The cryptocurrency space, as we know it is changing rapidly. The push for wider adoption is one that has dragged on for so long, and while the road to victory seems far, there are signs that things are beginning to shake up, as regulators and institutional investors warm up to the budding industry.
This reversal of fortunes can be attributed to many things, but the enforcement of Anti-Money Laundering (AML) standards is undoubtedly a significant part of that. The danger of transacting in crypto assets, as well as the assets’ proclivity for being used by criminals and terrorists, has always been one of the biggest hurdles in their push for adoption, and these standards could potentially roll over that massive stone.
Back in June, the Financial Action Task Force (FATF), a leading enforcer of AML standards across the world, proposed guidelines for cryptocurrency exchanges and other asset custodians to enforce to stay AML compliant. While many saw it as a giant leap forward (and, make no mistake, it is), insiders have been quick to point out the impossibility of implementing these standards.
Notably, the FATF’s standards require that asset custodians collect information on users (including names, account numbers, and perhaps even locations), as well as the details of their Bitcoin trading and other activities and transactions, all with the aim of tracking any suspicious activity.
For traditional financial institutions, implementation can be done without breaking a sweat. However, crypto industry executives have pointed out that crypt firms weren’t initially built to collect data and send them to each other. In addition to this, there is also the problem of deciding on how to pay for and govern a universal information-sharing system in an industry that’s as decentralized as this.
In an interview with the Wall Street Journal, Jeff Horowitz, Chief Compliance Officer at Coinbase, said, “Is it solvable? Yes. But is there a method that exists today to share this data? No.”
John Roth, the Compliance and Ethics Head at Bittrex, pointed out to Bloomberg that implementation could also be costly. In his words, crypto exchanges focus more on the people who buy cryptocurrency, as well as the activities they engage in. However, the anonymous nature of these assets themselves means that ascertaining the recipients of funds will be challenging.
He added, “It’s either going to require a complete and fundamental restructuring of blockchain technology, or it’s going to require a global parallel system to be sort of constructed among the 200 or so exchanges in the world. You can imagine difficulties in trying to build something like that.”
There is also the fear that this would lead to a complete overhaul of the crypto industry. Implementation would more or less take out the attribute of anonymity, and it could eventually force crypto enthusiasts to abandon the mainstream crypto industry and conduct all their transactions on unregulated peer-to-peer exchanges instead.
One of such exchanges, Hodl Hodl, has instead taken pride in its aversion for the rules, recently claiming that it doesn’t plan to implement any AML safeguards. Still, the challenges vary far between what has even been mentioned. Asset custodians based in countries that aren’t covered by the FATF don’t need to comply with these rules, and this could cause a mass exodus of exchanges to these nations as well.
For now, executives in the crypto space are having a hard time with these standards. As Horowitz put it, the coming months would be a huge test for the industry. The FATF already set a June 2020 deadline for compliance, but even the most optimistic of compliance experts believe that getting this done in time is an ambitious goal at best.