Ahead of the V20 Summit (held alongside the G20 Summit) later this week, the Financial Action Task Force (FATF) has introduced new proposals that aim to set new international standards for crypto businesses. The global body set up by G7 group of countries in response to the threats of money laundering on Friday June 21 adopted an Interpretive Note to its Recommendation 15 of October 2018. Recommendation 15 requires that virtual asset service providers (VASPs) be regulated for anti-money laundering and combating the financing of terrorism (AML/CFT) purposes and subject to effective monitoring or supervision.

It also adopted the present Guidance on the application of the risk-based approach (RBA) to virtual asset (VAs) and VASPs. The Guidance provides examples of risk indicators that should specifically be considered in a VA context with an emphasis on factors that would further obfuscate transactions or inhibit VASPs’ ability to identify customers. FATF intends to use these new measures to help national authorities understand and develop regulatory and supervisory responses to VA activities and VASPs. It also wants “to help private sector entities seeking to engage in VA activities, in understanding their AML/CFT obligations and how they can effectively comply with these requirements.” That is to make businesses seeking to be a VASP understand the key elements required to qualify as one and be able to act on behalf of the customers to  actively facilitate VA-related activities.

From another perspective 

As lawmakers, blockchain groups and VASPs prepare to meet at the Summit in Japan to discuss the FATF recommendations, insiders have voiced their concerns over the viability of these new rules for the evolving crypto industry.

“The new FATF rules are incredibly destructive and will not smother the nascent crypto industry as intended, but instead will serve to push it further from the reach of regulators,” says Jehan Chu, the co-founder of Social Alpha Foundation and Managing Partner at Kenetic. “The long term benefits of FATF standards are an illusion and will not result in the desired regulated outcome. The FATF rule set will strangle the newborn industry with its own umbilical cord, and further leave the ageing banking monopoly to wither and die.”  He notes that cryptocurrency regulation is difficult to enforce and the FATF rules will only accelerate technology that will sidestep or even rebuild a fully anonymous, decentralized financial infrastructure that will eventually challenge the existing regulated system.

For Dave Hodgson, the co-founder of NEM Ventures, the venture capital arm of the NEM blockchain ecosystem, the FATF recommendation may be ineffective due to flawed design especially for a proposed ‘travel rule’ on the crypto industry which he argues will probably increase the volume and prevalence of peer to peer (P2P) transactions.

“They may briefly create the illusion of compliance, pending regulators engaging the industry to see how best to achieve their aims,” Hodgson says. “These recommendations already stray towards breaking the spirit of GDPR by requiring the disclosure of personal information to foreign companies and governments about individuals who are neither citizens, nor conducting business with a particular country, via the enforcement of the ‘travel rule’.”

He added that to ensure compliance, affected parties will be required to invest large amounts of capital to meet these inefficient regulations while the FATF’s proposal may “stifle the ability for new innovative businesses to flourish and disadvantage those crypto institutions that already exist in the process.”