With the FATF expected to release proposals today, setting new international standards for crypto businesses, and with legislators, blockchain associations and VASPs due to gather at the V20 Summit (held alongside the G20 Summit) next week to discuss the FATF’s recommendations, executives in the blockchain space provide a commentary.
Hans-Ole Jochumsen, Advisor at Concordium, the next-generation, decentralized world computer and the first with ID-verification built in at the protocol level, and ex-Vice Chairman of NASDAQ, commented:
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“The international standards proposed by the FATF for regulating cryptocurrency transfers come as no surprise as we expect regulators to contravene not only transaction anonymity, but also other principles upon which blockchain is based, specifically some aspects of decentralization.
While blockchain users require fully private transactions, regulatory agencies with court orders in hand must also retain the power to revoke that privacy if needed. However, as anonymity is the status quo, it is difficult to identify who it is that a court might need to approach with a court order, which is why it is essential that blockchains introduce identity and AML features in order to ensure that businesses remain on the right side of the law and are regulatorily compliant.
It will also be challenging for a blockchain network to deliver on the FATF’s requirements as these protocols are decentralized, and there is currently no existing legal framework to govern the actions of anonymous stakeholders. At this present moment in time, it is not possible to uncover the identities or provenance of past transactions, the protocols’ de facto decision makers willingness to bend to regulatory pressure notwithstanding. However, on a practical level, the technology structures of many of these prominent blockchains might allow modifications.
I believe the next few years will see the emergence of a two-tier blockchain landscape with incumbents, and those capable of supporting regulatory requirements, with the latter having an advantage where traction is concerned over non-compliant networks.”
“The new FATF rules are incredibly destructive and will not smother the nascent crypto industry as intended, but instead will serve to push it further from the reach of regulators. Cryptocurrency regulation is inherently difficult to enforce, and the FATF rules will accelerate technology that will sidestep or even rebuild a fully anonymous, decentralized financial infrastructure that will eventually challenge the existing regulated system.
The travel rule will cause more transactions to be initiated and executed in anonymous systems, well out of the reach of regulators and banks. It will also undermine compliant crypto businesses who are currently self-regulating but will be unable to sustain business when their customer base dries up under this new regime.
The long term benefits of FATF standards are an illusion and will not result in the desired regulated outcome. The FATF ruleset will strangle the newborn industry with its own umbilical cord, and further leave the ageing banking monopoly to wither and die.”
Sebastian Higgs, Director of Business Development at Vo1t, which combines cutting-edge system design with cybersecurity best practices to create the world’s most secure cold-storage vault for digital assets, said:
“This is not like a SWIFT MT202 and MT103 message where you populate bank routing codes, sender and receiver information including the IBAN. Understandably, intermediary institutions have a responsibility here to screen the information of cross-border payments against regulatory filters as decided by local law and FATF16 requirements.
The application to cryptocurrencies presupposes that there is a way for the originating VASP to know who owns the destination address – the only beneficiary information field in order to record the transaction is the address, which is a hash of the public key, nothing identity-based.
VASPs are allies to the regulators, and one of the most effective partners to law enforcement in the industry. However, the application of this rule could encourage peer-to-peer transfer via non-custodial wallets which are significantly harder to track.”
Dave Hodgson, Director and Co-founder of NEM Ventures, the venture capital and investments arm of the NEM blockchain ecosystem, which serves to manage the NEM Community Fund, said:
“The FATF recommendation is likely to be ineffective in achieving its aims due to flawed design. They may briefly create the illusion of compliance, pending regulators engaging the industry to see how best to achieve their aims. While the upcoming V20 Summit – which is set to take place alongside the G20 Summit next week and will see legislators, blockchain associations and some of the biggest VASPs convene to discuss the FATF’s recommendations – is a step in the right direction for the industry, it may unfortunately be too little too late. These recommendations already stray towards breaking the spirit of GDPR by requiring the disclosure of personal information to foreign companies and governments about individuals who are neither citizens, nor conducting business with a particular country, via the enforcement of the ‘travel rule’.
Applying the ‘travel rule’ to the crypto industry will probably result in an increase in the volume and prevalence of P2P, but it’s worth noting that crypto exchange transactions are not the primary source of value transfer between parties. Illegal activity will continue as various privacy techniques to overcome these barriers already exist and are being used, therefore the regulations inconvenience those who are likely operating within the law, making their transactions slower and more expensive. It’s doubtful they will create transparency for law enforcement as people move to other non-exchange based mechanisms to work around the regulations or use encrypted solutions.
To ensure compliance, affected parties will be required to invest large amounts of capital to meet these inefficient regulations in order to continue to offer the same service level to end users. While the FATF’s proposal may further traditional institutional acceptance of crypto, it will stifle the ability for new innovative businesses to flourish and disadvantage those crypto institutions that already exist in the process.”
“Blockchain’s short, albeit colourful, history mirrors the early ‘Wild West’ days of the internet. Both were hailed as revolutionary inventions destined to change the world as we know it, and both are witnessing regulators grapple with new rules as technology is moving to solve problems the state simply cannot. While the new FATF guidelines are unsurprising, there is a very thin line between fostering and stifling innovation, and it remains to be seen which side these new rules will fall under.
Increased regulation in the blockchain and crypto space is a welcome move as it encourages traditional, institutional investors into the space, and thus encourages more mainstream adoption. However, the concern with implementing such strict rules are that they could ultimately kill the advantage of anonymity in crypto transactions, which are their biggest benefit compared to existing solutions. If the rules are too restrictive, the decentralized will simply become centralized.”