Hurry Up With Crypto ID Checks, FATF Tells Countries

After the potentially privacy-busting "travel rule" for crypto transfers, global standard setters at the Financial Action Task Force have their eyes on DeFi, NFTs and unhosted wallets.

AccessTimeIconJun 30, 2022 at 9:30 a.m. UTC
Updated May 11, 2023 at 6:18 p.m. UTC

Authorities need to fast-track checks on crypto users’ identities, global standard setter the Financial Action Task Force (FATF) said Thursday in a report. According to FATF, only 11 of 98 surveyed jurisdictions are enforcing and supervising the controversial measure known as the “travel rule.”

In 2018 proposals, modified in 2019, FATF said crypto service providers have to verify their customers' identities. The identity checks are supposed to allow authorities to track illicit funds, just as they do in the conventional financial system. However, many in the industry have complained the rule violates privacy and is poorly designed for payments taking place on a transparent blockchain.

While a quarter of the countries supposed to be passing laws are now in the process of doing so, around one-third have not even introduced a bill, FATF’s report said, citing figures from a March survey that has now been made public.

“Countries that have not introduced Travel Rule legislation should do so as soon as possible, and FATF jurisdictions should lead by example,” the report said.

FATF’s 39 direct members include the U.S., U.K., Germany and China, but it is also responsible for monitoring activity in smaller jurisdictions, such as Bermuda and Cyprus.

NFTs and DeFi

Now the watchdog’s gaze is turning to other parts of the crypto world – and it cites “increasing concern” about the sectors of non-fungible tokens (NFT) and decentralized finance (DeFi), alongside worries that illicit funds may escape from regulated providers to noncompliant actors or private self-managed wallets.

“Open sources suggest that DeFi is increasingly used for money laundering,” the report said, saying it would continue to monitor the market. It also said criminals can misuse NFTs for abusive behavior like wash trading, where artificial transactions push up market prices.

On Wednesday, the European Union (EU) agreed on the main policy lines of a bill to introduce the travel rule into its own 27 member countries. The agreement saw EU policymakers largely pull back on plans to expand the scope of money-laundering checks on payments to unhosted wallets or digital wallets held off of crypto trading platforms. Industry players like Coinbase (COIN) have previously criticized EU plans to track even the smallest payments to unhosted wallets, which it said would curb innovation and privacy.

Further EU talks on crypto licensing rules, including whether to regulate NFTs, will follow later Thursday.


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Jack Schickler

Jack Schickler was a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He doesn’t own any crypto.