belief that it should be an unfettered town square.
Now, he is faced with the challenge of turning that investment into a thriving business that will generate enough revenues to cover the eye-watering $1.2 billion in annual interest payments on his loan.
In November, Musk gave his initial presentation of one of the ways he plans to make the business profitable: by becoming the west’s WeChat and launching a Twitter payments feature. He’s already made the first steps towards that goal, filing registration paperwork with the US Treasury Financial Crimes Enforcement Network (FinCEN).
However, while his libertarian leanings may work for speech - the jury is still out - how will he reconcile his approach with a system that has an inherent need for guard rails? How does he plan to implement a know-your-customer protocol and robust anti-money laundering/countering the financing of terrorism programs when often participants in social media want the option to remain anonymous?
How can Twitter guarantee any user’s identity with effective identification and verification processes when even the $8 blue check program has proven to be full of vulnerabilities?
The financial system is a chain of interconnected entities from banks to payment processors, from traditional institutions to upstart digital companies.
It is imperative that they work together as a team to address financial crimes and report suspected criminal activity to create a secure ecosystem if commerce is to be successful.
Every new entrant into that system gives criminals a new opening to test the strength of the network, looking for an opportunity to scam and a venue to launder the proceeds from illegal activities.
Which begs the question: In his desire to become the next Alipay, how will Musk address the question of financial crime risk and compliance?
What will his risk appetite be and what will that mean for Twitter users’ exposure to criminal behaviour such as account takeovers and other types of fraud?
What systems will he put into place to perform customer due diligence and monitor transactions? The payment landscape has changed significantly since Musk left PayPal more than 20 years ago.
Determining risk appetite isn’t a simple binary decision. It requires thoughtful deliberation and balances the needs of business growth with the diligence required to keep the payments ecosystem safe in an ever-changing landscape.
Most importantly, it requires a sense of civic responsibility that acknowledges the role that financial crimes like money laundering play in funding and perpetuating human – along with drug trafficking and other serious crimes.
This is why the central question of Twitter’s ability to accurately identify its users is so critical.
To effectively mitigate the risk of money laundering, you need to understand who you are doing business with, whether they have a criminal history or if they associate with those who do - and continue this monitoring on a perpetual basis.
Given that there aren’t even fundamental identity checks to participate on the Twitter platform in its current form, how will the company make that epic leap to meet regulatory requirements beyond a willingness to pay an $8 subscription fee? Will he separate the two functions, tweeting and payments?
And finally, what about ongoing activities? By the end of last year, Musk had laid off almost half of his staff - most notably a large number of his public policy team.
While he is justifiably concerned about the company’s run rate, he will need to make significant investments in the people, policies, and technology that will be required to remain in compliance, assuming his plans are approved.
Like many of his brethren in fintech, he will need to hire financial crime specialists to ensure he is managing risk and complying with regulations in the regions where Twitter payments will be operating.
He will need to put policies in place that address the questions raised here and provide global regulators with evidence he is creating a strong compliance culture. Lastly, he will need to invest heavily in the data and technology that will monitor the millions of transactions that will occur on his platform, ensuring that the company doesn’t break sanctions rules and identifies questionable activities.
Elon Musk may have a laudable dream about the democratisation of payments for his user base, but the difference between the utopian ideal town square and the reckless wild west must be acknowledged in deciding where on that spectrum he wants to be.
The views and opinions expressed are not necessarily those of AltFi.
21 March 2023
Daniel Lanyon