The Financial Action Task Force (FATF): The Unseen Regulatory Force
The Financial Action Task Force on Money Laundering (FATF) is perhaps the most important organization you’ve never heard of. The G-7, which is essentially a club for the world’s wealthiest nations, set up the FATF in 1989. The mandate of the FATF is to create a global legal and surveillance infrastructure to combat money laundering.
Since then, the FATF has churned out one report after another to encourage member countries to enact stricter anti-money-laundering rules.
FATF’s Latest Target: Cryptocurrencies
The FATF’s most recent initiative has been to call for a global crackdown on cryptocurrencies, which it calls virtual currencies. It characterizes virtual currencies as an increasing threat for money laundering and terrorist financing. The “best practices” guidelines the FATF has developed require countries to register virtual currency exchanges and custodians. These companies will be obligated to follow the same detailed “know your customer” rules traditional financial institutions like banks must already enforce.
Countries like China and India have implemented restrictions on cryptocurrency trading. However, enforcing these bans can be challenging due to the decentralized and peer-to-peer nature of many crypto transactions.
Another far-reaching requirement will be to initiate a “travel rule” for every transfer of value in virtual currencies. Exchanges and custodians will have to determine the beneficial owner of both the sender and recipient in any such transfer. They’ll also need to pass this information along to each other when transferring funds.
If that’s too much trouble and a country doesn’t want to deal with virtual currencies, the FATF guidance suggests it’s OK to ban them altogether. Countries like Saudi Arabia, Vietnam, and Pakistan have already done this. In Saudi Arabia, cryptocurrencies have been banned, aligning with the FATF’s push for stricter regulation. However, the decentralized nature of crypto may still pose challenges for enforcement.
The Limits of FATF’s Heavy-Handed Approach
But the FATF’s heavy-handed attempt to force crypto exchanges to abide by the same rules as banks isn’t going to work. That’s because crypto transactions occur peer-to-peer, without a middleman. Many individuals and companies who use cryptos rely on exchanges for convenience. However, a significant number of transactions take place outside the exchange environment.
Even if a transaction originates on an exchange, what the FATF calls the “beneficiary” might not be a cryptocurrency account on another exchange. For instance, the value could be transferred into a digital wallet on a flash drive that is unable to accept identifying information. The decentralized nature of blockchain technology further complicates compliance. Blockchains were designed specifically to operate without the need for trust in intermediaries.
Moreover, it may be impossible to reprogram blockchains to incorporate the data that the FATF insists should be conveyed with each transfer.
The Shutdown of Crypto Exchanges
Even if governments manage to shut down centralized crypto exchanges, users can still transact. The peer-to-peer nature of cryptocurrency transactions ensures they do not need to rely on these platforms.
The new standards will force many, if not all, crypto exchanges to shut down. Jarek Jakubcek, a strategy analyst at Europol, the European Union law enforcement agency, says that would be counterproductive to law enforcement efforts. As he puts it:
“The majority of exchange-to-exchange transactions are related to trading activities that are naturally not criminal … Reallocating compliance resources at a high number of relatively low-risk transactions will move the emphasis away from flagging criminal transactions to focusing on low-risk transactions, which will naturally hurt crime prevention … The only benefit for the exchange will be a formal check in a compliance checkbox.”
The Coming Global Push for FATF Standards
Still, I think there is a high probability that most countries will adopt the FATF standards, including the travel rule.
Treasury Secretary Mnuchin seems to agree. In a press conference on July 19, he informed reporters that both the G7 and the G20 supported increased regulation of the crypto market. The G20, which includes a larger group of wealthy nations than the G7, is aligned with this regulatory effort.
Mnuchin went on to highlight the work of the Financial Stability Oversight Council Working Group on Digital Assets, which the Treasury Department created last year. If Uncle Sam plans a frontal assault on crypto, the working group will likely coordinate the attack.
Expanding Anti-Money Laundering Laws: A Threat to Travelers
One proposal that will likely be resurrected is a 2017 bill called the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act. It would expand the current anti-money-laundering rules and require travelers crossing a US border to declare “any prepaid access device.” This includes items such as prepaid debit cards, gift cards, phone cards, and, of course, cryptocurrencies in their calculation of carried value. All travelers must report a combined value of $10,000 or more when they cross a US border. This could particularly affect crypto users, especially those dealing with cross-border payments.
The new rules would change border-crossing requirements for thousands of travelers.
If you’re arrested for failing to comply with the new rules, Uncle Sam could secretly file a motion in federal court. This could result in a restraining order that allows the confiscation of every asset you own under federal civil forfeiture laws. Even your safe deposit box could be cleaned out. You could lose all your property without being tried or convicted of any crime. The restraining order could be extended indefinitely.
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Peer-to-Peer: Why Crypto Won’t Be Stopped
But it will be impossible for any government to put the crypto genie back in the bottle. Even if every country simultaneously shuts down every crypto exchange in the world, crypto won’t die.
Crypto exchanges represent only a small portion of the crypto ecosystem. If exchanges are shut down, crypto transactions will revert to their original design. They will function as envisioned by Bitcoin’s inventor, who used the name Satoshi Nakamoto. They will occur peer-to-peer, with no middleman standing in the way. This method, though less convenient than using centralized exchanges, allows cryptocurrencies to persist. It ensures they can continue to thrive even in heavy regulatory environments.
And peer-to-peer crypto exchanges can be virtually untraceable.
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