Governments appear to want to split bitcoin into two. But will they succeed?
In June, the Financial Action Task Force (FATF), a group of 36 governments seeking to address money laundering, said it wants to tighten its rules on the transfer of virtual assets like bitcoin.
New FATF guidelines place an obligation on cryptocurrency exchanges—where the general public can convert cryptocurrencies to traditional money, and vice versa—to obtain, hold, and transmit information about their users.
“The United States calls on all nations to join us in standing together against those who threaten the security of the international financial system”
The new rules will apply to anyone sending or receiving virtual assets like bitcoin to or from an exchange.
The objective of the guidelines, says FATF, is to force exchanges to identify and report suspicious transactions, freeze the assets of what it sees as illicit actors, or prohibit transactions with designated persons and entities. Currently, FATF blacklists two countries, Iran and North Korea.
FATF says it will monitor the implementation of its new requirements, which are non-binding. It will conduct a 12-month review of countries’ adherence to the rules in June 2020.
Speaking in June, US Treasury secretary Steven Mnuchin said he expects other countries to comply.
“The United States calls on all nations to join us in ensuring the FATF’s standards are implemented globally, and standing together against those who threaten the security of the international financial system,” Mnuchin said.
Risk of a split
If fully implemented, the FATF rules could split bitcoin into two categories—those with a clean history and those with a suspect one—said Obi Nwosu, chief executive of London-based cryptocurrency exchange Coinfloor.
Nwosu was speaking on the latest New Money Review podcast, ‘the future of money in 30 minutes’.
“Almost inevitably, there’s a bifurcation occurring within any given cryptocurrency,” said Nwosu.
“At some point there will be a line that identifies a coin as clean or not clean”
“In bitcoin,” he went on, “newly mined coins can trade at a premium over coins that have traded for some time. There’s a higher confidence they’ll be seen as clean by almost any jurisdiction.”
Bitcoin’s underlying database, or ‘blockchain’, allows anyone to see a particular bitcoin’s past transaction history.
Coins with a long history might be perceived as tainted if it could be shown they had passed through a darknet website, or had been linked to an entity suspected of financing terrorism.
Nwosu said this premium for newly mined bitcoin varies but could be “in the low single percentage points.”
“At some point there will be a line that identifies a coin as clean or not clean,” said Nwosu.
“The problem with this is that it strikes at the heart of a currency’s need to be fungible,” he went on.
In fungible currencies, users are happy to treat one currency unit and another as identical.
“That is a big concern for the cryptocurrency space,” said Nwosu.
“A lot of work is being done to increase fungibility, not to aid certain people that jurisdictions don’t want to transact with, but to help the average consumer.”
But if governments push too hard on the compulsory reporting of cryptocurrency transactions, a backlash may occur in any case, as technologists introduce new privacy features, said Nwosu.
“There’s a risk that the FATF’s new travel rule is going too far and could have negative effects,” said Nwosu.
“We welcome the development of new privacy technologies,” said Nwosu, “but we want to see them happen with a view to allowing regulators to achieve their objectives.”
“What we don’t want to see happen is these technologies being developed without any consideration for that. That could happen if regulators don’t take a balanced view.”
Raising the stakes for cryptocurrency
David Carlisle, head of community at Elliptic, a blockchain monitoring company, said the new FATF rules have undoubtedly raised the stakes for those involved in the cryptocurrency market.
“There are undoubtedly points of tension”
“There are undoubtedly points of tension that require a very close consideration by regulators, the industry and all stakeholders,” he said.
Carlisle is a former policy advisor at the US Treasury’s office of terrorist financing and financial crimes.
But he explained that the new FATF reporting rules don’t affect cryptocurrency transactions being done on a bilateral basis.
The podcast participants discussed a theoretical example of a North Korean bitcoin miner buying a tanker of oil from a Chinese entity, and paying in bitcoin using a direct peer-to-peer transfer.
“The new rules wouldn’t be able to stop such a transaction taking place,” said Carlisle.
“Where the FATF rules have greater effect is where an illicit actor may want to interact with a regulated entity,” he said.
“If they want to cash out their cryptocurrency, the overwhelming likelihood is that they would have to interact with a virtual asset service provider, who is obliged to comply with the FATF rules.”
“The new FATF guidance provides a robust and expansive framework to ensure there are more covered entities that need apply anti-money-laundering requirements,” Carlisle said.
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