Overreach or Necessary Correction? Why FATF Guidelines on Blockchain Are a Good First Step
By Michael Ou, CEO of CoolBitX, a blockchain security company and creator of the first mobile hardware wallet for digital assets
The Financial Action Task Force (FATF) is a globally important organization, but you’d be forgiven for going a bit cross-eyed while reviewing notes on the FATF’s “Paragraph 7(b), R. 16”. However, within this dry piece of bureaucratic prose resides regulatory recommendations that could radically alter how the global blockchain industry operates.
Many cryptocurrency and blockchain firms protesting the Task Force’s anti-money laundering (AML) mandate claim that there are insurmountable barriers to full compliance with its AML recommendations. Yet the truth is these recommendations are not only technically feasible – but vital to the good health of industry in the future.
When digital assets like cryptocurrencies were first introduced, early adopters touted that they were untraceable, nontaxable, and unencumbered by regulations. While the technology was accomplished, some of its side effects were lamentable: for many, digital assets became synonymous with suspicious behavior and shady characters.
Though digital assets have shed their bad reputation and inspired a multibillion-dollar industry, too many in the industry still insist that cryptocurrency transactions cannot or should not be traced.
How does this relate to the FATF? In its thirty years of operation, this body has demonstrated that it has little patience for excuses and makes few exceptions for countries, companies, or individuals who fail to adhere to standard financial practices.
If you consider the organization’s history, paragraph 7(b) seems inevitable. The offending section argues that “virtual asset service providers,” commonly called VASPs, should be able to consistently track and conclusively identify senders and receivers of digital assets to ensure that they are not abused in money laundering or terrorist financing.
The FATF’s February 2019 proposal — remember that it was a draft and that the organization invites comments before finalizing its guidelines — led to a huge outcry from the blockchain community. The UK-based Electronic Money Association, for one, asserted that the current phrasing would place “unnecessary burdens ” on any number of transfers, while blockchain exploration firm Chainalysis accused the FATF of “forcing onerous investment and friction ” upon cryptocurrency exchanges and other digital asset projects. Chainalysis even concluded that the recommendations, if implemented, would make digital assets less transparent than they are at present.
Chainalysis and EMA deserve the respect that the blockchain community has always afforded them, but in this case they may have gone slightly awry. Although the vast majority of digital asset transactions are legal and honest, bad actors still remain on the fringes of this new economic system. This is disconcerting, but technology exists that would allow for cheap, automated, and speedy verification of all digital asset transactions.
What’s at stake?
In 2018, there was roughly $600 million of dark web bitcoin transactions. Though this large sum of money represents just a small portion of today’s digital economy, we must operate on the principle that any dollar laundered is one dollar too many. Current proposals would flag movements of money over $1000 USD, but smaller sums might go unflagged and unexamined: Know Your Customer (KYC) and Anti-Money Laundering (AML) rules would only apply when transactions reached four figures.
There are no technical reasons that preclude a more thorough implementation of KYC/AML; since the technology is available to make every transaction more secure, why should we hesitate to implement it?
Digital assets, blockchain products, and cryptocurrencies are fast becoming essential commodities for twenty-first-century investors. Although their first decade was marred by rapidly decreasing illicit activity, we have the opportunity to make redefine them as the most secure, most trustworthy, and least exploitable asset class. The Financial Action Task Force has provided valuable insight into how this might be accomplished, yet we should take paragraph 7(b) as a starting point, not a conclusion.
There’s work to be done, it’s true, but the tools we need for it are already at hand. A bright future awaits.