How rapid Travel Rule moves softened the FATF on cryptocurrency

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Copper Team

It took just days for the new president of the Financial Action Task Force to show his hand on how he will support global cryptocurrency and blockchain regulations.

Germany’s Marcus Pleyer assumed the top role of the intergovernmental money-laundering and terrorist financing watchdog on 1 July 2020.

Right at the top of his two-year priority list is the digital transformation of KYC and AML rules.

Pleyer’s Chinese predecessor Xiangmin Liu initiated early discussions on how the cryptocurrency industry must abide by the financial services Travel Rule.

To coincide with Pleyer’s new leadership role, the FATFs’s 12 month review of Virtual Asset Service Providers landed on the mat on 7 July 2020.

The FATF is both incredibly powerful and notoriously difficult to please.

So it was perhaps a little surprising to read in the report that “while the supervision of [cryptoasset service providers] and implementation of AML/CFT obligations is generally nascent, there is evidence of progress…in particular in the development of solutions to enable the implementation of the Travel Rule.”

“The public and private sectors have made progress in implementing the revised FATF standards,” the report says, with 35 out of 54 reporting jurisdictions already having put the standards in place. 32 of these locations are actively regulating cryptoasset companies while three have banned their operations.

Overall, the language speaks to a general softening of tone — away from the punitive and more towards a collaborative mode of working.

Have crypto, will travel

It’s fair to say that in October 2018 when the FATF announced plans to apply its ‘Travel Rule’ to the sector, this upended cryptocurrency policy discussions across the globe.

The hammer dropped in June 2019 when the body finalised its recommendations.

Under the intergovernmental guidance, any person who receives over $1,000 must be identified, and their personal data must ‘travel’ with those transactions.

The deadline for compliance was originally June 2020. This terrified a lot of crypto businesses. No entrepreneurial business wants to be left out in the cold for failing to follow international financial guidelines.

But it turns out to have been a soft deadline rather than a cliff edge.

That does give the cryptocurrency industry a little breathing space to consider how best to align itself on the right side of compliance.

There have been some meaningful attempts from various quarters to solve this intractable issue.

First came Ciphertrace in July last year, which said it had created software that would create a validation certificate to confirm transactions sent between exchanges and wallets. At the time the company’s marketing lead John Jeffries summed up the situation: “The industry has said it’s virtually impossible to adhere to the Travel Rule. The reality is it can be done.”

So began the arms race to solve the Travel Rule. Now a flood of potential solutions are coming to the fore.

Dutch multinational ING became the first bank to put forward a solution in June 2020, with its ‘FATF-Friendly’ protocol for tracking transfers, while small startups like Notabene are pushing their own KYC infrastructure stack aimed at less regulatorily secure markets in Latin America and Africa. Custodian BitGo is one of the latest large operators to put forward its own solution.

Inside, not outside

Despite early protests that implementing this guideline would cripple the industry, leading players have shown a keen willingness to work within the system.

Coindesk reporter Ian Allison put it best earlier this year when he wrote: “Although it goes against the grain to shoehorn an identity layer onto a technology specifically designed to be pseudonymous, firms have no choice if they want to abide by the law. The shape and form this will take is something the industry must agree on, and fast.”

After a March 2020 G20 summit in Riyadh, Saudi Arabia, the message was clear. The world’s 20 leading economies supported the introduction of the Travel Rule.

In particular, central banks and economists backed the idea that cryptoasset service providers, from exchanges to custody wallets and insurance companies to brokers should “obtain and hold required and accurate originator information on virtual asset transfers”.

This data must include the sender and recipient’s names, their individual wallet addresses, along with the sender’s physical address. The last datapoint on that list is the most controversial for — as we have mentioned — cryptocurrency was designed to be pseudonymous.

There are ways around the address issue, as the FATF recommendations clearly state that it can be replaced by a customer identification number unique to the person sending or receiving cryptocurrency. Under other AML/KYC laws, providers should have a record of a person’s date of birth as part of their sign-up information.

A new messaging standard called IVMS101, that apes the SWIFT interbank system, was launched just a week after the summit.

Its key features are in providing unambiguous, automated data that relies on common standards across the industry. This uniform model will identify cryptocurrency senders and receivers, and the information will travel with each future transaction.

Where next?

In the near term, the FATF’s next major research project is due out in October 2020. It will look at “red-flag indicators and relevant case studies” on the potential misuse of cryptoassets for money laundering and terrorist financing.

With rumours that Coinbase could be the first of the international cryptoexchanges to IPO later this year, the stakes could not be higher.

Coinbase has already made significant moves to ingratiate itself with the relevant authorities.

So it was no particular surprise to see the San Francisco giant is designing a P2P system for sharing user information under the Travel Rule stipulations. In its working group are Gemini, Kraken and Bittrex, with whom Coinbase formed the Crypto Rating Council last year, a body that seeks to advise the industry on which cryptoassets could be considered securities under US law.

Longer term, a second FATF 12-month review is now underway and will come out in June 2021.

Moves like this suggest that the FATF oversight, under the direction of Mr Pleyer could well be in the form of a yearly rolling review.

Everything we have seen so far now implies that these annual deadlines will not be brick walls, but rather building projects that could last a lifetime.

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