FATF Needs a Whole New Approach to Regulating Cryptocurrencies, Says V20 Summit
The Financial Action Task Force (FATF) needs a whole new approach when it comes to policing crypto, according to Sian Jones, the driving force behind much of the anti-money laundering (AML) standards this is a sector that work to date.
Speaking at the close of the second Annual Virtual Asset Service Provider Summit V20, Jones said the FATF only needs to look at the rapidly evolving world of decentralized finance (DeFi) to see how incongruous the traditional system of verifying assets is becoming. financial transactions created half a century ago by SWIFT.
The global AML watchdog, FATF, has recommended local regulators in G20 countries and beyond to try to graft so-called travel rule requirements onto digital assets, where intermediaries (service providers of virtual assets or VASPs, in this case) must share personally identifiable information (PII) about crypto transactions.
However, the core of crypto is cutting out middlemen, something DeFi clearly demonstrates, Jones said.
“The FATF should consider developing entirely new approaches to managing money laundering and terrorist financing risks in cryptocurrencies,” Jones told V20 delegates on Wednesday. “The proven methods work, in a way, in the traditional world of money. Arguably, they can be made to suit the brokered crypto world. They don’t necessarily fit into a world of DeFi where they are not fit for purpose. “
Jones added that the FATF appears to have only partially understood the fact that “crypto was born out of the desire of some, not to circumvent authority, violate the law or facilitate money laundering, but rather to eliminate intermediaries, de-intermediate traditional finance. “.
On the second day of the V20 summit, which was open to members only, it heard from several representatives from leading platforms, DeFi, telling delegates that they had been denied access to the FATF private sector advisory forum meetings or not. They had heard nothing from FATF, Jones. He said the following.
The FATF did not return requests for comment prior to the publication date.
“The FATF needs to redouble its commitment to all players, including DeFi software developers and users who are not part of the industrialized crypto world,” Jones said. “Similarly, the industry must work more closely to present a unified voice and its commitment to the FATF and regulators.”
Going forward, Jones recommended creating a single unit to speak to the FATF that represents the entire industry and its associations, rather than 20 or more different voices, each speaking for a few minutes. He also suggested that meetings to speak to the FATF be held more frequently, monthly rather than quarterly.
With many crypto travel rules solutions now live, including a widely adopted messaging standard, industry players dived into the details to get those solutions to interoperate seamlessly.
The plethora of travel rule solutions has created an interoperability problem of its own, especially given the variety of proprietary proposals and non-profit protocols; some solutions prefer centralized anchor points like certificate authorities, while others want a more decentralized approach using blockchains and smart contracts.
So far, the biggest step in terms of interoperability has been the InterVASP Messaging Standard (IVMS 101), which spells out exactly what format the PII data message payload should take sent between VASPs. In the wake of this achievement, the V20 Summit heard that several more standards have been introduced and are under discussion.
Malcolm Wright, AML Director at Global Digital Finance, highlighted areas where standards could help eliminate pain points, including directory sharing and storing customer data.
“Some solutions are working on a directory or VASP search, so we need to soften the way a Sygna bridge will communicate with a Notabene,” Wright said. “Another could be a security standard for what happens to data when it is stored, for example how it is protected and kept separate. Nor should we overlook the need to filter information for penalties, although it probably does not need a standard”.
Setting aside the wrinkle smoothing that takes place across the FATF’s VASP universe, which is quite limited to the so-called “industrialized crypto” space, the elephant in the room is still what happens with private or non-hosted wallets.
Regulators often see this as some kind of proxy for illicit activity, but as stated above, it is a fundamental tenet of cryptocurrencies, not to mention a necessary way to avoid regularly repeating attacks on exchanges.
“Over the next several years, there are going to be a number of problems related to private noncustodial wallets that are huge,” said Dave Jevans, CEO of CipherTrace. “That would make all the work we’ve done over the last 18 months seem like child’s play.”
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