Illicit Cryptocurrency Activity: A Concern

Siddhartha Dasgupta

November 20, 2020

In recent years, we have seen a flurry of activity in the cryptocurrency space, with record number of ICOs and projects being launched, and the overall market capitalization has reached new highs in recent times. The growing number of virtual assets and the number of exchanges has naturally translated into more people being invested in the crypto market. While traditional financial regulators have long wanted to regulate the crypto market as a whole, but efforts haven’t yielded much because of the nature of the crypto market worldwide. Instead, market regulators such as SEC has accepted cryptocurrencies as a financial instrument and are constantly sending the right signals in being open to regulatory innovation when it concerns the crypto market. 

However, things started heating up in June of last year when the Financial Action Task Force(FATF) made a significant amendment to one of their recommendations. The FATF came into being in 1989, instituted by the G7 as a body to keep money laundering and terrorist financing in check. It has jurisdiction in 38 member states and 2 regional organizations (European Commission & Gulf Co-operation Council). The member states have an obligation to follow the framework when it concerns efforts to stop money laundering and terrorist financing. 

Recommendation 16

Commonly known as the Travel Rule, FATF’s recommendation 16 includes a framework to check money laundering and terrorist financing in the context of wire transfers. Under the new rule, Virtual Assets Service Providers(VASP) came under the gambit of FATF guidelines. Every VASP would be required to share identities of users at both ends of a transfer valued at $1000 or more. VASPs would need to also verify customer identifications between each other. 

The following flowchart beautifully explains the FATF guidelines and its impact in various scenarios (Courtesy: KYC-Chain):

As you can probably gauge that the flowchart, the new travel rule has significant repercussions for exchanges particularly. Apart from disclosing user information for high-value transactions, VASPs are required to monitor all transactions and determine a typical pattern for a transaction which will help spot criminal activity. They . also required to screen customer wallets and share any blacklists with all parties including other VASPs. Moreover, VASPs would need to be licensed or registered in their jurisdiction. 

The basic parameters for compliance with the Travel Rule fly straight into the very nature of the digital asset ecosystem which is fundamentally decentralized and anonymous. This has been the primary reason why regulating the cryptocurrency ecosystem has been rather difficult globally. By principle, most regulations operate on the premise of jurisdictions and national borders. Yes, there are international standards governing capital markets, but the crypto market fundamentally cannot even be governed under those standards. 

The Future

While the deadline for VASPs to comply with the amendments was June 2020 and shortly after, the FATF released a status report on how well member states and VASPs have done on implementing the travel rule. The adoption of FATF guidelines has been rather slow among member states and the VASPs that come under their jurisdictions. The challenges in implementation have been accelerated by COVID-19 related delays and the lack of tech infrastructure to report and enforce on the part of VASPs and regulators, respectively. 

 In a report release a few months ago, FATF acknowledged that out of 54 countries in its review, only 35 have made some progress in implementing the new travel rules. FATF has been working with member countries, VASPs and other key stakeholders to look at solutions that balance the needs of the crypto industry with the implementation of its own guidelines. But experts say it could be years before we could see a meaningful implementation on ground globally. 

It’s primarily because of varying regulations in different countries where VASPs are situated who would need to somehow be governed by an international standard that’s still not solid. However, it’s important to note that the US, Switzerland, and Japan have made some headways in implementing the amendment to the travel rule, which should provide a model for other countries to follow. Key stakeholders continue to take steps to create international standards. Earlier this year, we had the Joint Working Group (JWG), an international industry coalition created by blockchain organizations IDAXA, GDF and Chamber of Digital Commerce, released a crypto data exchange standard for VASPs to follow. These are all steps in the right direction, but we have a long journey ahead to fully secure the crypto ecosystem from illicit activities. 

Sources: Cointelegraph, FATF, KYC-Chain 

About the author
Siddhartha Dasgupta

Contributing Author

Sid has been a content solutions evangelist and a digital marketer for 10+ years. Having written for brands such as IBM, Infosys and other technology corporations and startups, he is always at the cutting edge of researching & writing about emerging technologies.

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