The Financial Action Task Force (FATF), an intergovernmental organization that coordinates activities to prevent money laundering and terrorist financing across 37 countries and two regional organizations, has established guidelines likely to significantly impact crypto currency exchanges:
“The cryptocurrency market is small and immature compared with markets for traditional stocks and bonds, but the criminals trying to profit from it are among the most sophisticated in the world—and they are reaping bigger and bigger rewards. “Unfortunately, we keep seeing the criminal numbers go up and up and up,” says Dave Jevans, CEO of blockchain analytics firm CipherTrace, which is developing an anti-money-laundering product for exchanges. According to a new report published by the company, thieves and scammers took an estimated $4.26 billion from cryptocurrency exchanges, investors, and users in the first half of 2019. “All of that stuff has to be laundered out,” Jevans says.
What draws criminals to cryptocurrency is the capacity for anonymous, peer-to-peer value transfer. Technically, most cryptocurrency systems are pseudonymous—users are identified publicly, but only by a string of random numbers and letters. Since every transaction is recorded on a public ledger, criminals resort to a range of tactics, including using multiple addresses and exchanges, to cover their tracks as they move ill-gotten money around.
In regulated jurisdictions like the US, Japan, and EU, exchanges—the bridges between the traditional financial system and the cryptocurrency world—are already required to verify the identities of their users, a process commonly called “know your customer.” But many exchanges around the world have lax policies that allow people to move money or cash out without identifying themselves.
The “travel rule”
In June the Financial Action Task Force (FATF; pronounced “fat F”) published a much anticipated, technically nonbinding guidance detailing expectations of how its 37 member jurisdictions should regulate their respective “virtual asset” marketplaces. Here’s the contentious part: whenever a user of one exchange sends cryptocurrency worth more than 1,000 dollars or euros to a user of a different exchange, the originating exchange must “immediately and securely” share identifying information about both the sender and the intended recipient with the beneficiary exchange. That information should also be made available to “appropriate authorities on request.”
Besides deterring would-be money launderers, this makes it possible to blacklist certain individuals who are subject to economic sanctions, as well as entities like terrorist organizations. It’s essentially a crypto version of a US banking regulation commonly called the “travel rule,” which imposes a similar requirement on traditional financial institutions (though the threshold is $3,000). In the US, crypto exchanges are already subject to this rule, according to a recent guidance from the Treasury Department’s Financial Crimes Enforcement Network. The agency just hasn’t started enforcing it yet.
Not so nonbinding
Since the Group of Seven (G7) and influential members of the G20 plan to apply the policy, it really is binding, says Jesse Spiro, global head of policy at Chainalysis, a blockchain analytics firm. In particular, the US, which happens to hold FATF’s rotating presidency, is pushing the issue. Secretary of Commerce Steve Mnuchin has called FATF’s standards “binding to all countries.””
It seems unlikely that this note about state sponsored theft of cryptocurrencies was unrelated to the announcement by FATF.
If interested in crypto, this article from MIT Technology Review is certainly worth reading in full.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group