Beyond KYC: Global Regulators Appear Set to Adopt Hard New Rules for Crypto Exchanges – CoinDesk

   2020-05-23 21:05

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The Takeaway

The cryptocurrency industry is bracing for forthcoming international regulative standards that would require exchanges to gather and share information about where and to whom they are sending cash.



This would go beyond the fundamental “know your consumer” (KYC) guidelines that bedevil numerous crypto users. In addition to verifying and keeping records of their own users’ identities, exchanges and other company would have to pass consumer details to each other when moving funds, just as banks are needed to do. This is known in the U.S. as the “travel rule”.

Numerous in the blockchain industry have argued that this practice is at finest burdensome if not totally unfeasible with cryptocurrency and apt to drive users away from controlled platforms.

Industry agents just recently made a last-ditch effort to encourage the Financial Action Task Force (FATF), an intergovernmental body, to reconsider or delay the suggested standard.

About 200 to 300 individuals, varying from primary compliance officers of leading exchanges to local bitcoin brokers, went to FATF’s consultative meeting in Vienna, Austria, on Might 6– 7 to voice their concerns.

But the regulators– especially those from the U.S., which holds the FATF’s turning 1 year presidency — appeared set on finalizing the requirement with at the majority of small tweaks, according to 4 individuals who participated in the Vienna meeting and talked to CoinDesk on condition of anonymity.

Sigal Mandelker, the U.S. Treasury’s Under Secretary for Terrorism and Financial Intelligence, reinforced that impression in a speech recently at Agreement 2019 in New York.

For one thing, she said the requirement was on track for publication next month.

“During its presidency of the FATF, the United States has actually dealt with other countries to clarify how all countries ought to control and monitor activities and companies in the digital currency space,” Mandelker said, including:

“We anticipate that in June the FATF will adopt a last variation of its Interpretative Note, in addition to updated guidance to further assist countries and industry with their obligations.”

While Mandelker did not discuss the travel rule, she referenced the 30-page clarifying guidance on cryptocurrency released May 9 by the Financial Crimes Enforcement Network, or FinCEN, a bureau of the Treasury Department. That guidance mentions the travel guideline throughout as something cryptocurrency services must follow.

“I encourage you all to read it closely,” she said.

Square peg, round hole

The Group of 7 (G7) advanced economies produced the FATF to combat money laundering and terrorist financing, and the proposed requirement seeks to avoid such actors from making use of crypto.

“A few of the features of emerging technologies that appeal most to users and companies– like speed of transfers, fast settlement, worldwide reach, and increased anonymity– can likewise produce opportunities for rogue regimes and terrorists,” Mandelker stated in her speech.

At problem is a single paragraph in the interpretive note on “virtual possession service providers” (VASPs), a classification that consists of exchanges and hosted wallet companies, that FATF put out for public remark in February.

Paragraph 7(b) checks out in part:

“Nations ought to ensure that originating VASPs acquire and hold required and precise begetter [sender] information and needed beneficiary [recipient] details on virtual property transfers, send the above information to beneficiary VASPs … and make it offered on demand to appropriate authorities.”

Also, when exchanges receive crypto payments on customers’ behalf, they should have to “get and hold producer details.”

To Joseph Weinberg, co-founder of the blockchain startups Shyft Network and Paycase Financial, this is inserting digital currencies into analog-era practices.

While the travel guideline and comparable regulations were composed for a world when funds were always sent through intermediaries, “cryptocurrency deals can happen from individual to individual, machine, wise agreements, and any other infinite set of possible endpoints– not simply exchanges or organisations,” noted Weinberg, who is likewise a consultant on blockchain issues to the Organisation for Economic Co-operation and Advancement (OECD).

He included:

“This would end up being excessively onerous to handle and might drive the entire environment back into the dark ages.”

A compliance officer at a U.S. exchange was more determined in his evaluation, calling the pending requirements possible, however a “paper-chasing exercise” and a “annoyance” that will not even more police goals.

“We’ll end up bothering good customers and asking them for information we can’t verify,” the executive stated.

Showing the challenge, Global Digital Finance (GDF), a trade group based in London, kept in mind in an April comment letter to the FATF that unlike a wire transfer, which by style needs bank, branch and account numbers for the recipient, a crypto deal needs just an address.

Source: Global Digital Finance

An exchange sending out crypto on a consumer’s behalf “does not understand with any certainty who the location address is owned by, as there is no register of such addresses and new addresses can be developed at any time.” Indeed, the sending exchange can’t be sure whether the recipient address comes from another company, controlled or otherwise, or to a person.

Even more, the proposed reporting requirements might easily be prevented, GDF argued. A consumer could send funds from an exchange to a non-custodial wallet (where the user controls the private keys). The owner of that wallet could then send the coins to somebody at a various exchange, and neither platform would have captured both sides of the transaction.

Source: Global Digital Financing

The standard could have the unintended consequence of “motivating P2P transfers by means of non-custodial wallets, which are substantially harder for law enforcement to track or control,” cautioned the GDF letter, which executives from U.S. exchanges Coinbase and Circle and even bank-owned enterprise blockchain company R3 co-signed.

FATF has teeth

To be sure, even if the FATF does embrace the guidance with the controversial part undamaged, the requirements would not take impact over night. Member nations would initially need to pass legislation or write guidelines putting the suggestions into impact.

Make no error: the oft-used expression “FATF recommendations” understates the company’s impact.

“The FATF recommendations are not legally-binding global law; however, due to the fact that the FATF’s members– 36 economies and two regional bodies– include the biggest and crucial monetary systems on the planet, its guidelines have teeth,” stated Julia Morse, Assistant Teacher in the Department of Political Science at the University of California, Santa Barbara.

“When nations with large financial systems like the United States and the U.K. implement FATF standards, they alter how international banks and financial companies do service worldwide. This develops downstream effects for countries that are not FATF members,” she said.

Even more, the FATF analyzes member nations’ compliance with its standards, and those that do not follow the standards can become pariahs in the global monetary system.

“If non-compliance is serious enough, states/jurisdictions can be put on a FATF graylist or, eventually, a blacklist. That functions as a strong warning to banks all over the world that deals with those jurisdictions are suspect,” stated Mark T. Nance an Associate Professor in the School of Public and International Affairs at North Carolina State University.

In the meantime, market members are waiting for the last guidance and hoping that governments will provide them enough time to concur on an option for sharing details amongst companies.

Industry leaders must be “advising an extended adoption timeframe to make sure correct application and coordination across the industry carry out,” Weinberg said.

There is some precedent for a grace duration: FinCEN settled the U.S. version of the bank travel rule in 1995 but due to required software application changes it was not put into practice until 2004, according to American Lender.

Apart from the functional concerns on exchanges and hosted wallet companies, a travel rule-like requirement will likely be anathema to privacy-conscious crypto users.

Currently uneasy delegating their personally recognizable details (PII) to routine hacking targets, the cypherpunk crowd might chafe at having this sensitive information shared with yet more entities.

As Weinberg put it:

“This would remove pseudonymity as it relates to any regulated entity and with it a significant part of the standard appeal and facility of cryptocurrency.”

Sigal Mandelker image by Anna Baydakova for CoinDesk

This content was originally published here.


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