More rigorous than KYC: The Financial Action Task Force on Anti-Money Laundering will finalize new international standards for regulatory encryption companies next month.

Summary of key points:

  • The Financial Action Task Force (FATF) of the Anti-Money Laundering will finalize next month's new international standards for the regulation of cryptocurrency companies.
  • It is widely expected that these standards will expose cryptocurrency exchanges, wallet providers and other institutions to the "travel rule" that the Bank of Communications has long followed.
  • The cryptographic industry representative said that if this requirement does not apply to cryptographic services, implementation will be very cumbersome and unfavorable for user privacy.
  • The “recommendations” of the Financial Action Task Force are not legally binding, but countries that do not comply with these recommendations will be excluded from the global economy.

According to Coindesk's May 20 report, the cryptocurrency industry is about to usher in a new international regulatory standard that will require exchanges to collect and share information about the flow of funds.

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Image source: visualhunt

This will be more restrictive than the basic "know your customer" (KYC) rules that plague many encrypted users. In addition to verifying and preserving the identity records of their users, exchanges and other service providers must also notify each other of customer information when transferring funds, just as Bank of America requires compliance with the Travel Rule.

Many in the blockchain industry believe that if cryptocurrency is not completely banned, then this is redundant and cumbersome, and it is easy to drive users away from the regulated platform.

Industry representatives have recently made a final effort to persuade the Intergovernmental Agency's Financial Action Task Force on Money Laundering (FATF) to reconsider or postpone the proposed standards.

From May 6th to 7th, about 200 to 300 people attended the FATF's consultation meeting in Vienna, Austria, and expressed their concerns. These include the Chief Compliance Officer of the top exchange and regional Bitcoin brokers.

However, according to four people who did not want to be named, the Vienna conference participants told CoinDesk that the regulators, especially the US regulators holding the FATF's one-year term, seem to have finalized the standards and will only make some minor adjustments at most.

Sigal Mandelker, deputy secretary of the US Treasury Department for terrorism and financial intelligence, further strengthened this impression by speaking at the 2019 Consensus Conference in New York last week (Consensus 2019). First, she said that the standard will be released next month. Mandelker said:

“During the chairmanship of the Financial Action Task Force, the United States worked with other countries to clarify how all countries should regulate and monitor activities and service providers in the digital currency arena. We expect the FATF to adopt its explanatory notes in June. Versions, as well as the latest guidelines to further assist countries and industries in fulfilling their obligations."

Although Mandelker did not mention the travel rule, she cited a 30-page clarification guide on cryptocurrency issued by the Financial Crimes Enforcement Network (FinCEN) of the US Treasury on May 9. The guide uses the travel rule as a guideline for cryptocurrency companies from start to finish. She continued:

"I suggest that everyone read it well."

Fang Hao round chisel, out of place

The G70 developed economies have created FATFs to combat money laundering and terrorist financing, and the proposed standard is to prevent cryptocurrencies from being used by such actors. Mandelker said in her speech:

"Some of the most attractive features of emerging technologies, such as transfer rates, rapid settlement, global coverage and anonymity, can also create opportunities for rogue regimes and terrorists."

In February of this year, the FATF publicly solicited comments on the “Voice Asset Service Providers” (VASPs) on exchanges and managed wallet providers, and published their explanatory notes, but one of the paragraphs caused controversy. Part of paragraph 7 (b) reads as follows:

“Countries should ensure that the transfer initiator virtual asset service provider obtains and maintains the necessary and accurate information about the virtual asset transfer initiator (sender) and beneficiary (recipient) and submits the above information to the beneficiary virtual asset service provider. This information is provided to the relevant authorities upon request."

Similarly, when an exchange receives a cryptocurrency payment on behalf of a customer, the exchange should "get and save the sender's information."

Joseph Weinberg, co-founder of blockchain startup Shyft Network and Paycase Financial, said that this is the practice of forcing digital currencies into the analog-era.

Although the travel rule and similar rules were developed for the passage of funds through intermediaries, Weinberg, the consultant of the Organisation for Economic Co-operation and Development (OECD) blockchain problem, stated that “cryptocurrency transactions can occur in people, Between machines, smart contracts, and any other infinite potential end point, not just exchanges or businesses." He added:

“This will make management too onerous and may push the entire ecosystem back into the dark ages.”

A compliance officer at the US exchange issued a more cautious comment. He said that these outstanding requirements are feasible, but it is a "dogmatic" and "making trouble" approach that does not advance the enforcement goals. The executive said:

“We will eventually trouble our quality customers and ask them to provide information, although we may not be able to verify this information.”

London-based trading group Global Digital Finance (GDF) pointed out in a letter to the FATF in April that cryptocurrency trading is different from wire transfer, it only needs one address, and the wire transfer design requires the payee to provide the bank. , branch and account number information.


Source: Global Digital Finance

Therefore, the exchange that sends the cryptocurrency on behalf of the customer "is not sure who the destination address belongs to, because there is no register for such an address, and a new address can be created at any time." In fact, the sender's exchange cannot determine whether the payee address belongs to another company, a regulated company, or an individual.

In addition, GDF believes that the proposed reporting requirements can be easily circumvented. For example, a customer can send funds from an exchange to an unmanaged wallet (user controlled private key). Then, the owner of the wallet can send the currency to another exchange, and neither platform captures the information of both parties to the transaction.


Source: Global Digital Finance

Therefore, GDF warned in the letter that the standard may have unintended consequences, that is, it “encourages the occurrence of P2P transfers through unmanaged wallets, which greatly increases the difficulty of tracking or control by law enforcement agencies”. The letter was signed by a number of executives from the US exchange Coinbase, the encryption startup Circle, and the blockchain company R3 with a banking background.

FATF binding force

To be sure, even if the FATF adopts a complete and partially controversial guidance, these requirements will not take effect overnight. Member States must first put these recommendations into practice through legislation or rules.

But don't get it wrong, the frequently used phrase "FATF advice" underestimates the influence of the organization. Julia Morse, an assistant professor of political science at the University of California, Santa Barbara, said:

“The FATF's recommendation is not legally binding international law; however, since the FATF's membership includes 36 economies and two regional institutions, including the world's largest and most important financial system, its rules are binding. .

When countries with large financial systems, such as the United States and the United Kingdom, implement FATF standards, they change the way international banks and financial companies conduct business globally. This has a downstream effect on countries that are not members of the FATF. In addition, the FATF also reviews Member States' compliance with their standards, and those that do not comply with standards may become a fall of the global financial system. Mark T. Nance, an associate professor at the School of Public and International Affairs at North Carolina State University, said:

“If the situation of non-compliance is serious enough, the state/jurisdiction can be listed on the FATF greylist or eventually blacklisted. This means that financial institutions around the world have issued strong warnings, ie with those jurisdictions The transaction is suspicious."

At present, the industry is waiting for the final guidance, and hope that the government can give them enough time to agree on a solution for information sharing between enterprises.

Weinberg said industry leaders should “recommended to extend the timeframe adopted to ensure appropriateness and coordination throughout the industry.”

Of course, there are some precedents for grace periods: According to American Banker, FinCEN finalized the US version of the bank travel rule in 1995, but it was not until 2004 because of the need to modify the software. Put it into practice.

However, in addition to the operational burden of exchanges and managed wallet providers, requirements similar to the travel rule may discourage privacy-conscious cryptocurrency users.

Password punks are already uncomfortable with entrusting their personally identifiable information (PII) to targets that are often hacked, and this time they may be annoyed with sharing more sensitive data with more entities. As Weinberg said:

“This will eliminate anonymity because it is associated with any regulated entity. At the same time, most of the basic appeal and premise of cryptocurrencies will disappear.”