Crypto lawyers weigh in on new FATF guidance

Though not legally binding, the guidance offers governments advice on how to respond to the development of virtual asset service providers (VASPs) — a categorization which includes exchanges, custodians, and hedge funds.

One of the recommendations, in particular, has caught the attention of the industry. The ‘travel rule’, which is currently applied to wire transfers in the US, would mean exchanges need to swap sensitive customer information when transferring funds — a policy that might not sound the death knell for cryptocurrency, but could introduce significant complications for platforms in jurisdictions that decide to introduce legislation reflecting the new guidance.

The travel rule

Covering the standard fare of licensing, supervisory requirements, and risk, much of the guidance is similar to FinCEN’s existing policy. Crypto lawyer Peter Van Valkenburgh says it represents "no meaningful threat or impediment to the continued vibrancy of cryptocurrency technology."

However, in a move that is ostensibly intended to protect the global financial system against threats like money laundering and terrorist financing, the FATF suggests that exchanges should be required to share information between them. This includes names, account numbers, and geographic addresses associated with cryptocurrency transactions. This would allow governments to identify and report suspicious activity, but it would also potentially expose the data and identities associated with crypto exchange users.

Radoslav Albrecht, CEO of crypto lending service Bitbond, criticized the guidance as being more appropriate for a pre-cryptocurrency world. “Cryptocurrencies and virtual assets are different from fiat, so virtual asset transfers should not have the same status as conventional money transfers,” said Albrecht. “It makes sense to regulate cryptocurrency at the point it interacts with fiat or traditional assets, but to try and limit a decentralized and permissionless infrastructure would inhibit some of the very benefits the technology brings.”

“Creating a clearer and more transparent regulatory framework, that defines which services are held to the same level of account as traditional financial services will help," said Albrecht. "But regulators should avoid restricting the developments of this industry, otherwise they’ll drive some of the best innovation underground.”

Even blockchain forensic firm Chainalysis, which maintains close relations with regulators, advised against the guidance when a preliminary draft was released in April. The firm’s view is that the infrastructure needed for exchanges to comply with the rules simply doesn’t exist, which could mean illicit activity is driven further away from the prying eyes of regulators. “Forcing onerous investment and friction onto regulated VASPs, who are critical allies to law enforcement, could reduce their prevalence, drive activity to decentralized and peer-to-peer exchanges, and lead to further de-risking by financial institutions," said Chainalysis in a response to the suggested guidance. "Such measures would decrease the transparency that is currently available to law enforcement.”

But while global exchanges might struggle to comply with the rules, FinCEN-regulated exchanges in the US have long been subject to similar standards, and already must disclose the identities of all participants involved in digital currency transfers greater than $3,000.

A rule made to be broken?

If the FATF has its way, then cryptocurrency exchanges across all member jurisdictions will be submitting transaction details within 12 months. But as the guidelines only represent an indication of preferred policy, there is no legal mandate for jurisdictions to comply, and as crypto attorney Jake Chervinsky points out, they often do not. "The more important the financial center, the less likely it is to hand over control of its regulatory regime to an international organization like FATF," tweeted Chervinsky. "Member countries can adopt all, some, or none of FATF’s recommendations. There are basically no repercussions for not adopting (or for violating) FATF recommendations."

Despite this, some jurisdictions have already begun to move into alignment with the new guidance. In an announcement that coincided with the release of the new rulebook, Brazil — whose president Jair Bolsonaro recently claimed to be ignorant of bitcoin — said that it will mirror the American approach to anti-money laundering.

Under new regulations, cryptocurrency exchanges in the country are required to inform the Federal Revenue of Brazil (RFB) of all transactions performed regardless of value, with customers themselves held responsible for reporting transactions to exchanges abroad when the value exceeds 30,000 Brazilian Real ($7,800).