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The FATF, the Financial Action Task Force, is an international organisation focused on preventing money laundering and financial terrorism. On June 21st, it published new guidelines on regulating cryptocurrencies, requiring that crypto exchanges identify their users and share that data.

The publication of the new recommendations comes just days before the FATF’s new President starts his period of office. Xiangmin Liu, of the People’s Republic of China, took up the position of President of the FATF on 1stJuly 2019, succeeding Marshall Billingslea of the USA. Xiangmin Liu is Director General of the Legal Department at the People’s Bank of China, responsible for developing many of China’s key financial sector regulations, policies and legislation. In his statement of objectives for 2019-2020, the new FATF President states:

“The FATF has for many years acted to identify and mitigate the risks of technological developments in financial services, from issuing guidance for a risk-based approach to pre-paid cards, mobile payments and internet-based payment services, to setting the first global standards for the regulation of virtual assets, including crypto assets. Under the Chinese Presidency, the FATF will develop the methodology for countries to be assessed against the standard for virtual assets, and it will start assessing FATF members for effective compliance with it.

“New technologies also provide opportunities for improvements to the efficiency and effectiveness of AML/CFT controls, both for supervision and for the benefit of financial intelligence units in their analysis of suspicious transaction reports.

“Recognising the need to harness these opportunities, under this Presidency, FATF will issue guidance on the use of digital ID. This will support supervisors and help the private sector realise savings and improve the effectiveness of customer due diligence measures, while mitigating the risks that may arise.

“Through this and further work to explore the opportunities provided by technology, the FATF will promote financial inclusion and the implementation of effective AML/CFT measures. This should enable and support more dynamic risk assessment and timely action by regulated entities to mitigate those risks, as well as more effective and risk-based supervision by national authorities. ….

“….Financial institutions continue to attract attention for the wrong reasons and find themselves the focus of increasingly large-scale money laundering as highlighted by investigations and sanctions by law enforcement agencies and supervisors.”

“The FATF will continue to strengthen the capacity and effectiveness of criminal justice systems, including the investigation and prosecution of money laundering and terrorist financing.”

Regulating the crypto industry has been much discussed internationally for some years, but there has been little in the way of co-ordinated legislation or standards. As an intergovernmental organisation, the FATF’s new standards are likely to be implemented by its 200 member states.

According to a report by Bloomberg, the new rules state that all virtual asset service providers (VASPs) will be required to collect information about their customers and the recipients of funds, and send that data to the receiver’s service provider with every single transaction. The FATF recognises cryptocurrency exchanges as VASPs and the new rules mean that these will be expected to work to the same standards as banks and other financial services providers.

The FATF will commence an audit of its member states in June 2020 to oversee the full implementation of its new rules. There will be penalties and service shutdown sanctions for those who refuse or are unable to apply these rules.

While some, such as US Treasury Secretary, Steven Mnuchin, welcome the new regulatory standards, stating that virtual asset service providers will no longer be able to operate “in the shadows”, not all in the fintech industry have welcomed this move from the FATF.

Many crypto exchanges and wallet providers are not equipped to collect and send the data required by FATF, and the level of investment that is likely to be required to comply with the rules may have an impact on continuing innovation and the pace of the development of crypto entrepreneurship.

While the objective of protecting the customer is widely accepted as an absolute essential, many crypto entrepreneurs are concerned that the principle of financial privacy which underpins cryptocurrency will be undermined and that this will be counterproductive for the crypto ecosystem. VASPs, some argue, deal with peer-to-peer permissionless networks and that these do not require the same standards as banks. They add concerns that these rules have been created under pressure from the traditional world of banking as a means of protection from the disruption caused by the rise of cryptocurrencies and digital assets.

However, on the upside, the new rules may well improve the relationships between crypto entrepreneurs and traditional banks, thereby creating better support for innovation rather than causing the stifling effect that some in the industry fear. Furthermore, once the technical challenges for implementation have been overcome, the rules are likely to have the long term effect of helping the cryptocurrency industry mature and achieve greater mainstream adoption.

At last week’s G20 summit in Osaka, Japan, world leaders welcomed the FATF’s cryptocurrency guidelines, stating: “We reaffirm our commitment to applying the recently amended FATF Standards to virtual assets and related providers for anti-money laundering and countering the financing of terrorism.”