The FATF's strongest regulatory new regulations have come, and the exchange's "resistance" will be held at the end of the month.

The world's mainstream cryptocurrency market – the United States, Japan, South Korea, China, how long is it to say goodbye to weak regulation (or even no regulation)?

The answer is probably: no more than a year.

On June 21st, the international intergovernmental organization FATF adopted the “Guidelines for Risk-Based Virtual Assets and Virtual Asset Service Providers” in routine plenary meetings, including transactions involving cryptocurrency exchanges, custodians, and money funds. The agency has proposed AML/CFT (anti-money laundering/anti-terrorism financing) regulatory requirements. The new regulations require that the relevant service providers need to attach corresponding customer information to each other to form a flow chart of assets so that the regulator can track them.

This new regulation that hurts user privacy and raises the cost of service providers is controversial. Dissatisfied practitioners claim to be defying the FATF at the upcoming G20 summit, while those disappointed with strong regulation claim to turn to over-the-counter and DEX platforms that are not regulated by the central agency.

In any case, the FATF's official document has been issued, and the most mainstream US, Japanese, and Korean governments have spoken out, and the cryptocurrency service providers will respond to compliance challenges and industry reshuffles.

The cat-and-mouse game between cryptocurrency practitioners and regulators may never be so intense.

Where is the “most strict” regulatory new regulation?

On the afternoon of June 21st, Beijing time, the American city of Orlando, along the Gulf Coast, is holding an international conference to tighten the spirit of cryptocurrency practitioners.

This is the annual routine plenary session of the FATF (full name Financial Action Task Force on Money Laundering), which includes organizations from the FATF Global Network, the International Monetary Fund (IMF), the United Nations, the World Bank, etc. 205 representatives.

“During the six-day meeting, we will discuss a series of important issues aimed at protecting the integrity of the financial system and promoting global security. With the strong support of organizations including the G20, the FATF has further developed its virtual asset regulation. The first topic of discussion is 'Explanation and guidance on virtual assets'.” The FATF officially stated.

The final new regulations mainly require virtual asset service providers (English "Virtual Asset Service Providers" ("VASP") to attach corresponding customer information when transferring funds to each other, thus forming a flow chart of assets for the regulatory agencies. Traceable. The information that VASP needs to provide/collect when providing the transfer service includes: when transferring virtual assets between companies, the information about the customer needs to be passed to the other party, including:

  • The name of the sponsor (ie sending the customer);
  • The issuer's account number of the transaction;
  • The physical (geographic) address of the sponsor, or the national ID number, or the unique identifier that allows the transaction service provider to identify the customer, or the date and place of birth;
  • The name of the beneficiary (ie receiving the customer);
  • The beneficiary account number of the transaction.

In addition to collecting information, the new FATF regulations require VASP to have the ability to freeze or ban transactions from sanctioned users.

In addition, VASP shareholder and executive structure changes are subject to regulatory approval. This is to “prevent criminals or their associates from becoming VASPs, gaining/controlling interests, performing management functions, or becoming a beneficial owner of VASP. Regulatory measures should include: substantial changes in shareholder, corporate structure, and business operations. At the time, VASP needs to obtain prior approval from the regulatory authorities."

As many practitioners have evaluated, the FATF “supervises VASP like a regulated commercial bank”. In fact, the FATF's regulation of VASP has indeed reached the level of traditional financial institutions.

Outside of VASP, OTC service providers, “underground” exchanges, and mixed-service providers will be “managed”.

The FATF recommends that individuals (OTC service providers) who use cryptocurrency wallets to provide cryptographic money transfer services should also be identified as VASPs, and therefore need to comply with these requirements. “If VASP is a natural person, you should be required to obtain a license or registration in the jurisdiction in which it is located.” But if the individual transfers the cryptocurrency for purchase of goods or services, or for a one-time exchange or transfer, then VASP. In addition, the FATF recommends that countries may require foreign VASPs that provide products or services within their jurisdiction to register with the appropriate authorities.

In addition, the FATF recommends that countries consider using open source information and web crawlers to identify unregistered or unlicensed cryptocurrency transactions. In addition, you should fully listen to “public feedback”, information provided by research institutions, and some “non-public information” such as intelligence or law enforcement reports to strengthen the review of “underground” exchanges.

In addition to supervising professional traders, FATF also includes some service providers involved in the circulation of cryptocurrencies, such as “mixed currency” service providers that provide fuzzy cryptocurrency transmission. The so-called mixed currency is to mix the coins of different transaction promoters, and then transfer them to the transaction recipients after the breakup, so the outside world does not know who the promoter’s money is transferred to, and who is actually transferred to the recipient. The person thus splits the relationship between the two parties.

FATF can't tolerate this technology that can perfectly launder money. “Countries should ensure that they can manage or reduce the use of transactional mix providers, tumblers or similar tools to transfer risk… if VASP is unable to manage and mitigate the risks associated with participating in such activities , VASP should not be allowed to participate in such activities," the FATF suggested.

The FATF also stated that VASP “serious and urgent threats of misuse of virtual assets and threats of terrorism” will give its 37 member states a “digestive understanding” and adopt this cryptocurrency supervision guide for one year, and will be in 2020. The guide was reviewed in June.

As the research director at the encryption research organization Messari Inc. said: "The FATF's recommendations may be much larger than the impact of the US SEC or any other regulatory agency to date, and are likely to be one of the biggest threats to the encryption industry." When combined with the EU's forthcoming AMLD5 (the fifth anti-money laundering directive) for cryptocurrencies, this new framework is reminiscent of a comprehensive global system of cryptocurrency transactions. In this system, no single user can escape regulatory requirements.

Won the US, Japan and South Korea

As many people know, the opinions expressed by the FATF itself are not enforceable. Therefore, if a member country violently "resistes the purpose", what will happen if the new rules are not implemented?

From the international status of the FATF, it was originally an intergovernmental international organization established by the Group of Seven (the United States, Britain, Germany, France and Japan) to prevent money laundering and coordinated international action on anti-money laundering, and then member countries are located in major financial centers on all continents. The 40 recommendations on anti-money laundering and nine special recommendations on counter-terrorism financing were adopted by more than 200 countries around the world.

Countries that do not comply with the FATF “proposal” will be blacklisted in the global economy. “Then it will basically lose the opportunity to enter the global financial system,” said Jesse Spiro, policy director at cryptocurrency research firm Chainalysis. Therefore, the regulatory guidelines issued by the FATF will naturally be strongly supported by member institutions. Otherwise, these institutions may be judged as non-compliant in the review, and the entire country may be included in the “gray list”.

In fact, at least the United States, Japan, and South Korea have already supported the new rules of the FATF. Among them, according to the Nikkei Asian Review, on May 22, the Japan Financial Services Agency (FSA) launched a new inspection of the cryptocurrency exchange to deal with the FATF inspection this fall. “The FATF will send an investigation department to review the strength of the AML policy of the Japan Financial Services Agency, including the policy of cryptocurrency exchanges.” In 2008, Japan received the lowest rating from the FATF review, so they have been trying to improve.

The cryptocurrency industry vertical media Coindesk's evaluation of the FATF is "an organization led by the United States", especially the United States is the current President of the FATF. The behavior of the FATF itself indicates to some extent the attitude and policy of the US Treasury against money laundering, which is the embodiment of the will and interests of the United States.

The EU issued AMLD5, which involved anti-cryptocurrency money laundering, before the FATF.

China joined the FATF as early as 2007, but it is well known that the domestic cryptocurrency is a comprehensive retreat. Since "exit", then don't worry about it?

According to the analysis of the Fire Coin Research Institute, the proposal indicates that the FATF's regulatory requirements for VASP have reached the same level as traditional financial institutions, which may further promote VASP compliance registration. In countries lacking supervision, it is possible to promote the implementation of corresponding licenses. And registration system.

Deng Jianpeng, a professor of law at the Central University of Finance and Economics, also agrees with this possibility. “This document, as well as a clear international recognition, provides a strong recommendation to Chinese regulatory authorities to recognize that virtual currency has typical financial attributes and financial risks. Based on this, in legislation and judicial interpretation, it should respond promptly. Considering the corresponding amendments. First, the virtual currency is included in the counter-terrorism financing and anti-money laundering. At the same time, it positively recognizes that it has the typical property nature, and the legitimate rights and interests of the legal holders of virtual assets are clearly defined in law and justice. Protection." Deng Jianpeng told the media.

Practitioner's struggle "sports"

How should multinational organizations manage and the state manage, and how should practitioners respond?

Let's take a look at their FATF's new rules of "happy and mixed".

What is "hi"?

As Deng Jianpeng, a professor of law at the Central University of Finance and Economics, said, “The release of this guidance document shows that global currencies are increasingly looking at virtual currency as a virtual asset with typical financial attributes.”

Since it is a valuable thing, then compliance with regulatory requirements is legal and should be guaranteed accordingly. “So, regulation can bring legal certainty, trust and confidence to the market. Only in the framework of compliance regulation, the use and circulation of cryptocurrency can be widely used, otherwise it will only be used for certain illegal purposes. Or a gray area."

Moreover, the cross-border supervision led by the FATF is even more rare. “Digital assets are cross-regional, and chain transactions are actually borderless. This poses a great challenge to single-country regulation. Joint supervision is born. And the level of policy development in various countries is also uneven. The supervision of FATF is very important. ""

“Is this (the strong supervision of the FATF) a potential difficulty? Of course, at least at the very beginning, but it seems to be necessary. For this industry, the road map after the past is not so difficult. "The Bloomberg has commented this way."

So what is this "difficult" or the worries of practitioners?

That is, the FATF will increase the cost of VASP, which will lead to industry reshuffle, and some trading service providers who are unable to conduct compliance operations will withdraw from the market.

The new rules require VASP to collect customer details and data and share it with peers and regulators. Josh Gnaizda, CEO of Crypto Fund Research, believes this regulation will have an impact on more than 500 cryptocurrency funds that have emerged over the past few years. “Following FATF-induced transaction delays or additional transaction costs may significantly reduce fund returns.”

When decentralization became “centralized in the trading session”, when the barbaric and profitable industry began to bear “extra” compliance costs, the FATF did not touch a small cake. Most of VASP's attitude toward the new rules can be imagined, even "non-stakeholders" – the father of anti-virus software, John McAfee, is screaming on Twitter: we must declare war on it!


In fact, this sentence is not to talk about it.

At the G20 Leaders Summit in Osaka on the 28th and 29th of this month, there will be a “V20 Summit” held at the same time.

V20 Summit, the full name of "V20 Virtual Asset Service Providers Summit", is currently determined to participate in the VASP including Fire Coin, Coinbase, Circle, Bitfinex, Kraken, bitFlyer, and other important industries. VASP also includes traditional financial institutions such as Deloitte. In addition, at the V20 summit, there are also the “Japan Financial Affairs Agency, members of the Diet in Japan and Australia, the French Ambassador to Japan, and the UK Secretariat”.

Why is VASP rushing with the G20 Summit? I have to start from 5 years ago.

At the 2014 G20 Summit in Brisbane, Australia, the Australian Digital Business Association (ADCA) hosted the “Global Digital Currency Dialogue” event. A year later, ADCA signed a Memorandum of Understanding with the British Digital Business Association and established the Global Blockchain Forum (GBF). This V20 summit was initiated by the founders of this forum and the participating countries.

V20 organizers hope that by negotiating with the government to improve the reputation and sustainability of digital currencies, VASP can adopt appropriate regulatory guidelines and technical solutions rather than making regulation an obstacle to innovation.

There is a list of agenda proposals on the official website of the V20 Summit, including a timetable for delaying the entry into force of the new FATF regulations; developing industry-proven regulations that reflect the uniqueness of virtual assets to influence the FATF's proposals; and developing agreements to support VASP and Standards to meet FATF requirements for information collection, and more.

It can be said that this is a very powerful expedition of cryptocurrency practitioners who want to present their own imaginations to today's major economies.

“Talk directly to the FATF to clarify the unique nature of the encryption industry and find industry-specific solutions to manage regulatory risk.” Elaine Sun, Chief Compliance Officer of the Firecoin Group, said he will participate in the event as a group representative on the 28th. .

DEX, OTC trading will be booming?

Regardless of how to protest, a documentary document of the FATF has been issued, and VASP needs to worry more about it at this time. I am afraid that it can cope with this compliance challenge.

“This requires building a global parallel system in about 200 exchanges around the world (not including VASPs such as wallets), and it is much more imaginable to see what VASP needs to do in the exhibition industry.” A cryptocurrency practitioner revealed .

Even more troubling is the fact that this costly compliance operation can have no small side effects. That is to let some users who pursue personal privacy and asset security jump out of the regulated VASP system and instead choose a non-regulatory approach.

"The new rules may force encrypted transactions out of the controlled platform, and this is one of the best platforms to see financial crimes at the moment." Roger Wilkins, former chairman of the FATF and former Australian Department of Justice, said that he was worried about VASP for compliance. The painstaking effort.

Coinbase Chief Compliance Officer Jeff Horowitz once said: "I understand why the FATF wants to do this. But it may also prompt more people to conduct P2P transactions, which will reduce the transparency of law enforcement."

Michael J. Casey, senior consultant at the Massachusetts Institute of Technology's Digital Money Program, believes that the new rules will allow many people to trade on the decentralized exchange DEX. "The new rules will prompt developers to speed up the tools people use to develop decentralized transactions. Make it easier for end users to trade directly outside the regulated organization."

Reference materials:

Crypto Exchanges Are Facing Their Biggest Regulatory Hurdle Yet, Bloomberg

Global money-laundering watchdog launches crackdown on cryptocurrencies,Reuters

The Cat-and-Mouse Game of Crypto Regulation Enters a New Phase, Michael J. Casey


US Treasury official website

Global Blockchain Industry Panorama and Trends Annual Report (2018-2019), Fire Coin Research Institute

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