As far as anonymity in the crypto exchange universe is concerned, it is time to put up or shut up. The battle that everyone has been expecting after a decade of non-compliance has finally come to a head. The regulatory establishment, via the FATF proposals that were adopted by G20 finance ministers last June, will no longer sit idly by, waiting for the crypto industry to self-police its activities. The “travel rule”, as it has been called, will be in effect a year from last June. There are only eight months to the deadline, and the global network of 200+ crypto exchanges is reacting, although differently, at every level.
What is this “travel rule”? Per a recent Cointelegraph exposé: “In what has now become known as the travel rule, the FATF guidelines require regulators and Virtual Asset Service Providers (VASPs) — namely, exchanges from various countries worldwide — to collect and share personal data during transactions. The recommendation imposes the same standards on the cryptocurrency sector that are normally shouldered by the banking industry.” Each jurisdiction will adopt its own rules, but the clock is ticking.
This anonymity “face-off” has been brewing for some time. The efforts taken by the Financial Action Task Force (FATF) are only the latest in a long line of antagonistic threats to rule all cryptocurrencies as illegal in the eyes of regulators, government officials, and law enforcement authorities across the planet. The perception, whether or not it is the actual reality of the situation, is that the blockchain affords the criminal element of our society a “safe haven”, a place where identities are unknown and illicit activities are allowed to thrive and prosper at the expense of the public at large.
Legitimate exchanges want regulatory oversight and the credibility that it brings to the industry. Unfortunately, there is a small percentage of exchanges that persists due to the anonymity cloak of disguise they can provide. Ryan Taylor, CEO of Dash Core Group, told Cointelegraph: “Thus far, it appears that exchanges are preparing to address the recommendations put forward by the FATF. However, because the FATF guidance must be implemented in local jurisdictions around the world, and those jurisdictions will undoubtedly act on the guidance differently, exchanges are struggling to understand the specific requirements they will need to meet. For now, that is a guessing game for them.”
Unfortunately, the “bad actors” in the network will make the transition difficult. John Roth, chief compliance and ethics officer at American cryptocurrency exchange Bittrex, explains: “The new guidance about emerging technology is not a surprise. The industry is currently split between compliant, regulated exchanges and those that are not. Hopefully the attention FATF is giving to the space will force non-compliant exchanges to join the mainstream. Currently, exchanges that chose to bear the costs of compliance, which are considerable, are at a competitive disadvantage in the global marketplace. Uniform rules uniformly enforced will level the playing field.”
Roth goes on to add: “Criminal actors do not need to use exchanges to engage in money laundering, and in fact are well advised to stay away. This means that while compliant exchanges and honest actors will bear the cost and inefficiencies involved in the rule, criminal actors can circumvent the requirements with a click of a mouse. It increases the costs and complexity of compliance without addressing the real concerns about money laundering.” In other words, crooks will use cash, as they always have.
Many industry insiders are still disappointed that the FATF and regulators refuse to acknowledge the limitations of blockchain technology and the technical problems that exist that will stall the implementation of the “travel rule”. Chainalysis, a crypto analytics firm that had counseled the FATF during its deliberations regarding how to correct the ills of crypto anonymity, had proffered the idea of an industry-wide data sharing “overlay” system that could solve the problem, but no one is supporting this approach at this time.
Binance recently announced that it plans to delegate this compliance activity to a little known firm in London by the name of Coinfirm. This company is “a UK-based risk and compliance platform that was founded in 2016 to deal with technology issues surrounding KYC and AML compliance”. How this firm will perform its magic has not been disclosed, but it will most likely involve an online, real time negative file that is continually updated with information that will support compliance requirements.
Cointelegraph concludes its report by saying that: “The travel rule from the FATF is a sign that the time has come to establish a boundary between regulation, technology and privacy. But what remains unclear is where that line should be drawn. As it stands, only the most private currencies face a serious existential crisis. With time quickly running out, VASPs are still scratching their heads about how to negotiate the looming regulations. Those that don’t comply will find themselves left out in the cold.”