FATF crypto guidelines challenge exchanges to compromise anonymity


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The highly anticipated crypto guidelines from the Financial Action Task Force (FATF) may cause crypto zealots to go on the warpath. G20 financial officers will review and adopt the new FATF guidelines at their next meeting in June in Japan, but insiders that have already had a look reveal that the crypto industry may be technically challenged to implement significant parts of the new rules. There is only so much that you can change on a blockchain platform to meet the new requirements, the most important of which is to verify the identity of both senders and receivers in line with existing KYC/AML standards.

Crypto zealots will cry foul. According to Satoshi Nakamoto’s original design, anonymity and privacy were supposed to be protected from external prying eyes of government officials and regulators, a religious pillar that has stood the test of time over the past decade. Global regulators have gradually become more receptive of the notion of cryptos, but this so-called “pillar”, in their minds, must be modified before they will ever move to the next level. Over time, exchanges have grudgingly implemented a variety of KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures within their respective shops, but only to a degree that did not drive customers to competitors.

It was June of last year when the FATF announced its plans to develop crypto guidelines on behalf of an initiative created by the G7 finance ministers. Last October after an interim review, Reuters reported: “The FATF said in a statement that the new rules will require every jurisdiction to properly license or regulate crypto exchanges and some firms to provide encrypted wallets.” The target set for the release of final rules was set to be June of 2019, after allowing ample time for regional submissions, debate, and then review of proposed policies.

FATF President Marshall Billingslea added that:

By June, we will issue additional instructions on the standards and how we expect them to be enforced. As part of a staged approach, the FATF will prepare updated guidance on a risk-based approach to regulating virtual asset service providers, including their supervision and monitoring; and guidance for operational and law enforcement authorities on identifying and investigating illicit activity involving virtual assets.

During the process of drafting guidelines, the FATF received feedback from Chainalysis, a respected crypto research firm. Chainalysis noted a number of areas that would be challenging:

  • “FATF’s guidance, as it is currently drafted, would have profound implications for the cryptocurrency industry.”
  • “There are clear technical obstacles that prevent cryptocurrency businesses from being able to comply with these standards.”
  • “Cryptocurrencies were originally designed as a peer-to-peer financial system that has no central authority and no intermediaries.”
  • “In most cases crypto exchanges are unable to tell if a beneficiary is using another exchange or a personal wallet.”
  • “Requiring a transmission of information identifying the parties is not technically feasible.”
  • “There is no infrastructure to transmit information between cryptocurrency businesses today, and no one has the ability to change how cryptocurrency blockchains work.”
  • “Such measures would decrease the transparency that is currently available to law enforcement.”

The research firm also provided the following helpful suggestions:

Cryptocurrency exchanges can use the transparency of the shared ledger to form an effective risk-based approach. It should be the job of exchanges to collect and store know your customer (KYC) information of each transaction’s originator, and while the transactions themselves are public, exchanges should also link their customers with their specific transactions, as this information is not available on the public ledger.

Observers believe that a subset of exchanges will do their best to comply, but they are also concerned that the so-called “illicit trade” may migrate to less regulated locales:

Libertarian-minded cryptocurrency believers will view this as an abominable surveillance system that contravenes the censorship-resistant principles upon which bitcoin was built… What is likely to emerge, then, in parallel to the FATF-regulated ecosystem of regulated custody-taking institutions, is an entirely separate economy of peer-to-peer exchanges among people who control their own cryptocurrency.

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FATF crypto guidelines challenge exchanges to compromise anonymity

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