In Europe, and worldwide, there have been many structural changes to know your customer (KYC), and anti-money laundering regulations (AML). Regulators and the public have been focusing their attention on high-profile cases of money laundering and the entry of illicit funds onto global markets.
The Wirecard scandal was a particularly salacious example, in which the investigation into widespread fraud revealed a chain of shell companies involved in illegal distribution of narcotics and pornography. Over at Danske Bank, some $227 billion was laundered through an Estonian subsidiary, going virtually unnoticed for nine years.
In the United States, the Securities and Exchange Commission filed an action against Ripple Labs and two of its executives, claiming they had raised over $1.3 billion through an unregistered, ongoing digital asset securities offering. This case continues.
The traditional forms of regulation that were applied to crypto and blockchain technologies in general are not compatible.
AML requirements are also being improved as regulators and banks gain a better understanding of criminal acts. These adjustments were largely reactive and trial-by-fire.
The European Union introduced more strict financial regulations to address the rapidly-evolving challenges in the blockchain industry. Many members now have their own regulations for crypto assets, with Germany leading the charge in being first to do so.
The individual regulations outline the path for cryptocurrency companies and the requirements to obtain and maintain a financial license. Compliance increases investor protection and confidence.
These financial crimes, and cryptocurrency, continue to evolve, and regulators have been working hard to address, enforce, and monitor these restrictions. Internationally, the most prominent monitoring body is the Financial Action Task Force (FATF), which outlines general guidance and determines best practices in anti-money-laundering practices and combating the financing of terrorism.
FATF’s Recommendation 16 is considered soft law. However, it sets the standard for crypto asset regulations. Recommendation 16 of FATF, also known as “travel rule”, requires that businesses collect and keep personal information from participants to blockchain transactions. The theory is that authorities will have greater oversight of and enforce crypto market regulations by having access to these data. They will know who’s doing what. Transparency is the key.
Travel rule dilemma
FATF’s travel rule impacts two types of businesses: traditional financial institutions (banks, credit firms and so on) and crypto companies, otherwise known as virtual asset service providers (VASPs).
The travel rule was originally only applicable to banks. However, it has been extended to include crypto-companies in its 2019 version. Many FATF member countries began to include the travel rule in their AML laws by 2021. The crypto industry was shocked by this regulatory change. High stakes: A service provider that fails to comply with the travel rules can be declared noncompliant. This is an obstacle in doing business.
The travel rules are a significant hindrance, but they don’t account for the newness of crypto technology. Due to the difficulty of obtaining KYC information about recipients and then integrating that data into daily business, integration is difficult for crypto-based businesses.
To be able to receive this data for outgoing payment, crypto companies would need to have the data provided by clients. It would then become virtually impossible for them to verify. It would be disruptive for crypto’s exemplary efficiency. It poses challenges in terms of accuracy for banks and VASPs. It also creates additional data gaps due to the creation of data silos around the world.
There is an important gap in standardization between international standards and those that are specific to certain communities. This includes transactions recorded on one blockchain and transactions verified there. Cross-chain communication allows transactions between blockchains and can be combined with transactions on another electronic system such as PayPal.
There must be a compromise between people who have valid concerns over the anonymity of crypto assets and those who believe regulation is too restrictive. Each side has a point. However, crypto’s legitimacy and viability in the wider financial market and industry are net benefits for both sides. This negotiation is crucial.
Non-anti-regulation but anti-unworkable regulation
We need effective regulation. This means legislation must be applicable to digital assets. It should not limit the market and fail to solve any AML-related issues.
Given the global nature of traditional finance, FATF has to issue a framework international for crypto regulatory oversight.
International criminal financial trading — illegal weapon sales, money laundering and human trafficking — are all part of the same business. It is therefore necessary to crack down on this criminal financial trade.
This is a huge challenge because blockchain’s decentralized nature, which goes against the standard central-server that we use almost everywhere, poses a significant problem. Crypto is being built with the same rules and regulations that are used by traditional financial institutions. This misstep, misunderstanding and disregard for innovation and new technology means crypto will be unable to compete.
The traditional forms of regulation that were applied to fiat currencies do not apply to crypto in all aspects. These regulations, however well-intentioned, are based on an outdated system and must be modified.
Fair restrictions of technology use require a deep understanding of the limitations and characteristics of the technologies and mutual cooperation. Blockchain is currently a topic that attracts more passion than real understanding in traditional financial circles.
The core issue lies in the belief that cryptocurrency transactions can be traced and are therefore anonymous. In most cases, blockchain transactions can provide more transparency and traceability than traditional banking. Blockchain transactions will be more traceable than traditional cash transactions.
This technology has such great potential and should be available, regulated, and accessible to everyone. The way we work is being revolutionized by blockchain and digital assets. Regulators must follow their lead. It is not enough to impose old-fashioned directives and punish people unfairly. It’s possible to find a better way.
End of the outlaw era
A collective database that includes users who adhere to international standards can be used as a means of monitoring activity. The industry can identify and limit illegitimate vendors and users much faster than normal by having a collective database of users.
A well-thought out tweaking of suggested regulations can create a verifiable network to build trust, properly utilize blockchain’s potential and keep bad actors from manipulating or corrupting the system. This would make it possible to prosecute international financial crimes, and ensure crypto’s legitimacy worldwide.
Crypto is no longer an outlaw, but its legitimacy has been elevated to unprecedented levels. This can be achieved only by adhering to regulatory oversight.
Regulative oversight cannot be a copy-and-paste approach to blockchain transactions. It must be one that fights criminal activity and boosts investor confidence.
Publited at Mon, 16 August 2021 17:17.03 +0000