The deed is done. Financial ministers of the G20 group have now decided to confront the crypto industry with tough new rules related to Know Your Customer (KYC), Anti-Money Laundering (AML), and Counter the Funding of Terrorism (CFT), much as is now required of banks across the globe. The Financial Action Task Force (FATF) spent a year developing and reviewing their proposed rules, which will be finalized by the end of this month. The G20 meeting was held this past weekend in Fukuoka, Japan.
The G20 group stated in its communiqué:
Technological innovations, including those underlying crypto-assets, can deliver significant benefits to the financial system and the broader economy. While crypto-assets do not pose a threat to global financial stability at this point, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering (AML) and countering the financing of terrorism (CFT)… We also continue to step up efforts to enhance cyber resilience, and welcome progress on the FSB’s initiative to identify effective practices for response to and recovery from cyber incidents.
The latter reference was to the work of the Financial Stability Board (FSB), as it searches for effective means to counter the prevalence of cyber-hacking attacks in the crypto industry. The G20 group is also open to receiving results from any related body of ongoing work that might help regulators deal with any “gaps” in crypto regulation. It specifically asked for the FSB and “other standard setting bodies to monitor risks and consider work on additional multilateral responses as needed.”
There had been speculation before the meeting that the FATF might make a few modifications in its proposals, based on input from Chainalysis, a respected crypto research firm. As we reported last month, Chainalysis had noted several stumbling blocks: “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… 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.”
The firm went on to state that:
There is no infrastructure to transmit information between cryptocurrency businesses today, and no one has the ability to change how cryptocurrency blockchains work,” but Jesse Spiro, head of policy at Chainalysis, had informed the press before the meeting that he did not expect the FATF to make any changes in its proposed guidelines. His direct response was: “It would surprise us if FATF substantially modified the pre-existing draft in any major substantive way.
Spiro based his comments on the belief that FATF officials were only reiterating the needs of the banking and regulatory industry that “certain standards, including proper Know Your Customer (KYC), enhanced due diligence (EDD), transaction monitoring, and suspicious activity reporting are necessary to combat money laundering”.
Most all crypto exchanges have some form of KYC rules in place today, but nowhere near the level contemplated in these new guidelines. Per one report:
In addition to verifying and keeping records of their users’ identities, exchanges and other service providers would have to pass customer information to each other when transferring funds, just as banks are required to do – a procedure known in the U.S. as the travel rule.
The debate has always been how to maintain the anonymity of the blockchain, while satisfying the KYC/AML/CFT requirements of regulators. It has been a “Holy War” of sorts between crypto zealots and libertarians and the banking and regulatory establishment. If cryptocurrencies are ever to mature to the next level, this issue must be faced directly by the crypto industry.
Alexander Zaidelson, the CEO of a privacy coin-centered Beam, noted: “I think that a balance should be found between privacy and compliance, where people can choose the level of compliance that works for them. It is similar to how cash works today – private people do not need to report cash transactions, but businesses do.”
It is not possible to check every PC and every mobile phone for the presence of a crypto wallet. It is not possible to block the Internet. Instead of engaging in a futile fight against anonymous cryptocurrency, the regulators should work together with the developers and find ways to make them a part of the existing ecosystem.
Bitcoin, which typically reacts negatively to regulatory pronouncements such as these, dipped to $7,500 on the news, but it has since recovered lost ground and rests at $7,900, its average for the past thirty days.