With the stock prices of both Credit Suisse and Deutsche Bank under pressure, many in the financial field are becoming concerned the world could be facing a renewed financial crisis. But this time around events could play out very differently. It might not even be banks that pose the greatest financial risk to consumers. It could be payment providers like PayPal.
The really big difference between 2007 and 2022 is that bank runs no longer look like the image above, they look like this:
That’s what I was faced with when I tried to transfer £500 from my PayPal account to a regular bank account. On Sunday morning the same message was still occurring. A quick scan of social media proved I was not alone.
“Boycott PayPal” was also trending on Twitter.
So what might the error message indicate about the business?
Here’s what we know so far.
In the last 48 hours a sneaky amendment to PayPal’s acceptable use policy widely captured the public’s attention. Free speech advocates had spotted that customers agreeing to the update would be allowing a sum of $2,500 to be lifted from their accounts if PayPal ever found them guilty of “sending, posting, or publication of any messages, content, or materials” that “promote misinformation” or “present a risk to user safety or wellbeing”.
When word got out, those already concerned about the company’s draconian turn started shutting their accounts and urging others to do the same on social media.
For some, the action proved the final straw.
On Saturday evening U.K. time, PayPal’s former president David Marcus distanced himself very clearly from the action. Elon Musk, whose pathway to billionairehood started in 2000 when his company X.com was merged with Peter Thiel’s Confinity to create the PayPal of today, later tweeted that he agreed.
Readers of the Daily Sceptic and members of the Free Speech Union (such as myself) will already know that over the past few months PayPal has been on a whirlwind tour of shutting down the accounts of platforms and media sites it has deemed guilty of spreading misinformation. In many instances, those affected, such as the Daily Sceptic, were not even consulted ahead of the fact and had little idea of what specific text, post or media had violated PayPal terms.
So why exactly would PayPal descend to this level of reputational self-harm?
It’s hard to know for sure, but chances are the decision rests on pressures PayPal itself is facing with respect to its legal duty to enforce Know-Your-Customer (KYC) and Anti-Money Laundering (AML) rules. If I was to take an educated bet, it’s the counterterrorism section of the rulebook that is most relevant.
These days it’s hard to imagine that banks weren’t always responsible for screening transactions and making judgements about their legitimacy. But until the Financial Action Task Force (FATF) was formed in 1989 with a view to combatting money laundering, banks only really cared about screening credit risk. It wasn’t until 2001 and the 9/11 attacks on the Twin Towers (and the introduction of the Patriot Act) that the scope of banks’ responsibilities in this field was expanded to include combatting the financing of terrorism too.
Tackling terrorist financing and criminality was easy enough when everyone was on the same page about what constituted terrorism or financial crime. But one man’s freedom fighter is another man’s terrorist. And in an increasingly polarised world, it’s become harder for ordinary bank employees to differentiate free-speech critical of authority from radicalising terrorist content, such as that distributed by Isis on social media to recruit new members.
It wasn’t the job they were hired to do.
Three factors have muddied the waters further.
The first is the scale of penalties directed at banks found in breach of AML/KYC regulation. The fear of being slammed with fines has made banks and payment providers like PayPal hugely risk-averse and inclined to err on the side of caution when facing any ambiguity. If something even whiffs of misinformation, from their point of view it’s better to shut it down than to run the risk of getting a fine.
Second, is a lack of resources. Human arbitration is costly, and screening activities would be unaffordable if they were to be done by living, breathing individuals. This is why banks and payment providers like PayPal have invested huge sums of money in cost-saving screening technology to detect illegal transactions both actively and preemptively. The problem here is that most of these tools, known as suptech or regtech, are algorithmically applied with limited human oversight. That means it’s mostly artificial rather than human intelligence deciding who gets to stay on a platform and who gets frozen out. As yet, robots are not well known for their sense of nuance, empathy or capacity to process ambiguity. How they decide what they decide is a black-box interpretation of the inputs they’ve been programmed with.
The third issue is the structure of the KYC/AML policing system itself. Since the scale of the task is so enormous, it goes beyond the scope and capacity of any existing government agency. Knowing this, governments, very similar to how they managed the enforcement of lockdown policy, realised it would be more cost-efficient to outsource the policing of their own rules to the banks and payment companies directly. But this is a strategically coercive dynamic. If payment companies don’t fall in line, they risk having their licences removed and their businesses shut down. Non-compliance is therefore not an option. PayPal isn’t perfect, but the pressure it is facing is very similar to the pressure pubs, restaurants and supermarkets faced under Covid. The structural problem here, as with the retail sector during Covid, is those payment companies are not legislative specialists. They take for granted that the governments know what they are doing and that the rules they are setting are human rights compatible and in line with the laws of the land. Nor do the payment companies have the capacity to investigate the rights and wrongs of every case. This is a job for the legal system, which is already excessively costly to access for most ordinary individuals.
This in itself is a huge blind spot for the financial system. There’s a very strong case to be made that the way democratic governments have gone about enforcing AML legislation is not compatible with human rights at all. The enshrined right of habeas corpus might even be under threat. The FATF has itself belatedly realised this. Back in October 2021, it noted in a “stock-take on the unintended consequences of the FATF standards” that (my emphasis):
Situations have arisen in the course of FATF evaluations concerning the interaction between the FATF Recommendations on combating TF (particularly R.5 and R.6) and due process and procedural rights (e.g. to legal representation, fair trial, and to challenge designations, etc.), which have been considered on a case-by-case approach as they arise in specific country contexts. In addition, the FATF has also been made aware of instances of the misapplication of the FATF Standards, which are allegedly introduced by jurisdictions to address AML/CFT deficiencies identified through the FATF’s mutual evaluation or ICRG process, potentially as an excuse measures with another motivation. This information often comes as a result of stakeholder input or when the attention of the FATF or its members is drawn to a particular issue, such as when another international body is reviewing legislation or actions are taken by national authorities. Analysis in the stocktake has therefore focused on the due process and procedural rights issues most often arising in evaluations or feedback.
The stock-take identified the following factors as key examples of where misapplication of FATF standards had affected due process and procedural rights:
- excessively broad or vague offences in legal counterterrorism financing frameworks, which can lead to wrongful application of preventative and disruptive measures including sanctions that are not proportionate;
- issues relevant to investigation and prosecution of TF and ML offences, such as the presumption of innocence and a person’s right to effective protection by the courts;
- and, incorrect implementation of UNSCRs and FATF Standards on due process and procedural issues for asset freezing, including rights to review, to challenge designations, and to basic expenses.
Readers can hopefully see the issue.
The entire regulatory system since 2008 has focused on ensuring that the 24-hour payment banking infrastructure we have become used to will never face the risk of going down again.
Put bluntly, the style of service disruption currently being experienced at PayPal is something major banking and payment institutions are not supposed to be able to get away with. At least not for long. So yes, it does feel like a big deal.
For the most part, the practice of shuttering access through website maintenance, downtime or error messages is more commonly seen at cryptocurrency platforms during extreme bitcoin selloffs. Closing access to people’s accounts or pretending to do website maintenance often gives operators the time to raise the liquidity they need by slowing redemptions. But it’s far from a transparent or honourable policy.
For PayPal to have triggered a run on itself because it was merely following government orders is not just unfortunate, it is careless. But it also speaks of a deeper problem at the heart of the anti-money laundering regulatory structure. The entire system we have created may no longer be fit for purpose. Consider, for example, that despite many billions of dollars spent on FATF compliance, a company like Wirecard, whose business model in retrospect looks to have been based on fraud as a service (FAAS), could so easily rise to the top of the German stock market. Nor has any of the regulation been successful at combatting the type of electronic financial fraud (mostly based on phishing attacks or social engineering) that impacts users every day.
We need to seriously ask if the benefits outweigh the collateral damage also being incurred.
But while PayPal might not be entirely responsible for its own actions on the KYC/AML front, its business model may be more vulnerable to this sort of fallout than most people appreciate. The culpability for that lies with PayPal exclusively.
A key revenue generator for the group has always been the interest revenue it absorbs from all the customer balances it holds. (You may not have realised it, but if you have any significant sums in a PayPal account, you won’t be collecting interest on them.) A large outflow of deposits could easily inhibit the company’s ability to raise this income and harm its overall revenue-generating capability. (You don’t have to hold balances at PayPal to use it.)
More critical for PayPal at this juncture will be its inability as a payments company to access the central bank lender-of-last-resort backstop. That means if the group is genuinely facing challenges meeting transfer and redemption requests, it will only be able to turn to wholesale liquidity markets to make up the difference. The degree to which customer balances are locked up in harder-to-liquidate securities or bonds will largely determine its success here. Frustratingly for PayPal, in the current illiquid bond market, there’s a good chance that selling these quickly and without a loss could be challenging. The alternative path for PayPal will be to use these securities as collateral for temporary loans. But the expense here is potentially open-ended if there are no obliging counterparts. That may (or may not) be why the company is currently restricting transfers.
Before rushing to conclusions, it’s important to stress the company still has recourse to liquidity from fully-funded (in fact over-collateralised) entities. We may not know the makeup of that liquidity, but solvency is unlikely to be an issue over the longer term. The biggest problem facing users today will be uncertainty over how quickly they can transfer funds out of the PayPal ecosystem.
What I can say is that in the modern digital age, bank runs will be different. We may even long for the days when tellers transparently shut up shop when the vaults ran dry. At least it was clear what was going on. These days, on the other hand, it will become ever harder to differentiate a bank run from a maintenance issue on a website. Such matters will be shrouded in plausible deniability and uncertainty. Suffice it to say, corporate communication departments will always err towards disinformation of their own sort, that any such outage is nothing out of the ordinary.
Even more concerning is that in the event of a run, customers will no longer be able to tell if those with better connections aren’t unfairly cutting ahead of them in the redemption queue. Virtual queues may seem technologically efficient, but there’s no transparency to them at all.
That’s why if you’re caught out by any of these policies you already don’t stand a chance of getting your account back unless you have existing connections to the management or a platform of your own. None of this is progressive or encouraging.
Izabella Kaminska is the Editor of the Blind Spot, a financial news media service focused on the news everyone else is missing.
PayPal was not contacted for this piece, which is based on the opinions of the author.
Stop Press: PayPal has now done a reverse ferret, claiming the new Acceptable Use Policy, containing the threat of the $2,500 fine, was issued in “error”. MailOnline has the story. As Kyle Becker pointed out on Twitter, PayPal is claiming its new policy to fine users $2,500 per infraction for “misinformation” is, in fact… misinformation.
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I’m not sure, but that photo at the top does make me wonder…why is it that when you reach the age of approx 65yrs you start to find the colour beige appealing..? I’ve always wondered that. 😮
Looks like the Beige Brigade have been duly offended!🤣 🤦♀️
You can grow out of the affliction 🤣
I like beige and taupe shades. Not so keen on greige – grey / beige. I find grey a bit depressing. I suspect PayPal is feeling a bit grey at the moment…
I wasn’t even slagging off the colour. Merely observing that it does seem more popular among a certain age group. 🤷♀️ Actually, in that above pic I can see my Granda and David Attenborough is bringing up the rear. Uncanny….🧐😁
I’m not offended at all. 😂 Thank goodness I was standing beyond the bus shelter, ahem. 🫣
Back to grey PayPal (soon to be in the red), they may have been fettered with FATF, KYC / AML regulations but I’m unsure that the regulations specifically state that miscreants would be penalised a sum of £2,500. It’s almost as if it was plucked out of thin air.
Whoever tipped off, inadvertently or otherwise, PayPal’s alleged plans, good on them I say. If it was ‘misinformation’ it has had the consequence of raising awareness of what TPTB can and will do.
Chanel would call it “blanc cassé” I’ll have you know
Great article.
I work in IT providing systems to financial services firms. In the 30+ years I’ve been doing it I have seen the proportion effort expended on audit, compliance and security increase exponentially. It’s hard to imagine that the risks which are meant to be mitigated have increased by the same degree. In any case, a lot of the activity is meaningless box ticking involving people who have no clue what they are doing.
It looks like you have offended a couple of professional box tickers.
Yes but it keeps thousands of bureaucrats in Government employ in their jobs and able to expand the scope and scale of their remit – which is the sole purpose for this nonsense.
This is all good news as far as I’m concerned.
Most ordinary people haven’t encountered the force of the blunt instrument that is the anti-corruption function of financial institutions.
As always, people cheered on as these these draconian powers waved through thinking they were for a good cause – stopping money laundering, terrorism, corruption – and that it would never affect them, because they were good people and had nothing to hide.
And of course, they’ve been oblivious to the surveillance that they too have been subjected to by their banks all this time.
So the turkeys are coming home to roost for some? Good.
I’m sick and tired of arguing with people about the perils of empowering the state and its institutions. Let them learn it the hard way.
When I was doing compliance (in addition to many other roles!) we had to watch out for persons of political risk. All MPs etc were included.
I noticed a couple of years ago the rules had been changed to specifically exclude parliamentarians on the basis they were faultless. Oh, yer.
‘… stopping money laundering, terrorism, corruption…’
Which like the ‘war on drugs’ has not only not stopped it but made it more profitable thus more prolific. As the difficulty and risk increases, cost increases and bigger dividends are available to those who think the risk is worth it.
A Paypal blockchain expert has been helping the Bank of England with its work towards the implementation of a Central Bank Digital Currency. There was a very good video posted the other day explaining the dangers to freedom associated with this technology. I view with suspicion any development that appears to move the world closer to the use of Central Bank Digital Currencies.
The current fiat system we have is already the definition of “Central Bank Digital Currencies”.
What we need is a new peer-to-peer (P2P) payment system which has no middleman (centralised or not), i.e. the proper Blockchain and its currency, Bitcoin, which carries the acronym BSV, since BTC was stolen in August 2018 when the Chain of Signatures was taken off the Blockchain, rendering it a worthless Security (few people noticed this).
ALL the other “cryptocurrencies” (including BTC) are worthless security offerings and should be completely ignored.
So there are two blockchains?
What’s the chain of signatures?
Any information appreciated.
There can be as many Blockchains as we like, but there is currently only one which adheres 100% to the Bitcoin Whitepaper of 31st October 2009, written by Satoshi Nakamoto (Dr Craig Wright).
Every transaction entered into a Blockchain (this can be any data, representing anything, record of a real world event, or a video, anything) is signed by the parties involved in the transaction. The signatures are cryptographically linked to the previous transaction, in such a way that if any party tries to falsify an entry, the whole thing fails. No one benefits from such an event.
The longer a blockchain has been in existence, the more people become dependent upon it not failing.
The Blockchain which has BSV as its currency is the only one which supports REAL ENTERPRISES, REAL BUSINESS.
It is the only Blockchain which can scale (it already massively outperforms Ethereum and the false Bitcoin). The BSV Blockchain accounts for over 99% of all data stored in this way, and it uses only a fraction of the power of the other things which masquerade as “Cryptocurrencies” and “Blockchains”.
Please visit coingeek.com
I do not benefit personally in any way from telling you this, I am not an agent, I only believe in the Blockchain and want to see the real thing succeed. It can solve an awful lot of problems.
Thanks a lot for the information; makes sense.
I agree that it is a promising idea. Transactions that are hard to snoop on and a currency outside of the control of central governments seem like things we might be in desperate need of quite soon.
I have been researching Dr Craig Wright on the Internet. He’s a bit of a character isn’t he? I don’t find anyone who a judge ruled had given deliberately false information, particularly trustworthy. Sorry Joe.
If we reach the point where we can’t trust central banks to provide money without giving up our freedoms, I think I would prefer to go back in history and use precious metals, cowry shells or even a barter system. Perhaps the free people of the world who decide to opt out of the central bank digital currency/social credit system, could create ‘freedom banks’? They could create currency for people living in the free areas and those banks would be accountable to the people they serve. Maybe there are some banking experts reading this site who could start making plans?
Don’t believe everything you read on the internet. There are very powerful parties who stand to lose an awful lot if BSV gains traction.
Yes, Craig is a colourful character. But don’t attack the character.
And there have been plenty more cases which found totally in Craig’s favour, by the way – not least the one which proved he and no one else is Satoshi Nakamoto.
Please see link posted a short while ago by HP.
https://off-guardian.org/2022/10/09/this-week-in-the-new-normal-49/
I was struck by the quote ‘Around 90% of the world’s central banks are now using, trialling or looking into CBDCs. Most don’t want to be left behind by bitcoin and other cryptocurrencies, but are grappling with technological complexities.’
My feeling is still that Bitcoin and other cryptocurrencies have been created as precursors, not alternatives, to Central Bank Digital Currencies.
Most of our financial freedom is already gone. Most people just don’t know it because their financial operations are quite simple and within pre-accepted parameters so they are unaware that they are under surveillance and control. They haven’t bumped up against the boundaries.
Financial institutions are already charged with scrutinising their customers and their transactions. It’s just that the current process is a bit cumbersome and clunky.
CBDCs will just make it all more efficient.
Not least being a single global tax system (obvious step to needed you facilitate global government) so there would not be the competition from different tax jurisdictions with different rates, to have a restraining influence on taxation levels. The EU Imperium is moving towards this.
At that point our money would not be our own but would belong to the global government, and we would just be given an allowance, pocket money, at our masters’ discretion.
This was the video posted the other day. Thanks to Mogwai
https://odysee.com/@librarybeyondbeyond:a/the-convenient-cashless-society-the:a
Some good news.
https://www.bbc.co.uk/news/business-63194562
I find it hard to understand why a large bank needs to ask 50+ year old business people where they got the money to invest £1000 between them in a start up.
Ditto, why they need to ask an investment holding company incorporated in the UK and holding shares in a UK buainess, with all UK directors and shareholders and 13 transactions a year (12 bank charges and one accounting fee), what it does and why do they need the bank account.
They seem to give credit cards to abyone and bank accounts to almost anyone yet respectable bona fide businesses are harrassed.
They ask for an explanation for infrequent bank transfer payments of £hundreds. money launderers would not waste their time with that sort of amount!!
It’s easier than chasing real criminals and you’re home for dinner every night.
Well, unbeknownst to most people, governments have enforced all manner of regulations on banks to spy on their customers and make sure they don’t do anything “wrong”. And if they do, they are in trouble.
Banks no longer work for the customers, they are an organ of the state.
It happened behind most people’s backs.
Well actually, it was explained as anti-money laundering and anti-corruption and the population clapped like demented lemmings, not realising they were being penned into a financial prison.
Data protection laws do the same sort of thing. Pretty much every piece of data protection legislation is really legislation that gives the government institutions access to information about their citizens. At the same time, it puts all kinds of limitations and requirements on the handling of data on everyone else, and that’s the part that’s publicised.
It’s free access to data for the state and its institutions and limits and obligations for everyone else.
In a small way I fell foul of the bank “spying”. I needed urgently to transfer a few tens of pounds to the account of a long-standing acquaintance of mine who was tearfully stranded after some card-related technological or banking problem. Over the years I had done this a couple of times for other people without issue at the counter. On this occasion, I was taken to an interview room and quizzed about the nature and background to the transaction. Apparently, my transaction was rare (for me) and the bank claimed my story sounded like I was a victim of a fraud, the type where you get a fake text from somebody impersonating a family member stranded cashless at an airport. They steadfastly refused to carry out the transaction and I wound up stomping out, drawing the money in cash and physically taking it miles to my acquaintance. I can understand the need for greater caution in detecting fraud, but ultimately if the bank can simply refuse my request to carry out a transaction, despite my accepting full responsibility if it is a fraud, how can one trust a bank not to block other transactions, perhaps even withdrawal of my entire deposit, on the grounds of “suspected victim of illegality”?
I recently tried to withdraw a sum of money from my account to buy a new vehicle for my son, who’s jalopy had finally expired. I was forced to reveal this to the immense hippo at ComBank before she would allow me to access my own money. She then demanded to see the Roadworthy Certificate for the car I intended to buy! I demanded to see her manager. She was a teller- a checkout chick!
Good article. Reminds me of when, a few years ago, it took me over half an hour to convince my local branch of NatWest that my payment of £7000 to HMRC to settle my tax bill wasn’t money laundering.
I remember when NatWest sent my money to the wrong account because they used the surname to identify the account instead of the sort code and account number.
Took me a year to convince them they’d made a mistake. They finally admitted it and compensated me a measly £500.
The PayPal policy has been dropped. (Around 15:00 today, 9-Oct).
The intent was there. No sensible potential customer will ever trust them .
That’s what worries me, there aren’t many sensible anythings…
Someone once said that ‘the purpose of all laws is to prevent bad things happening…. to the people who created them’.
When I closed my account with Paypal it was forever. They crossed a line and became instantly obsolete.
Amazon should be treated the same in my view. They are the blistered old hard-on of Satan himself and we will live to regret letting them dominate markets across different platforms that are insidious (Alexa) and soften us all up through consumer convenience, bread and circuses.
Perhaps cancelling accounts is one answer to cancel culture.
Agreed, my PayPal account has gone forever and I never use Amazon. No Smart Meter and definitely no Alexa. I’m not going to make it easy for them.
I have been steadily withdrawing small amounts of money from my bank accounts for a few months and now have a reserve in cash at home …. as a precaution.
Me too, except I took out a large chunk in cash all at once. You would have thought I was trying to access something that wasn’t mine with the hoops I had to jump through, and they asked me at least ten times if I had been asked to withdraw the money. I mean, I know some people are vulnerable, but I began to feel a bit insulted that they thought I was hard of thinking – I’m not that old.
When the light go out, cash will be king, although I wouldn’t put it past government to introduce curfews when the lights are off because, of course, we can’t be trusted to keep ourselves safe…..or perhaps start looting.
Indeed: cancel culture is a double-edged sword.
Is the Co-op Bank heading the same way? It is running a campaign to make potential customers think that their rivals are funding coal-fired power stations and removal of trees from America and perhaps the drowning of cute kittens, though I don’t think it is blocking money transfers to climate-sceptical accounts, nor threatening to fine sceptics. Yet.
Do they publish a list of their evil rivals so I can invest in them?
Good piece and the point about less transparency during liquidity issues is a great harbinger of the problems of going digital. More power to screw the individual by hiding sold to you by the convenience of doing everything online.
You gave up your ability to escape when you signed up for their system.
When UBI comes along it will be the same. And those that need it won’t complain, they will thank the State. Labour will probably roll it out in full to suck in the struggling middle classes.
Why does Izabella Kaminska still have a PayPal Account? She should close it down and help destroy PayPal.
The simple answer is to Bank in Ukraine where huge sums of cash are discreetly laundered. But you may be behind the Bidens in the line.
Talking about Ukraine. They seem to be leading the way to a Digital ID/Social credit system in Europe via their DiiA app.
https://borgenproject.org/ukrainian-diia-app-helps-refugees-receive-aid-and-news/
Already used to keep track of people, make payments from the state and as vaccine passports. How long before payments to and from the state would have to be made using a new central bank digital currency? I expect Elon Musk is following developments closely with an eye on his ‘X’ app providing a similar ‘service’ in the US.
All very well, but it butters no parsnips with me.
I fail to see how any of that explains why ‘coincidentally’ the private account of Toby, Daiky Sceptic and Free Speech Union were taken down at the same time. I’m struggling to see how they might inadvertently have been mistaken for ISIS recruiters.
Nor indeed the numerous other individuals and enterprises that are on the Conservative or contrarian side of the political/ideological spectrum and how few (any?) Leftie, Wokie, or promoters of Government propaganda get banned.
PayPal et al are ideologically controlled by those managing them who are malevolent, wanting to impose their World view and stifle any who disagree. The oddity is why their shareholders who clearly must be losing out, are letting them get away with it.
If PayPal goes belly up… GOOD! Maybe a lesson for the other crud in the Big Tech cesspit.