New FATF cryptocurrency guidance shaves away industry grey areas
Global standards are bringing clarity to the blockchain and cryptocurrency industry.
On 21 June, the Financial Action Task Force (FATF) solidified its cryptocurrency recommendations. This may be a pivotal moment for the industry and technology as a whole because there's now a global ruleset for crypto that all countries can work with.
On the one hand, the regulations have been regarded with wariness by a crypto industry that's worried about rising costs and the risk of being lost in a web of compliance obligations. On the other hand, people are also looking forward to growth and institutional involvement that can more easily occur now that there are global guidelines.
There are pros and cons, and how they balance out for an individual player depends on their line of work.
Pros and cons
The most immediately contentious issue is the maintenance of the so-called "travel rule", which essentially says cryptocurrency businesses will have to start sharing customer data with each other on an unprecedented scale all over the world. The idea is for authorities to basically be able to map the flow of digital money around the world and to identify the people involved in the transfers, thanks to virtual asset service providers holding and sharing information with each other.
The general consensus among many crypto exchange operators is that the only viable ways of doing this are going to be expensive and unpleasant, and it may necessitate the creation of a SWIFT-like inter-exchange network to act as a second "layer" for carrying information between exchanges.
The guidelines don't explicitly say how this information-sharing scheme should be done, and instead leaves it up to local authorities in each country to pass regulations that work for them.
Relatedly, it also emphasises that countries need to have an actual authority in charge of enforcing these measures and punishing non-compliant operators, and that the self-regulation common to crypto is not a substitute for a competent authority.
The FATF doesn't lay down the law on how exactly those authorities should be meeting FATF recommendations, and instead leaves it to each country to find a solution that works for it. But it does suggest that "countries and their competent authorities should treat all VASPs (virtual asset service providers) on an equal footing from a regulatory and supervisory perspective in order to avoid jurisdictional arbitrage."
A level playing field
The overall tenor struck by the guidelines is one of digital asset normalisation, and it points out that cryptocurrency is not inherently dirtier than any other kind of money, and that crypto exchanges aren't inherently shadier than any other financial services. In order to ensure a well-regulated industry, financial institutions should not shun crypto exchanges out of an excess of caution, it adds.
"It is important that FIs apply the risk-based approach properly and do not resort to the wholesale termination or exclusion of customer relationships within the VASP sector without a proper risk assessment," FATF says.
The new rules colour in a lot of grey areas, but they do not necessarily cover individuals using digital assets for non-business purposes, non-custodial wallets, peer-to-peer noticeboards or all dapp makers.
But there are still situations where dapps themselves may be financial services, which could hinder uptake for some.
Generally, a dapp user must pay a fee to the dapp, which is commonly paid in virtual assets (VAs), for the ultimate benefit of the owner/operator in order to run the software. When dapps facilitate or conduct the exchange or transfer of value (whether in VA or traditional fiat currency), the dapp, its owner/operator(s) or both may fall under the definition of a VASP, FATF explains.
The additional clarity may go a long way towards spurring additional developments in cryptocurrency, even if some of those developments are just working out how to resolve newfound regulatory requirements.
Disclosure: The author holds BNB and BTC at the time of writing.
- Ethereum price: Massive slide as market faces bearish pressure
- Ethereum 2.0: Roadmap, timeline and implications
- Bitcoin falls to US$34,000 as confidence in money markets improves with the Biden inauguration
- Bitcoin price lags while regulators raise fears and banks grapple
- Bitcoin price sees volatility around $37,000 with Pantera Capital projecting $115,000