Complying with regulators could mean the difference between going mainstream and remaining forever on the margins of the global financial system.

What’s going on here?

• One of the biggest knocks against cryptocurrency has always been its status as a refuge for tech-savvy criminals. The image persists, in part because some crypto firms have evaded regulators by moving to jurisdictions that are less strict.
• But a new set of global anti-money-laundering rules aimed at cryptocurrency exchanges has been handed down by the Financial Action Task Force (FATF). The rules, which call on exchanges to share personal information about their users with each other, are controversial:
  • Many cryptocurrency enthusiasts think the privacy that drew them to the technology could evaporate;
  • Complying with the rules is likely to make the industry more attractive to mainstream financial institutions and users.

The problem

• The cryptocurrency market is small and immature compared with markets for traditional stocks and bonds, but the criminals trying to profit from it are among the most sophisticated in the world—and they are reaping bigger and bigger rewards.
• What draws criminals to cryptocurrency is the capacity for anonymous, peer-to-peer value transfer. Technically, most cryptocurrency systems are pseudonymous. Since every transaction is recorded on a public ledger, criminals resort to a range of tactics, including using multiple addresses and exchanges, to cover their tracks as they move ill-gotten money around.
• In regulated jurisdictions like the US, Japan, and EU, exchanges are already required to verify the identities of their users, a process commonly called “know your customer.” But many exchanges around the world have lax policies that allow people to move money or cash out without identifying themselves.

The “travel rule”

• In June the FATF published a much anticipated, technically nonbinding guidance detailing expectations of how its 37 member jurisdictions should regulate their respective “virtual asset” marketplaces. Here’s the contentious part:
  • whenever a user of one exchange sends cryptocurrency worth more than 1,000 dollars or euros, the originating exchange must “immediately and securely” share identifying information about both the sender and the recipient.
  • That information should also be made available to “appropriate authorities on request.”
• Besides deterring would-be money launderers, this makes it possible to blacklist certain individuals who are subject to economic sanctions, as well as entities like terrorist organizations. It’s essentially a crypto version of a US banking regulation commonly called the “travel rule”. The agency just hasn’t started enforcing it yet.

Not so nonbinding

• Since the G7 and influential members of the G20 plan to apply the policy, it really is binding. In particular, the US, which held FATF’s rotating presidency, is pushing the issue. Secretary of Commerce Steve Mnuchin has called FATF’s standards “binding to all countries.”

A global anti-money-laundering system?

• In July, Reuters reported that as part of an effort to combat money laundering, Japan’s government is “leading a global push” to set up for cryptocurrency exchanges a system like SWIFT, the international messaging protocol that banks use for bank-to-bank payments.
• But several people familiar with the FATF-led international discussions around cryptocurrency regulation told that there doesn’t appear to be a government-led global cryptocurrency surveillance system in the works – at least not yet. And it’s likely that whatever does eventually emerge won’t look much like SWIFT. Exchanges are still early in the process of figuring out what systems and technologies to use to securely handle sensitive data, and how to do it in a way that complies with a range of local privacy rules.

A line in the sand

• “Regulators have made clear that the old way of transacting, where you have pseudonymous transfers – that’s not going to scale,” says Yaya Fanusie, a blockchain consultant and researcher. Some users may leave compliant exchanges for others that choose not to share personal information or seek out more decentralized methods of exchange that are harder to police.
• But Fanusie says such a community will have to remain niche. He says mainstream financial institutions will be more comfortable adopting the technology knowing that money laundering controls are in place. Over the next year are so, we will see the industry “trying to figure out how it wants to position itself, and if it wants to scale.”

Content source: Orcutt. M (2019) New money-laundering rules change everything for cryptocurrency exchanges. MIT Technology Review. Available from: https://www.technologyreview.com/s/614164/new-money-laundering-rules-change-everything-for-cryptocurrency-exchanges/?utm_medium=tr_social&utm_campaign=site_visitor.unpaid.engagement&utm_source=Facebook&fbclid=IwAR1eGm-Un490FGP-JhMCASvtUGW5BoXBIPm3lpUQaP-d5Qo9afDau1deax4#Echobox=1567187500 [Accessed 2 September, 2019]