The July G20 cryptocurrency meeting was a deceptively big deal
The FATF's G20 presentation is the driest but most bullish news you'll hear all day.
At the last G20 Finance Ministers and Central Bank Governors meeting in March, representatives agreed to come together in July and present a set of specific recommendations on what to do about cryptocurrency.
The deadline has arrived, and the recommendations can generally be boiled down to "not much."
The gist is as follows:
- The G20 finance ministers and central bank governors have decided that cryptocurrencies don't pose a current threat to global financial stability, so it's not really their problem yet. They note that cryptocurrency brings benefits while posing new challenges.
- The main benefits highlighted by the G20 ministers are with the distributed ledger technology itself, rather than digital currencies per se.
- The main challenges and points of action at the moment are in dealing with cryptocurrency's applications in money laundering, tax evasion and terrorist financing.
- As such, they've passed the "how/whether to globally regulate cryptocurrency" question onto the Financial Action Task Force (FATF), which handles the money laundering, tax evasion and terrorist financing side of things.
- The FATF has a new deadline of October 2018 to clarify how it wants to deal with cryptocurrency.
The outcome is that nothing has changed for cryptocurrency as a result of this meeting, except to clarify that the FATF is where the action is right now, and that there's a new deadline of October 2018 which might bring some very interesting developments.
As such, the main event might be the presentation given by the FATF to the G20 finance ministers as part of these July proceedings.
The official word from G20
"Crypto-assets can deliver significant benefits to the financial system and the broader economy," the newest report (PDF) says. "Crypto-assets do, however, raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. Crypto-assets lack the key attributes of sovereign currencies. While crypto-assets do not at this point pose a global financial stability risk, we remain vigilant.
"We welcome the updates provided by the FSB [Financial Stability Board] and the SSBs [standard setting bodies] and look forward to their further work to monitor the potential risks of crypto-assets, and to assess multilateral responses as needed. We reiterate our March commitments related to the implementation of the FATF [Financial Action Task Force] standards and we ask the FATF to clarify in October 2018 how its standards apply to crypto-assets."
Over to you, FATF
The FATF is responsible for developing the guidelines and recommendations for preventing international money laundering, tax evasion and terrorist financing. At the pointy end, these take the form of recommendations and standards for financial institutions to meet. It's typically up to member nations to ensure that their financial institutions meet these standards, under threat of economically unpleasant things happening if they don't at least try to enforce these standards.
However, actually meeting the standards can be very different in different countries, even as the standards remain nominally the same. This is because the risk factors vary between locations and because not all countries are equally devoted to compliance with FATF standards. For example, a bank that wants to deal with other financial institutions in an overseas high-risk country might have to spend more on compliance procedures to meet those same standards.
Meanwhile, the global, intermediary-free and bankless nature of cryptocurrency means it doesn't fit into existing FATF guidelines anywhere near as neatly as fiat currency and other asset types. This means a small single-country entity might be able to safely do crypto where a large multinational wouldn't.
As such, the larger, more global and more complex institutions are still more likely to refuse to touch the stuff until formal FATF clarity arrives.
Western Union, for example, spends about $200 million per year on compliance costs. It's expensive but it works. Western Union has so far avoided cryptocurrency transfers because the currency is still in a regulatory grey area, and the company can't use cryptocurrency in all payment corridors without doubling up on compliance and other expenses. However, smaller equivalent companies see a different cost-benefits picture in cryptocurrency because they aren't as burdened by unclear global regulations.
What this means
The FATF will be meeting in September to consider whether crypto can work with existing standards, or whether new regulations will be needed. The findings will then be presented as a proposal in October.
Depending on what FATF comes out with, it's possible that October 2018 might be a watershed moment for big money cryptocurrency adoption, throwing open the doors to a lot of entities that are so far willing but not yet able.
The FATF roadmap
There are a few key takeaways from the FATF's July report.
Clarification is needed ASAP
"There is an immediate need to clarify how the FATF definitions and Recommendations concerning customer due diligence, money or value transfer services, wire transfers, supervision, and enforcement apply to virtual currency/crypto-asset providers and related businesses," the FATF July report says.
"The FATF will hold an intersessional meeting in September on how the FATF Standards apply to virtual currencies/crypto–assets. In October 2018, FATF will consider detailed proposals to clarify the application of its Standards to activities involving virtual currencies/crypto-assets. FATF will consider whether it needs to update its 40 Recommendations to reflect the technical aspects of virtual currencies/crypto-assets."
The link between crime and crypto is small but growing
The FATF has noted that cryptocurrencies are functionally a very attractive option for criminals, and that despite being relatively little-used at the moment the links between crypto and crime are strengthening.
"Virtual currencies/crypto-assets facilitate easy online access and global reach which make them attractive to move and store funds for money laundering and terrorist financing. The FATF is actively monitoring the risks associated with virtual currency/crypto-asset payment products and services... Besides small-scale drug trafficking and fraud, the link between virtual currencies/crypto-assets and other predicate crimes appears to be growing."
Work is already well underway
Different countries have already responded to cryptocurrencies with their own regulations. Some haven't brought any specific new regulations, others have tried to stamp them out and some have just tried to ensure compliance with existing FATF regulations in their own way.
This patchwork of approaches isn't terribly useful for an organisation that aims for unifying global regulations, and the FATF aims to encourage a more unified global approach. It's possible that regulations in some countries might also shift in response to the October findings.
"The FATF has developed a comprehensive approach to respond to the increasing use of virtual currency/crypto-asset activities for money laundering and terrorist financing. This approach is intended to ensure that all countries exercise a sufficient level of oversight on virtual currency/crypto-asset activities taking place within their jurisdiction and to encourage a more consistent approach to the regulation of virtual currencies/crypto-assets across different countries."
This isn't just convenient, it's essential to the effectiveness of cryptocurrency regulation which is only as strong as its weakest link. In the long run, this suggests that the regulatory extremes of cryptocurrency bans on one end, and anything goes on the other, will eventually give way to a unified middle ground.
"The global regulatory environment for virtual currencies/crypto-assets is changing rapidly. This may make it challenging to ensure a consistent global approach, which could increase risks. Given the highly mobile nature of virtual currencies/crypto-assets, there is a risk of regulatory arbitrage or flight to unregulated safe havens."
Blockchain, digital ID and education
The US will continue to explore how to better provide technical assistance to other countries. The FATF will also be pushing for a shift towards digital identity systems, including blockchain solutions, and prioritising the development of standards that are compatible with the use of digital customer identification.
It will also be working with law enforcement around the world to educate them on how to better investigate cryptocurrency-related cases and conduct blockchain forensics to identify tools to help with the job and identify barriers that might hinder investigations.
"The FATF will continue its work to understand digital ID and verification technologies and will prioritise its ongoing work stream to ensure that the FATF Standards are compatible with the growing use of digital forms of customer identification. Digital ID has the potential to enhance financial inclusion and reduce costs of customer on-boarding as well as to better manage the risks of money laundering and terrorist financing.
"Many national law enforcement authorities could significantly improve their understanding of how to effectively conduct investigations of cases involving virtual currencies/crypto-assets, and how to disrupt criminals. The FATF will work further with investigative authorities on identifying relevant tools to support criminal investigations involving virtual currency/crypto-asset payment products and services as well as identifying technological or other limitations which hinder effective investigations when these payment products and services are involved."
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.