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May 6 and 7 Financial Action Task Force (FATF)the global standard setter for AML/CFT regulation, will hold a private sector consultative forum in Vienna to discuss cryptocurrencies and other virtual assets. Elliptic’s Tom Robinsonalong with other leading industry experts and global policy makers, will attend the meeting and help set the course for the future of crypto regulation.
At Elliptic, we have been working closely with our customers, industry partners and regulators to understand and assess the impact of the FATF’s cryptocurrency recommendations. Read our written response to FATF’s Cryptocurrency AML Guidelines here.
Below we share our thoughts on some of the FATF recommendations and how blockchain analytics will enable the crypto industry to answers to the challenges ahead.
Tightening the executive environment
When the FATF adopts its updated guidelines and requirements in June this year, countries will be required to draft anti-money laundering regulations that apply to a wide range of crypto service providers and platforms.
Importantly, countries will now be responsible for the effectiveness of their crypto regulatory frameworks – including whether they can enforce the associated AML requirements.
Countries that do not implement appropriate regulatory and enforcement mechanisms could find themselves in the public eye shouted by the FATF.1
As such, crypto companies around the world will now face a greater risk of regulatory action if they fail to comply, wherever they are located. In fact, the process is already underway, because regulators in countries such as Australia2, Japan3and USA4 have begun to take regulatory action when concerned about violations.
Regulators elsewhere will no doubt flex their muscles over time to demonstrate compliance with the FATF’s recommendations – and crypto companies everywhere need to be on guard.
New technologies, old regulations
FATF’s rules on cryptocurrencies present some significant technical issues that will be the main highlight of the debates in Vienna.
The most controversial of these is the FATF’s recommendation that regulated crypto-businesses should comply with existing wire transfer requirements that banks and other major financial institutions already apply.
Currently, when an originating bank in one country sends funds electronically to a receiving bank in another country, it must retain and provide the receiving bank with all known information about the client who sent the funds, as well as the identity of the individual receiving them.
Global regulators see this as key to preventing terrorists and other criminals from anonymously sending funds around the world. The FATF therefore proposed that crypto exchanges and other regulated crypto businesses should also comply with electronic transfer requirements and provide each other with the same level of information about the recipients of crypto transfers.
However, there is a catch.
Cryptocurrencies are peer-to-peer payment networks that use pseudonymous or anonymized addresses instead of customer identities – and do not rely on intermediaries such as banks to provide accounts to transfer funds. Traditional wire transfer requirements that would normally apply in the fiat world can be easily circumvented if an exchange buyer sends funds to a crypto address that cannot be reliably attributed to a real world identity.
As such, trying to replicate bank transfer regulations in the crypto space is a classic example of a square peg/round hole approach. We need new solutions to overcome the challenges and risks that cryptocurrencies present while maintaining the ultimate goals of global regulators.
Blockchain analytics can fill in the gaps
An approach rooted in blockchain analytics is the most effective way to mitigate crypto risk and increase transparency in the crypto sector. Block analysis tools are a key component of identifying and managing crypto-specific money laundering and financing of terrorism risks.
There are several ways that blockchain analytics tools can help fill some of the gaps where legacy regulatory and compliance approaches may be inadequate.
For example, blockchain analytics tools offer a thorough, public audit of transaction activity that allows regulated crypto-businesses to monitor client fund flows with a level of control not possible in the mainstream banking world.
As we recently demonstrated in the case of Hamas’ bitcoin crowdfunding campaign5blockchain analytics allows us to detect new typologies of terrorist financing and track associated funds across the bitcoin ecosystem in real time as they occur.
Crypto companies can use blockchain analytics tools to make informed, risk-based decisions about whether to maintain customer relationships or file suspicious activity reports where they uncover even remote connections to illegal actors that would go unnoticed in the traditional world of fiat banking. Law enforcement agencies can also take advantage of blockchain analytics, relying on the highly transparent nature of many public blockchains to track illicit crypto flows as they pass through numerous entities and addresses located around the world – something not always possible in the traditional financial sector.
For these reasons, we strongly believe that the FATF should recognize and clarify the important role that blockchain analytics solutions can play in enabling the successful application of AML requirements, and help both regulators and regulated businesses around the world gain this level of understanding.
New challenges require new solutions. At Elliptical we have made it our mission to think outside the box to find innovative ways to help crypto businesses identify the risks they face, paving the way for the successful implementation of crypto regulation around the world.
Contact us today to learn more about how we can support your business in responding to the FATF’s cryptocurrency recommendations and other challenges to overcome compliance.
footnotes:
1High Risk and Other Supervised Jurisdictions, FATF
2“Crypto Exchanges Huobi and Fisco Investigated by Japan Watchdog: Report”, Coindesk
3“FinCEN Fines Peer-to-Peer Virtual Currency Exchange for Violating Anti-Money Laundering Laws,” FinCEN
4“Hamas Shifts Bitcoin Fundraising Tactics, Highlighting Crypto Risks: Survey”, Reuters
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