After the prolonged disaster that 2018 was for Bitcoin and the cryptocurrency market, the king of all digital assets, as well as many similar projects have been surging since last April. Uncertainties drive the rise on the way the world’s economy will perform over the next few months, but there’s another reason. Digital money gives their owners a way to work around the oversight that the world’s governments can exert on the traditional financial system.
The cryptocurrency market has remained autonomous and unregulated for the most part since its inception, about a decade ago, and that is indeed one of its main advantages. The problem is that such a benefit could go away soon as the governments and banks start to catch up.
The FATF initiative
The Financial Action Task Force (FATF) is a multi-government agency supported by more than 200 of the world’s national governments (including the US) which aims to fight money laundering and the financing of terrorism by issuing recommendations that can help get rid of money laundering the world over.
The organization is preparing to publish a new report in which it will explain how the participating countries should keep a close eye on the movement of digital assets, according to its spokeswoman, Alexandra Wijmenga-Daniel. In an email, she describes how some new rules should apply to cryptocurrencies and businesses that work with them such as trading and exchange platforms, custodians and crypto hedge funds.
It remains unclear how this is all going to affect the cryptosphere. It will depend almost exclusively in how the rules that have governed traditional bank transfers for the last four decades will be construed and applied to cryptocurrencies. Messari Inc.’s director of research, Mr. Eric Turner, says that these are “one of the biggest threats to crypto today,” he added that “Their recommendation could have a much larger impact than the SEC or any other regulator has had to date” in an email.
The guidelines will be directed towards both exchanges (such as Coinbase or Kraken) as well as asset managers (like Fidelity). The companies dealing in crypto will have to gather personal information from customers transacting at EUR 1.000,00 or more. They will need to know who’s receiving funds in transfers and to provide data about each individual transaction.
It sounds deceptively simple.
The problem with compliance
Complying with the prospective rules will be costly in terms of effort and money as well as challenging, as explained by John Roth, BitTrex’s chief of compliance and ethics. The company’s daily trading volume is of about USD 58 million. Let’s not forget that wallet addresses on distributed ledgers are supposed to be anonymous in many cryptocurrency systems so collecting the required information could only be possible if the customer provides all that information voluntarily because automatic means could not suffice. Exchanges don’t always know who’s at the other end of every transfer, pure and simple.
“It’s either going to require a complete and fundamental restructuring of blockchain technology, or it’s going to require a global parallel system to be sort of constructed among the 200 or so exchanges in the world,” Roth stated. “You can imagine difficulties in trying to build something like that.”
Several exchanges in the US are trying to figure out how to implement such a system, according to Kraken’s (the San Francisco-based cryptocurrency exchange, which trades at the tune of USD 195 million daily) Mary Beth Buchanan.
“Without enhanced technology systems, this is a case of trying to apply 20th-century rules to 21st-century technology,” Buchanan said. “There’s not a technological solution that would allow us to fully comply. We are working with international exchanges to try to come up with a solution.”
According to Mrs. Buchanan, it could all end up creating costs that could cause some non-compliant platforms to go out of business. Phil Liu, chief legal officer at Arca’s in Los Angeles, said that “People in crypto like to make a big deal about giving personally identifiable information to the government, but I don’t see a whole lot of disruption for legitimate players if the proposal is enacted,” Liu in an email.
Even worse for the platforms is that customer could choose not to complain at all and just to deal directly with other cryptonauts without recourse to the platform’s services. That would enable them to keep their privacy intact and probably to save some money while they’re at it.
San Francisco’s Coinbase’s (the US largest cryptocurrency exchange) chief compliance officer said that while he understands the FATF’s position on this subject:
“applying bank regulations to this industry could drive more people to conduct person-to-person transactions, which would result in less transparency for law enforcement. The FATF really needs to consider the many unintended consequences of applying this specific rule to VASPs.”
And how soon will we see the consequences in practical terms? It’s too early to say because it’s just a proposal for the time being. Also, it will depend on how quickly every individual agency catches up and starts implementing them. The Financial Industry Regulatory Authority (FINRA), for instance, is expected to enforce the new rules right away – once they become rules rather than suggestions.
The Financial Crimes Enforcement Network (FinCEN) was already onboard as it issued interpretative guidance, which is very much in the same spirit as those by FATF. But sooner or later, every agency will follow suit. And that, in turn, could cost the non-compliant businesses their license as money-transmitter services.
A country rejecting FATF’s new rules would find itself placed in the organization’s blacklist “it can essentially lose access to the global financial system,” according to an analysis by Jesse Spiro of Chainanalysis Inc.
Over the last few years, more than 500 crypto funds have appeared all over the planet, and they will be affected as well. They could create trading delays, or increase the cost of doing business, and it would bring returns and profits down.
The regulators are in close contact with the cryptocurrency industry, so they’re most likely aware of the situation. They know that compliance will take time and effort and that it will require developing new technologies and processes to be working correctly before you can rely on them at a productive legal level.
There could be benefits as well
There is a silver lining, nevertheless.
The new rules would mean greater oversight for crypto, which, in turn, could breed confidence from the institutional financial world. That could make the digital asset industry grow a lot, which would be a good thing.
“Will it be a potential hardship? Certainly, at least initially,” Chainalysis’s Spiro explained.
“While it may be a hardship, it seems to be something that’s necessary. The road map at the end of the day after this is less arduous for this industry.”
The cryptocurrency market has enjoyed a great deal of freedom. Yes, the point in the distributed ledger technology is to disrupt the world’s financial system, as Satoshi stated very clearly when he brought Bitcoin online for the first time. But it couldn’t last forever, and some kind of regulation was always going to be unavoidable, especially as it becomes more successful as a means to do financial transactions that really do compete with the traditional ones.
But will FATF’s proposal will become the real new standard for the world? Nobody can tell for sure right now. But since so many members support FATF and it seems to be the only viable proposal on the table, it has at least a chance to stand. As with so many other things in the crypto verse, we’ll just have to wait and see.
Disclaimer: The presented information is subjected to market condition and may include the very own opinion of the author. Please do your ‘very own’ market research before making any investment in cryptocurrencies. Neither the writer nor the publication (TronWeekly.com) holds any responsibility for your financial loss.