Crypto Firms Can't Outrun the Travel Rule

Firms need to accept their regulatory responsibilities, says the president of FATF, the global anti-money laundering watchdog.

AccessTimeIconJan 12, 2022 at 7:22 p.m. UTC
Updated May 11, 2023 at 4:51 p.m. UTC
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Virtual assets are expanding to almost every corner of the globe, introducing new opportunities and risks for investors, businesses and entrepreneurs. From the start, the crypto industry set out to challenge the rules of finance. By cutting out the middlemen, such as banks or credit card companies, blockchain technology offered the potential for users to quickly transfer value across the world.

Marcus Pleyer, deputy director general in Germany’s Federal Ministry of Finance of Germany, assumed the position of president of the Financial Action Task Force (FATF) in July 2020.

Its innovative features – and huge shifts in price – have led to massive financial speculation and to criminals using crypto assets to receive ransoms and launder their proceeds. But firms have often ignored the reality of their products being used for illicit purposes. That is why the Financial Action Task Force (FATF), a global anti-money laundering and counter-terrorist financing watchdog, needs everyone to take responsibility and effectively implement anti-money laundering regulations.

Concerns About Regulations

Many in the virtual assets industry have raised concerns about regulation. Regulation could cause more harm than good, some claim. It will damage the industry, restrict job creation and stifle innovation and growth are common remarks.

None of that has turned out to be true. In contrast, the onset of regulation is strengthening trust to the industry and is promising to be a great boon to the industry. Since Bitcoin emerged 12 years, entrepreneurs have created thousands of types of virtual assets, including stablecoins. Bitcoin and ether both hit new all-time highs in 2021 amid a wider rally in crypto markets, which are now estimated to have surpassed $3 trillion. Rather than smothering development, regulation has helped ease concerns about crypto being the “Wild West” of finance and encouraged a broader range of investors. As it matures, the industry should not fear regulation, it should embrace it.

The FATF released updated guidance in October outlining how governments and companies can effectively implement the FATF’s global anti-money laundering rules for virtual assets and their service providers. Money laundering fuels serious crime, and so it is vital that all players in the crypto sphere take their responsibilities seriously. No company should give a free pass to ransomware creators, drug traffickers or human smugglers to launder their illicit profits, or to terrorists to finance their activities.

Hundreds of cases of criminal misuse demonstrate the need for proper controls. Those include last year’s ransomware attack on Colonial Pipeline , which shut down major fuel pipelines across the eastern part of the U.S.. While the ransomware payment of 75 bitcoin may seem small, the attack significantly damaged critical infrastructure and caused significant economic disruption.

No one, in good conscience, can see those cases and just shrug their shoulders. Clinging to aspirations of total independence and anonymity in the face of crypto being misused is fundamentally irresponsible.

It is important for everyone to focus on the basics of regulation first. It is the responsibility of all governments to ensure virtual assets are regulated properly. This includes licensing or registering the virtual asset service providers and supervising the sector to ensure that they do customer due diligence, keep records, report suspicious transactions and implement the so-called “Travel Rule.” There has been progress, but an FATF review highlighted how only 58 out of 128 jurisdictions reported that they have the necessary rules in place for virtual assets and their providers.

This is not good enough. All countries need to put the basic rules in place for crypto companies to understand their obligations so that they can ensure they effectively implement the rules. Consistent and fair rules that leave room for innovation while protecting against misuse by criminals will create a level playing field and regulatory certainty for everyone to work with.”

The Travel Rule

The FATF “Travel Rule” is at the heart of that approach, alongside a commitment to take a risk-based approach to regulation. The Travel Rule means that providers of virtual assets need to collect and share customer data for transactions over a certain threshold. This is not a radical idea. It simply means crypto providers must stick to international rules that ensure the protection of legitimate finance and prevent illicit finance. That involves the handling of data with care, the need for privacy and the use of due diligence measures.

The FATF will not proscribe a one-size-fits-all compliance solution to the industry. It is up to businesses to use technology that they find most effective to record and share sender and recipient information. It is heartening to see in recent years how the crypto sphere has evolved with an understanding that growth in this marketplace requires regulation.

Addressing DeFi

The trend toward decentralized finance, or “DeFi,” has been an area of concern. The idea of making traditional financial products, such as loans, available through blockchain technology potentially has numerous benefits, in particular to those without access to traditional financial products, such as the unbanked. However, the widely publicized hacks and scams that have plagued the sector highlight the risks of criminal exploitation.

Governments need to engage with the DeFi community, while DeFi developers need to take money laundering risks seriously. Authorities should identify the individuals with control or sufficient influence over DeFi protocols and hold them responsible for implementing anti-money laundering measures. The FATF has been clear that although providers of so-called DeFi services market themselves as decentralized, that is not necessarily the case. Authorities need to focus on what a business does, not the terminology or technology it uses. As this is a rapidly changing area, the FATF is monitoring how systems evolve and any emerging risks.

So-called stablecoins, governance tokens and initial coin offerings are also discussed in the updated guidance. If you are a business that operates in these areas, you should recognize that criminals and terrorists will try to take advantage of the financial services you provide. It is because of those risks that the crypto ecosystem cannot remain unregulated. It is the responsibility of governments and law enforcement to take these issues seriously, and it is the responsibility of businesses offering these financial services to follow the regulations

As new technologies develop, new services will emerge. Some will potentially promise total anonymity and no centralized control. However, ultimately, if a business provides financial services, then it needs to apply anti-money laundering rules. At the risk of repeating myself, this is not to stifle innovation. This is not about big government versus private firms. It is simply about preventing serious crime and terrorism.

Ultimately, everyone has to decide. The crypto world has legitimate and legal uses, but just like the international banking sector, it can be exploited to cause immense harm. Do you want to help the corrupt, the criminal gangs and sanctions evaders to launder their illicit profits and further fund their activities? Or, do you want to help prevent serious crime and terrorism by ensuring national authorities can trace the money that fuels organized crime?

You have to choose a side. I know which side I am on.

UPDATE 1/12/22: "So-called" was added to the second reference of stablecoins at FATF's request.


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Marcus Pleyer

Marcus Pleyer, who is Deputy Director General in Germany’s Federal Ministry of Finance of Germany, assumed the position of President of the FATF on 1 July 2020. He succeeded Xiangmin Liu of the People's Republic of China.

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