Beyond KYC: Regulators Set to Adopt Tough New Rules for Crypto Exchanges

Published on by Coindesk | Published on

About 200 to 300 people, ranging from chief compliance officers of top exchanges to regional bitcoin brokers, attended FATF's consultative meeting in Vienna, Austria, on May 6-7 to voice their concerns.

The regulators - particularly those from the U.S., which holds the FATF's rotating one-year presidency - appeared set on finalizing the standard with at most minor tweaks, according to four people who attended the Vienna meeting and spoke to CoinDesk on condition of anonymity.

The Group of 7 advanced economies created the FATF to combat money laundering and terrorist financing, and the proposed standard seeks to prevent such actors from exploiting crypto.

At issue is a single paragraph in the interpretive note on "Virtual asset service providers", a category that includes exchanges and hosted wallet providers, that FATF put out for public comment in February.

While the travel rule and similar regulations were written for a world when funds were always sent through intermediaries, "Cryptocurrency transactions can occur from person to person, machine, smart contracts, and any other infinite set of potential endpoints - not just exchanges or businesses," noted Weinberg, who is also an advisor on blockchain issues to the Organisation for Economic Co-operation and Development.

Illustrating the challenge, Global Digital Finance, a trade group based in London, noted in an April comment letter to the FATF that unlike a wire transfer, which by design requires bank, branch and account numbers for the recipient, a crypto transaction requires only an address.

An exchange sending crypto on a customer's behalf "Does not know with any certainty who the destination address is owned by, as there is no register of such addresses and new addresses can be created at any time." Indeed, the sending exchange can't be sure whether the recipient address belongs to another business, regulated or otherwise, or to an individual.

To be sure, even if the FATF does adopt the guidance with the contentious part intact, the requirements wouldn't take effect overnight.

"The FATF recommendations are not legally-binding international law; however, because the FATF's members - 36 economies and two regional bodies - include the largest and most important financial systems in the world, its rules have teeth," said Julia Morse, Assistant Professor in the Department of Political Science at the University of California, Santa Barbara.

Apart from the operational burdens on exchanges and hosted wallet providers, a travel rule-like requirement will likely be anathema to privacy-conscious crypto users.

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