The battle has been enjoined. The “cat-and-mouse-game” has come to a close. Global regulators have finally united behind new guidelines produced by the Financial Action Task Force (FATF) to mount a singular assault on the anonymity feature of blockchain technology and end their collective angst over all things crypto. Chainalysis, a respected crypto research firm, had worked diligently with the FATF to guide them on what was possible and impossible within the crypto space, but the G20 sponsored group was having none of it, when it came to complete compliance with KYC/AML/CTF regs.
The finance ministers of the G20 group, primarily a subset of global central banking types, met earlier this month to review and endorse the FATF proposals, which had not been modified, based on the recommendations from Chainalysis. An official G20 summit is scheduled for June 28 and 29 in Osaka, Japan, to ostensibly adopt and implement the proposed guidelines of the FATF. Major crypto exchange executives have been rushing about, trying to arrange a sit down, being term a “V20 Summit”, with finance leaders and global policymakers to debate the controversial anti-anonymity data gathering proposal.
The focus of the debate will be on this proposal: “Global regulators [are] to ensure that “virtual asset service providers” – exchanges, custodian banks and others involved in the crypto markets – collect, hold and remit information on the counterparties to customers’ trades executed on their platforms, and make this available to law enforcement”. There are more related details: “[All companies are] to collect information about customers initiating transactions of over $1,000 or 1,000 euros, as well as details about the recipients of the funds, and to send that data to the recipient’s service provider along with each transaction.”
The proposals sound simple and straightforward enough, so what is the big problem? As Malcolm Wright, chief compliance officer at Diginex, a digital asset financial services firm with asset management licenses in Hong Kong, notes: “It’s an overlay of what happens in traditional banking put in the context of what happens in crypto.” The issue is that this rather simple rule is not feasible within the realm of blockchain technology.
Comments from major exchanges were swift. Here are just a few noteworthy remarks:
- John Roth, chief compliance and ethics officer at Seattle-based exchange Bittrex, which has about $58 million in daily-trading volume: “It’s either going to require a complete and fundamental restructuring of blockchain technology, or it’s going to require a global parallel system to be sort of constructed among the 200 or so exchanges in the world. You can imagine difficulties in trying to build something like that.”
- Mary Beth Buchanan, general counsel at San Francisco-based Kraken, which does about $195 million in daily volume: “Without enhanced technology systems, this is a case of trying to apply 20th-century rules to 21st-century technology. There’s not a technological solution that would allow us to fully comply. We are working with international exchanges to try to come up with a solution.”
- Jeff Horowitz, chief compliance officer at San Francisco-based Coinbase: “I get why the FATF wants to do this. But applying bank regulations to this industry could drive more people to conduct person-to-person transactions, which would result in less transparency for law enforcement. The FATF really needs to consider the many unintended consequences of applying this specific rule to virtual-asset service providers.”
To date, executives from several large crypto exchanges have confirmed their plans to attend the quickly arranged “V20 Summit”, including Circle, Coinbase, bitFlyer, Kraken, and Huobi. The group has also invited finance leaders, regulators, and policymakers to attend, as well, in the hope that some accommodation can be reached to develop a solution that will address the information needs for all participants in a crypto transaction going forward. Per Eric Turner, director of research at crypto researcher Messari Inc.:
[It’s] one of the biggest threats to crypto today. Their recommendation could have a much larger impact than the SEC or any other regulator has had to date.
In order for the crypto industry to mature to the next level and achieve the level of awareness and adoption desired, the anonymity issue must be addressed head on and resolved favorably. Per Elaine Sun, chief compliance officer at Huobi Group, one of the world’s largest cryptocurrency exchanges by volume:
Direct conversations with FATF to clarify the unique nature of the crypto industry will help to build a mutual understanding of regulatory exposure, and find industry-wide solutions to manage such exposures.