Digital money can be a fraud-fighting tool

If I go to my local ATM and withdraw $400 from my account, and lose it later while walking down the street, is the bank responsible for that loss? Of course not. The money was removed from its custody and entrusted to mine. If a malefactor stops me on the street, coerces me into withdrawing $400 from my account and then takes it, is the bank responsible? No, I think?

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If somebody contacts me online, lies and tells me they accidentally put $400,000 into my bank account, convinces me to walk into my local bank branch and withdraw $400,000, to use it all to buy gold, and to then hand over that gold to some courier, is the bank in any way responsible?

Maybe? I know what the banker answer to that question is. But the legal answer may be a bit murkier.

A New Jersey judge this week, as our Nathan Place reports, dismissed a motion from PNC Bank to dismiss a civil suit filed against it by an elderly customer who fell victim to exactly the scam I just detailed. First off, that is just a horrible story. Jeffrey Maas lost essentially his entire life savings to this elaborate scam, which began online and followed him into his local bank branch and then a local gold store. And then disappeared with his money. 

But it raises a lot of legal questions, none of which are new, of course, but all of which are germane.

Banks have naturally resisted the idea they should be held liable for these kinds of crimes, and not out of callousness. Banks are just custodians of their clients’ money. They are responsible for making sure it doesn’t get lost while in their possession, but they are not responsible for what happens to it after it leaves their possession. A report published last week by the House Financial Services Committee’s Republican cohort agrees with that assertion. The report outlined a host of new tools banks could use to fight fraud, while at the same time arguing for policy changes that would codify what banks are and are not responsible for.

Consumer groups have been trying to push for more accountability from banks. The New Jersey suit is one attempt to set a legal precedent, and it’s not the only one. New York Attorney General Letitia James is suing Early Warning, the bank-owned consortium that operates Zelle, in an attempt to force banks to reimburse customers who were victims of fraud. The issue, in other words, is not going to go away. There is too much money being stolen from too many people.

There is a technology-based solution, though it would involve something that nobody seems to want: a digitized dollar. If the U.S. dollar were run on a blockchain-based system — yes, like a stablecoin — it would be possible for stolen money to simply be “burned,” to be wiped off the digital ledger. The authority in charge could then re-issue the amount lost to fraud to the defrauded. 

The capacity for this was part of last year’s stablecoin legislation, which expressly requires stablecoin issuers to maintain the capacity to track, freeze and seize stablecoins. It’s not easy, mind you, to do this. But it’s possible. And once stolen funds are tracked and frozen, returning or reissuing them is a routine process. For instance, in the case above, the $400,000 stolen could be tracked and then “frozen” by the issuer, preventing it from being moved. The stolen funds could then be “burned,” essentially destroyed and removed from circulation. The defrauded party could then have $400,000 worth of new currency minted and delivered to them. In other words, the fraud could be wiped out of existence. It would be like it had never happened.

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Right now, stablecoin operators are being forced to maintain this capability, but virtually nobody outside of crypto traders uses stablecoins. For a system like this to have real teeth, it would have to be used in a currency that is universal and ubiquitous. A digital version of the U.S. dollar would be such a universal and ubiquitous currency, but the very idea of that was literally outlawed in the recently passed housing bill. 

That anti-digital dollar regulation, though, has an end date of 2030. Maybe by then people will change their minds.