FATF to issue cryptocurrency regulatory guidance on 21 June
Exchanges could bear the brunt of the changes, but the entire crypto ecosystem will feel it.
On 21 June the Financial Action Task Force (FATF), the global anti-money laundering body, will publish a note to clarify regulations for virtual asset service providers, Bloomberg reports. This primarily includes cryptocurrency exchanges but also encompasses custodians, wallets and a range of other cryptocurrency-related businesses.
The gist of the rules is that cryptocurrency service providers will have similar compliance obligations as banks. They'll be required to verify the identity of customers and conduct their due diligence on transactions of US$1,000 or €1,000 equivalent or more, and generally do their part to prevent people from moving money anonymously.
What's not clear is exactly what kind of system is going to be used to make this happen. No one's entirely sure what the exact contents of the FATF note on 21 June will be, but the industry is bracing for the worst.
Easier said than done
The rules were initially devised for bank wire transfers, but cryptocurrency transactions are an entirely different beast.
"Without enhanced technology systems, this is a case of trying to apply 20th-century rules to 21st-century technology," said Kraken general counsel Mary Beth Buchanan. "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."
The clock is ticking though.
"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," said Bittrex compliance and ethics officer John Roth to Bloomberg. "You can imagine difficulties in trying to build something like that."
Coinbase chief compliance officer Jeff Horowitz cautions that an overly heavy hand could push more people into making peer to peer transactions, which would have the exact opposite effect that the FATF is looking for.
"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," he said. "The FATF really needs to consider the many unintended consequences of applying this specific rule to VASPs."
These unintended consequences can already be seen in China, which is simultaneously wrangling a crypto ban and a status as a leading cryptocurrency market. There, a lot of trading is done peer to peer through invite-only app chat rooms. It can also be sporadically observed through trading volumes on peer to peer services like LocalBitcoins and Paxful.
There are also potential downsides in how these regulatory obligations will raise costs, and restrict some of the functionality offered by digital assets.
Neither of the two options laid out by Roth – a fundamental restructuring of blockchain or a global parallel system – is going to be cheap, and these are costs that exchanges and other services will have to pass on to customers somehow.
You can run but you can't hide
Change is coming, but it will take time. Nations will be tasked with enforcing the FATF's will and many have already made movements in their own way. For example, FinCEN, the USA's anti-money laundering organisation, has already released its own guidance which appears to be cut from the same cloth as the FATF's ruleset.
But 21 June is penciled in as something of a start date for countries to start looking at this in earnest.
Change is coming. And although there are a lot of concerns from the businesses who will bear the brunt, others are looking forward to the industry growth that may be ushered in by additional regulatory clarity.
Disclosure: The author holds BNB, ZIL at the time of writing.