FATF’s New Recommendations Regulate Crypto Exchanges

This article investigates the new FATF’s recommendations concerning crypto services.

What is FATF?

The FATF (Financial Action Task Force, FATF) is set up by the G7 with the participation of the European Commission during the G7 Paris meeting in July 1989.

The creation of the Group was a response to the increased laundering of criminal proceeds worldwide. Given the difficulty of identifying dirty money in the international financial system, an understanding of the urgency of developing collective measures to counter financial crimes has arisen.

Currently, the FATF includes 36 member countries and two international organizations.

The main instrument of the FATF in the implementation of its mandate are 40 recommendations in the field of AML / CFT, which are audited on average once every five years, and 9 special recommendations in the field of countering the financing of terrorism, developed after September 11, 2001.

Why Bother With Regulations?

The Financial Action Task Force on Money Laundering (FATF) has updated its recommendations regarding digital asset management. Amendments tighten control over the activities of cryptocurrency market providers. Thus, regulators are recommended to introduce compulsory licensing of such sites, as well as those engaged in P2P-trade in cryptocurrencies. In addition, the exchange must establish the exchange of information about customers, as well as prevent transactions of persons under sanctions.

FATF strengthens control over cryptocurrency services. At the end of last week, the international group published an updated Guide to Risk-Based Approaches to Digital Assets and Digital Service Providers. Provisions relating to the control of the new financial industry were included in Recommendation 15 (R15) of the FATF standards in October 2018. They concern the regulation of the development of new technologies and products, including new delivery mechanisms.

“The threat of criminal and terrorist use of virtual assets is serious and urgent, and the FATF expects all countries to take immediate action to implement the recommendations,” the organization said. The results of their use are planned to be estimated in June 2020.

The document, in particular, prescribes to control the exchange of customer information between market participants. Thus, cryptoservice operators (for example, stock exchanges) when withdrawing funds to another site will have to provide this site not only with a set of personal data (name, surname, number and passport series, actual address of residence) of both the sender and recipient of funds, their accounts and cryptographic addresses.

It is not only about fiat, but also about cryptocurrency operations. In fact, all transactions, even the smallest ones, will be subject to control, whereas now crypto service operators do not require mandatory KYC / AML procedures when transferring small amounts (up to $ 1–2 thousand per day). “This will be an additional burden on the infrastructure and will significantly reduce the conversion of registrations of new customers on the stock exchanges,” says the head of crypto-exchange in Huobi Russia, Andrei Grachev. In addition, he points out, at the first stage of the application of the norm, unverified customers may have problems with withdrawing funds from wallets.

Are The New Regulations Possible?

On the one hand, this provision threatens the existence of anonymous digital currencies, as they will be de-listed from licensed exchanges, said Roman Zabuga, an anonymous messenger from Crypviser. On the other hand, decentralized exchanges (such as IDEX) are being actively developed, where anonymous assets will continue to be accessed. At the same time, the results of the application of the new norm will probably cause the fluctuating countries, which are members of the FATF, to decide in favor of the circulation of cryptocurrencies, Mr Zabuga points out.

Another important item of recommendations is the compulsory licensing of all digital service operators operating in the FATF participating country. Moreover, this rule can also be applied to individuals who regularly perform cryptocurrency transactions. It can be, for example, about private exchanges of digital currencies, as well as traders involved in trading digital assets on P2P platforms. In addition, the FATF recommends that regulators register foreign digital services in their jurisdiction.

It is likely that the regulators will follow the path of the classical securities trading system, where an individual does not have the ability to perform operations directly without an intermediary. However, the mechanisms for identifying such persons and suppressing their activities in the world have not yet been formed. “Here we need to take into account the issues of qualification of individuals because there are risks of creating a new grey sphere of trust management,” adds Mr. Zabuga.

In addition, it is stated in the document that service operators will have to monitor and block transactions with digital assets for persons and organizations under international sanctions (UN list), by analogy with the standard for classical financial organizations.

The Future After The New Regulations

As mentioned above, FATF members are not formally obliged to fully or partially follow the rules and recommendations of this group. But in fact, a country that ignores the implementation of the FATF standards for combating money laundering will receive a black mark on the international market, which will seriously complicate for companies from this country, for example, receiving foreign investment.

The new FATF rules will undoubtedly lead to a global tightening of cryptocurrency regulation, although they will make the market more “clean”. The turnover of most exchanges will fall due to a decrease in the flow of “dirty” money, which will go to unregulated sites and to the P2P market. Having a legislative base at their disposal, over time, regulators will get to the over-the-counter market and, quite likely, they can start hunting for private traders and small exchangers. Anonymous cryptocurrencies will get a serious blow, in many jurisdictions their use can be completely prohibited.

As a result, over the next 2–3 years, the cryptocurrency market expects significant changes with increased state control over the business, which will lead to an even greater separation of the “white” and “black and gray” cryptocurrency turnover.

Conclusions

However, it can be assumed that the recommendations will still receive the support of regulators since many of them are interested in developing such rules.

For example, authorities in many countries are already talking about the need to create regulatory standards for crypto industry — recently G20 countries have appealed to the Financial Stability Board to strengthen monitoring of the cryptocurrency market and to develop measures to counter the risks associated with digital currencies.

Some predict that excessive FATF rigor will not promote market transparency, but quite the opposite, it may force many cryptocurrency companies to switch to the black market.

Originally published at https://changenow.io on July 15, 2019.