Mitigating money laundering and terrorist financing are tasks that can only be addressed with internationally coordinated actions because of their global context. The Financial Action Task Force (FATF) is since its establishment in 1989 the driving force of these agendas. Even though the Paris based institution as an intergovernmental organization does not hold legislative powers itself, it periodically updates and publishes recommendations and interpretive notes concerning the regulation of anti-money laundering and terrorist financing measures. These recommendations are acknowledged as the international standard on this subject by the FATF member states and for the most part these recommendations are implemented in those states via self-commitment.
WHICH NEW CRYPTO REGULATION IS FATF CURRENTLY PROPOSING?
Cryptocurrencies and other virtual assets have been part of FATF standards for the last couple of years. At first, FATF discussed a general licensing obligation for Virtual Asset Service Providers (VASPs). In the current draft of an update of the interpretive note to FATF recommendation no. 15, FATF plans to introduce a far more extensive interpretation guideline. In subsection 7 (b) of the draft of the interpretative note FATF proposes that its member countries should ensure that VASPs in their jurisdiction obtain and hold information on the originator as well as the beneficiary of all crypto transactions that they processed and that this information is submitted to any beneficiary VASP if the cryptocurrency is transferred again. Furthermore, FATF suggests in this draft that abovementioned information is to be made available to the competent supervision authorities on request. FATF already announced that it plans to decide on the adoption of these changes in June of 2019.
WHAT WOULD BE THE CONSEQUENCES OF FATF´S REGULATION PROPOSAL FOR CRYPTO TRANSACTIONS?
For service providers offering their customers crypto transactions and wallet services the new interpretive note on recommendation no. 15 would mean that they would have to create systems that enable them to obtain, transmit and receive the aforementioned required customer data. This would pose a serious threat to the financial privacy of their customers. These systems would have to be operated on an international level and therefore meet the more or less rigid data protection regulations of the FATF member countries. Therefore, smaller VASPs in countries with low IT security requirements could be targeted by data thieves who so could steal sensitive financial information from a vast number of crypto users. The targeted crypto transactions, those that are made with the intend to launder money or to finance terrorism on the other hand could simply avoid VASPs and instead use peer-to-peer transactions to and from wallets that are kept on local devices. A storage or transmission of the involved party data between VASPs would not take place in this case. FATF’s objective of mitigating money laundering and terror financing therefore seems unachievable with this kind of regulation.
WHAT ARE THE CONSEQUENCES OF THE FATF PROPOSAL FOR PRIVACY COINS?
The fate of so-called Privacy Coins such as Monero or ZCash could, if the proposal is implemented, be a complete prohibition of use through VASPs. Privacy Coins focus on the financial privacy of their users by obfuscating the participating blockchain addresses as well as the transferred amounts of coins. In these blockchain systems the data required by the VASPs for compliance with the FATF Proposal could not even be obtained for technical reasons. Privacy-focused blockchain based payment systems trying to implement the basic ideas of banking secrecy and financial privacy into blockchain transactions would therefore only be available on an unregulated peer-to-peer basis. It seems questionable that FATF considered these consequences prior to drafting this proposal.
Attorney Lutz Auffenberg, LL.M. (London)
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