Compliance Exec: Crypto Too Slow to Adopt Anti-Laundering Rules Ahead of FATF Review

Compounding matters, “each country is kind of doing its own thing, which makes compliance actually very difficult for us,” says Malcolm Wright.

May 27, 2021 at 10:38 p.m. UTC
Updated Sep 14, 2021 at 1:03 p.m. UTC

The world’s governments are about to get a report card on their progress combating financial crime in the cryptocurrency arena, and at least one compliance executive expects a poor grade. 

Next month the Financial Action Task Force (FATF), an intergovernmental body that sets standards for anti-money laundering (AML) measures, will meet for its triannual plenary. On the agenda is assessing how far the FATF’s 39 members (37 jurisdictions and two regional organizations) have come in adopting its recommendations for policing crypto – including the  controversial “travel rule” requiring businesses to share customer information. A final guidance document is expected shortly afterwards. 

Speaking Thursday at Consensus 2021, Malcolm Wright, the advisory council chair at trade group Global Digital Finance, sounded pessimistic about the impending review.

“One could perhaps conclude that there’s not enough progress on licencing, that the industry is still not progressing fast enough to respond to compliance and particularly the travel rule,” said Wright, who stressed his view was coming from outside FATF’s consultation process and that it was also partly his opinion. 

“And there's not enough coordinated regulatory frameworks. That is, at the moment, each country is kind of doing its own thing, which makes compliance actually very difficult for us,” said Wright, whose day job is as chief compliance officer at 100x Group, the operator of crypto derivatives exchange BitMex.

If he is correct, the FATF may start to publicly call out jurisdictions it deems to be lagging behind when it comes to crypto and where regulatory arbitrage, or exploitation of loopholes, may be taking place. That could prompt regulators and law enforcement, especially in the U.S., to take a tougher stance toward crypto exchanges and other service providers in far-flung jurisdictions that do business with Americans.

It’s not been easy grafting AML strictures from the traditional financial world onto the pseudonymous-by-design cryptocurrency space. So far, the FATF recommendations have spawned a range of technical solutions, to some extent creating problems when these new systems don’t work in conjunction with each other.

DeFi dragnet

Concerning areas of unevenness in the FATF guidance given thus far, Wright pointed to the emerging area of decentralized finance (DeFi), where strangers on the internet can lend each other money and charge ample fees.

The original capture of DeFi in the eyes of the FATF, which happened in 2019, involved the owner or operator of a decentralized application used to exchange value, fiat or virtual currency being classed as a virtual asset service provider (VASP) and so falling within regulations. But this was later widened to include any provider that may develop or operate a DeFi platform, even if they have no interaction with users or collect no fees.

“So that would be unlikely to facilitate money laundering or even to have any means to interrogate data, or to report to authorities,” said Wright, who joined 100x last year as its first-ever compliance chief after BitMex ran afoul of U.S. authorities.

This is further complicated by FATF’s core concept of having a level playing field towards regulation, Wright added, since centralized crypto finance (CeFi) and DeFi are constructed and operate so differently from one another.

“To attempt to regulate on the basis of functional equivalency alone – for example, a CeFi and DeFi exchange both conduct token exchange – that will be troublesome,” Wright said. “The unintended consequence of the current drafting could be to end up regulating far more parties than necessary to meet their [FATF’s] AML objectives.”

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