Crypto industry at the crossroads. Part 1

    08 Aug 2021

    The AML / CFT requirements for crypto business are becoming more and more stringent. And as ShapeShift’s recent refusal to cooperate with regulators and transition to DEX status demonstrates, not everyone is ready to accept this. But what comes next?

    While BTC is growing and trading at around the $ 40,000 mark, the crypto industry is generally full of optimism. However, increasingly you can hear alarm bells going off. For example, US senators intend to toughen taxation and raise an additional $ 28 billion in taxes on cryptocurrency. Specifically, there are plans to expand the requirements for crypto accounting and reporting at the legislative level and closely monitor all transactions worth over $ 10,000.

    At the same time, Europe wants to require all owners of crypto wallets to get verified, stop using anonymous cryptocurrencies, and diligently comply with AML/CFT standards. So people are encouraged to abandon one of the key advantages of cryptocurrencies – anonymity. Will they go for it?

    Here is a story from many years ago, that happened in country, where the author of these lines worked as a finance journalist. One senior financial official responsible, among other things, for the fight against money laundering, in a long off-the-record conversation admitted using cryptocurrencies and anonymous debit cards himself and said he would be very upset if they were banned in his country:

    “This may sound ridiculous, and I try not to tell anyone about it, but I have a phobia – I am terrified of aliens, have been since childhood. I have to see a therapist because of it regularly. But I cannot reveal these expenses – the tipsy official admitted. – My party won’t accept it, I will be ridiculed and removed from office under a plausible pretext. And generally speaking, in real life there are always lots of situations when you need anonymous payments, and this has nothing to do with crime.”

    Indeed, what’s happening today in developed countries under the guise of combating money laundering, tax evasion, and terrorism financing is nothing if not obscene: People simply get denied their rights to private financial life.

    Although in fairness, it must be said that the foundation of the current tightening of rules was laid on June 21, 2019, when the intergovernmental Financial Action Task Force (FATF), with representatives from 37 countries, published the final list of recommendations to prevent money laundering and terrorist financing through cryptocurrencies. And even though the FATF recommendations are not binding, most countries around the world are still striving to bring their legislation in line with them.

    Experts fear that the new FATF requirements if adopted by most countries, could significantly impact the crypto industry. Tighter regulation will complicate the work of the largest crypto exchanges and cryptocurrency wallet operators, as they will have to identify even small transactions. Until now, most exchanges didn’t have to go through the whole KYC (“know your customer”) procedure for small users who deposit and withdraw cryptocurrencies in the range of a few thousand dollars per day.

    One of the main innovations introduced by the FATF was a provision obliging cryptocurrency service operators to disclose client information when they make a $ 1000 or more transfer. And not just about fiat currency transfers, but also about cryptocurrency transactions, which essentially spells the end of the legal anonymity era.

    In countries where the largest cryptocurrency exchanges are registered, state regulators adopting the recommendations will greatly shake up the market and make harder the work of both exchanges and traders, which is exactly what we are now seeing happening with Binance being pressured by regulators in various places across the world.

    Calling the “threat of criminal and terrorist misuse of virtual assets” a “serious and urgent” issue, the FATF now demands local laws to be drafted in compliance with the new requirements. This means that all operators of cryptocurrency-related services will be obligated to obtain a regulatory license in their country. Another point of the new FATF rules will affect individuals regularly conducting cryptocurrency transactions, primarily private exchangers and P2P traders, who will face special terms imposed on them.

    The FATF also recommends prohibiting cryptocurrency services from hiding the real senders and recipients of transactions, including through the use of mixers and anonymous cryptocurrencies. Services unable to control the use of such methods might get closed by regulators. Finally, crypto service operators will be required to monitor and prohibit transactions for individuals and organizations under international sanctions.

    While it’s true that the FATF member countries are not formally obliged to fully or partially comply with the organization’s rules and recommendations, a government that ignores the FATF standards for combating money laundering will be blackballed from the international market. That will seriously complicate things like obtaining foreign investment for companies from this country. It will be much more difficult for its banks to receive loans from banks in Europe and the United States and carry out any international transactions – those will have to be checked multiple times. Simply put, the adoption of the FATF standards is a prerequisite for cooperation with European financial institutions.

    Right now, it is the new FATF rules that are causing a global tightening of cryptocurrency regulation. So far, nothing indicates that the actions of the FATF can significantly reduce the volume of cryptocurrency transactions or significantly raise transaction fees. But the fact that it has become more difficult for exchanges and exchangers to work is apparent.

    What will be the industry’s response to the growing pressure? The existing paradox will probably have to be eliminated. Cryptocurrencies and blockchain technology themselves embody of the very idea of ​​decentralization. On the contrary, crypto companies are very centralized, following the classic businesses model. Now they have to make a choice: exist under strict state control or leave for the Extra Jus space…

    To be continued…

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