Crypto Regulations INCOMING! Here’s What They Could Look Like

Crypto Regulations INCOMING! Here’s What They Could Look Like

Over the last few months, we’ve seen calls for crypto regulation grow louder in countries around the world, with some taking their first steps towards a full-scale crypto crackdown. While the recent crypto market crash has accelerated the trend of crypto regulation, this trend has its roots in a set of so-called recommendations decreed by an international organization called the FATF. Today I’m going to give you a bit of background about the FATF, a recent report it issued about crypto regulations, tells you what it could mean for the crypto market and explains why the FATF is a scam.

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What Is The FATF?

Let’s see what the FATF has been up to and what they’ve got planned for the crypto rabble. If you’re unfamiliar with the FATF, here’s what you need to know. The Financial Action Task Force, or FATF, is an intergovernmental organization that consists of 40 countries and dozens of other organizations such as the World Bank, the International Monetary Fund, and the United Nations.

The FATF was founded in Paris in 1989 by the G7 countries to combat money laundering worldwide; its mandate has since expanded to combat any threats to the integrity of the international financial system, which, of course, includes cryptocurrency, given that its implicit and explicit purpose is to replace the financial system that the FATF is attempting to protect.

The FATF achieves its mandate by issuing so-called recommendations about the kinds of regulations countries should put into place to combat money laundering and the like. The most famous of these is the so-called travel rule, which requires all transactions above a certain amount to be closely tracked.

It theoretically doesn’t have the power to write national regulations. In practice, however, any nation that fails to implement the FATF’s recommendations as regulations can find itself on the FATF’s gray list or, worse, its blacklist. Being gray listed by the FATF makes it significantly more difficult for a country to interact with the global financial system, whereas being blacklisted effectively cuts that country out of the global financial system entirely. For anyone wondering, the only countries currently blacklisted are Iran and North Korea.

Crypto Regulations INCOMING map

It should come as no surprise then that over 200 countries around the world have committed to following the FATF’s recommendations, which were expanded to include cryptocurrencies back in 2019 because of the previous crypto bull market and the announcement of Facebook’s digital currency LIBRA.

In October last year, the FATF issued its final recommendations for cryptocurrency, which essentially involve labeling all crypto transactions that preserve privacy in any way or don’t involve an intermediary of some kind as high risk, with the end goal of eliminating crypto as we know it today.

There’s only one problem with the FATF’s master plan, and that’s that only around 30% of relevant countries have implemented crypto regulations in accordance with the FATF’s crypto recommendations. The FATF is not happy and recently published a report about the current state of conformity. This is the report I’ll be summarizing today, but before I do, I want to give you a bit of context about how serious it seems to be.

The FATF held a confidential conference about the digital transformation of the financial system in Berlin, where they discussed crypto CBDC’s and digital IDs. Because the conference was confidential, we couldn’t find any information about what was said or decided, and our attempts to reach out to members of the FATF about any details were obviously in vain.

What we did discover, however, is that the FATF has just changed its precedent. The new FATF president is a former police commissioner and long-time FATF member named Raja Kumar. This is significant because Raja is from Singapore, whose recent crypto crackdown has been brutal and unrelentingly hard. It’s safe to say that we could soon see the same internationally.

Summary, Key Findings, Next Steps

The report is titled “Targeted update on implementation of the FATF standards on virtual assets and virtual assets service providers”. The FATF report begins with an executive summary of the report, some key findings from the report and what it wants from countries regarding crypto regulations going forward. The authors start by pointing out that it’s been around three years since the FATF issued its first cryptocurrency recommendations and that its finalized cryptocurrency recommendations were issued in October last year.

As far as findings go, over the last year, jurisdictions have made only limited progress in introducing FATF’s travel rule, with only 29 of 98 relevant countries tracking crypto transactions above a certain amount and only 11 of them enforcing regulations related to crypto transaction tracking. Not only that, but 36 of the 98 countries haven’t even started discussing implementing the FATF travel rule to track crypto transactions, and all I’m wondering is which countries these are for research purposes.

Interestingly, the authors applaud the crypto industry for independently implementing the FATF travel rule. This is likely a reference to the travel rule universal solution technology or trust system, which includes Coinbase and a dozen other big crypto companies and was put together earlier this year. According to the Decrypt, the initial members of TRUST are: Anchorage, Avanti, Bitgo, bitFlyer, Bittrex, BlockFi, Circle, Coinbase, Fidelity Digital AssetsSM, Gemini, Kraken, Paxos, Robinhood, Standard Custody & Trust, Tradestation, Zero Hash and Zodia Custody. Take notes, folks.

The authors then go on to boo countries that have implemented the FATF travel rule, arguing that they haven’t done so in a coordinated manner because God forbid that there are different laws in different countries. The authors also blast decentralized finance protocols for not actually being decentralized and take issue with the rapid rise of NFTs, despite the fact that the FATF had previously excluded this crypto niche from its recommendations. It seemed to imply that any exchanges that offer privacy coins are non-compliant in terms of what should be done about this deeply troubling state of affairs.

 The author’s request, or rather demand, that countries pass laws tracking crypto transactions asap and ask countries that have implemented the travel rule to promote implementation elsewhere is not very subtle. The authors also ask the crypto industry to work closer with governments to track crypto transactions. The FSA will ask regulators around the world to closely monitor the DeFi and NFT markets and the FATF will release another update about global compliance with its recommendations in June next year.

Implementation of FATF Recommendations

Anyway, the next part of the FATF report is the introduction, which repeats a lot of what was mentioned in the executive summary. One difference is that the authors reveal that last year’s compliance report focused specifically on the crypto industry’s compliance with the FATF. This could be a part of why we saw a coordinated crackdown on Binance by regulators around the world, which ended when Binance copy trading implemented KYC. It might also be why Coinbase and others are rushing to create their own FATF compliance systems.

The authors go on to specify that this compliance report concerns the crypto industry as well, specifically whether exchanges and others are implementing the FATF’s travel rule, which involves collecting detailed information about every crypto transaction worth more than $1,000.

What’s funny is that the authors note that not all countries responded to all the questions in a survey about recommendation compliance that the FATF conducted in March this year. Whether or not this will land any of those countries on the FATF’s gray or blacklist remains to be seen.

This brings us to the first section of the FATF report, which concerns the state of public sector implementation of FATF standards for VAs and VASPs, with VA meaning virtual assets aka cryptos and VASPs meaning virtual asset service providers aka exchanges. I probably should have pointed that one out earlier.

The authors start this section off by saying that countries have made limited progress in creating regulations related to the FATF’s recommendations, which isn’t surprising given that we’re still technically in a pandemic and uncomfortably close to another world war, never mind the energy issues.

What’s more surprising is that the author’s note quotes that since June 2021, no jurisdiction has received a fully compliant rating. In other words, there isn’t a single country that’s currently meeting the FATF standards, which is wild until you remember that the FATF’s end game is to end crypto. Some of you might also remember that FATF’s recommendations regarding cryptocurrencies are complex, confusing, and were changed until October last year. The result is what you see here:

Crypto Regulations INCOMING chart

It’s all the areas where countries are struggling to comply, the biggest one being licensing and registration.

Travel Rule

The second section of the report concerns another recommendation that countries are struggling with, and that’s the one and only travel rule. The authors start by repeating that countries have made limited progress in tracking crypto transactions since the FATF’s last compliance report, with only one additional country enforcing the FATF travel rule since that time. The horror!

The authors then reveal something extremely important, and that’s that more than half of the 98 relevant countries are planning on passing regulations related to the FATF travel rule in 2023, but they don’t note which ones, so keep your eyes peeled.

The authors also reveal the reasons why countries have been so slow in implementing the travel rules, and that’s because they still haven’t created any crypto regulations that clarify rules for cryptocurrencies or exchanges, and because they don’t have the knowledge they need to comply.

The authors then turn to what they call ‘the sunrise issue’, which is when exchanges are operating in or offering services to countries that haven’t implemented the travel rule while being based in a country that has implemented the travel rule. As you might have guessed, the authors really only have one solution to this problem, and that’s the broad and rapid introduction of the travel rule.

In the next subsection, the authors talk about what should be done about unhosted wallets, aka private crypto wallets. They highlight the fact that some exchanges have begun tracking all transactions to private crypto wallets in some countries and imply this is the way to go. The authors then advise all countries to require exchanges to collect information about every single crypto withdrawal regardless of the dollar amount, and to collect even more information if the transaction looks suspicious or the individual or institution withdrawing is deemed to be high-risk.

To add insult to injury, the authors note that this is something that was apparently recommended by the crypto industry itself, as per their consultations with the private sector. Then again, it could have just as easily been the banks demanding these ridiculous requirements to derail the crypto industry. I wonder which one is more likely.

In any case, the image you see here is the dollar amount at which crypto transactions will be tracked according to the countries that responded to the FATF survey, which they are again not named. As you can see, most are planning to set the threshold at one thousand dollars or euros, which is the same thing these days.

Crypto Regulations INCOMING figure

If you’re wondering what information exchanges will be asking for, the authors note that most countries will require exchanges to ask about why you’re withdrawing your crypto, where the money you used to buy that crypto came from, and the address of the owner of the crypto wallet you’re sending to.

 When it comes to what the government wants to see from the crypto industry, the authors start by thinking some crypto exchanges should be proactively compliant. Even so, the authors note that it’s not enough because the entire crypto industry must fully align with the FATF if it wants to be compliant. I couldn’t help but notice that the FATF refers to a company called Notabene in one of its footnotes. This is the company pushing for FATF compliance in crypto.

The authors then end this section on a predictable note, and that’s a call to action for the crypto industry to enforce the FATF’s crypto recommendations regardless of their national regulations to ensure universal implementation.

On a related note, if you’re wondering how exchanges and governments are tracking crypto transactions, the answer is blockchain analytics companies.  

Crypto Developments And Risks

Anyhow, the third section of the report concerns developments in the crypto markets and the emerging risks. This unelected and unaccountable international organization has identified. The authors start by saying they’ve been keeping a close eye on private wallets, DeFi, and NFTs over the last year and that unspecified ‘delegations are expressing concern about the latter two and that the private sector is having issues applying the FATF’s recommendations to these crypto niches’.

What’s hilarious is that the authors seem to take issue with cross-chain bridges in cryptocurrency because they make it possible to switch between different cryptocurrencies without an intermediary like a centralized exchange. You’d think they’d be more concerned about all the hacks and exploits.

The authors emphasize that the FATF’s recommendations do not apply to crypto code but stress that any individual or institution that’s found to have significant control over a crypto project or protocol could find themselves face to-face with the FATF and its cronies. This means that the only way that crypto projects and protocols can protect themselves from the wrath of the FATF is to be decentralized from top to bottom.

Next, the authors explain the FATF stance on NFTs and confirm that NFTs that are unique and used in practice as collectibles rather than as payment or investment instruments are not VAs, generally speaking, for the purpose of the FATF standards. This is extremely bizarre, because there seems to be some shady stuff going on in that crypto niche, just like in the traditional art market, which is coincidentally also not a point of contention for regulators around the world.

Regarding peer-to-peer transactions and stable coins, the FATF says there’s no cause for concern there quite yet, but the FATF seems to be concerned about the growth of stable coins, which is not that surprising given that stable coins are direct competition to fiat currencies and especially CBDCs.

As for emerging risks, the government is concerned about the prospect of sanctions evasion, which is ironic given that the authors frequently cite chain analysis reports, which conclude sanctions evasion is not possible with cryptocurrency. It seems the FATF used this as an opportunity to shill for the travel rule.

The FATF is concerned about ransomware, and they admit that most ransomware attackers are cashing out their ill-gotten gains using exchanges that are compliant with the FATF’s recommendations. Regardless, the authors insist that the travel rule is somehow the solution to this problem.

What Does It Mean For Crypto?

The fourth and final section of the report concerns the next steps for countries and the crypto industry, and since we already covered all these earlier, that leaves one last topic. That’s what the FATF’s push for unquestionable compliance with its recommendations means for the crypto market.

On the one hand, it’s a bit of a double-edged sword. Financial privacy in cryptocurrency will slowly but surely be eliminated. Privacy coins, mixers, and other technologies that preserve privacy in any way, shape, or form will be delisted and forbidden, else you will be designated as high risk.

On the other hand, this crackdown on financial privacy will force crypto projects and protocols to decentralize and result in better crypto projects and protocols. I reckon THORchain is one such crypto project, as it allows you to trade natively between different cryptocurrencies without KYC with best crypto trading bot.

Another positive effect of the FATF’s recommendations is that they will force countries to clarify crypto-regulations around the world. Recall that their inability to comply with the FATF ultimately boils down to the absence of basic crypto regulations and clear crypto definitions. The introduction of crypto regulations and the clarification of crypto definitions will likely lead to even more institutional interest in cryptocurrency, which could potentially protect it from the more extreme endgame of the FATF to turn crypto into another arm of the existing financial system.

Why The FATF Is A Scam

Unfortunately, it looks like institutions won’t be able to stop the FATF from forcing countries and the crypto industry to implement the travel rules once basic crypto regulations have been established. The worst part is that there is zero empirical evidence that the travel rule does anything at all. Believe it or not, this info can be found on the FATF’s own website, specifically its FAQ page about money laundering.

On the question of how common money laundering is, according to a 2009 report by the UN, criminal proceeds amounted to 3.6% of global GDP, with 2.7% being laundered. The very next sentence states that this falls within the widely quoted estimate by the International Monetary Fund, who stated in 1998 that the aggregate size of money laundering in the world could be somewhere between 2-5% of the world’s gross domestic product. Call me crazy, but this tacitly confirms that the FATF’s recommendations did absolutely nothing to reduce money laundering between 1998 and 2009. For reference, the FATF’s recommendations were first drafted in 1990, one year after the organization was founded.

What’s more is that the United Nations office on drugs and crime notes on its website that money laundering still accounts for two to five percent of global GDP, which implies that the FATF’s recommendations did absolutely nothing between 2009 and 2020, when this particular web page was published.

The fact that up to 40% of all money laundering occurs in the United States is a real wake-up call. Countries like the United Arab Emirates are the ones on the FATF’s naughty list, probably because Dubai is quickly becoming the world’s crypto hub and possibly because the U.A.E refuses to sanction Russia.

This begs the question of why the FATF recommendations are still around. Besides the FATF’s close connection to the United States, the answer is what the FATF is all about, and that’s money. The anti-money laundering industry has been growing exponentially over the years because companies can keep claiming they need ever more capital to be effective even though everything they’re doing clearly isn’t working, and that’s because human corruption is difficult, if not impossible, to regulate.

If you need more evidence, look no further than the 2019 study published in the journal of financial regulation and compliance, which noted that the compliance mechanisms aimed at preventing money laundering and terrorism financing can be easily circumvented. Just take a second to consider that criminals stole $100 billion in pandemic relief funds in the United States alone. Seriously, let that sink in. The US government has been cheated out of $100 billion.

At some point, you start to wonder whether this is incompetence or something more. As per a Coindesk article about the FATF crypto recommendations, ‘worldwide spending on AML and sanctions compliance by financial institutions is estimated to exceed $180 billion a year, about 100 times more than the 1 billion to 2 billion dollars in criminal assets that get seized annually’. Logically, the article concludes that the current regulatory hodgepodge of FATF-driven KYC and AML regulations has birthed ineffective systems that do little to stop money laundering. Instead, they enable political censorship, financial surveillance fraud, and inequality.

In sum, the FATF is a scam, a Ponzi just like the fiat-based financial system, it explicitly seeks to protect.

[This article is a transcription of a video made by Coin Bureau]

[Original video:]