The New Rules That Could Cripple the Crypto Market

Bitcoin and other cryptocurrencies have operated in a Wild West market that has often skirted the level of government oversight exercised over traditional financial systems. Now, however, the highly volatile industry could face its largest threat yet, as outlined in a recent Bloomberg report.

An intergovernmental organization is expected to publish rules on June 21 that could cause delays for trading the digital asset, as well as sharply boost costs for crypto exchanges and about 500 crypto funds. The new rules are “one of the biggest threats to crypto today,” according to Eric Turner, director of research at crypto researcher Messari Inc. “Their recommendation could have a much larger impact than the SEC or any other regulator has had to date," he added.

New FATF Guidelines

  • New guidelines outline how government should oversee crypto businesses
  • Will affect exchanges, custodians and crypto hedge funds, others
  • Require companies to gather information on customers that initiate transactions in excess of $1,000 or 1,000 euros
  • Could drastically increase transaction times, costs, and a jump in P2P transactions

Source: Bloomberg

The Financial Action Task Force is a multi-government effort that develops recommendations for combating money laundering and the financing of terrorism, per Bloomberg. The organization, which has 38 members including the U.S. and is followed by over 200 countries, is preparing to release guidelines on dealing with cryptocurrency for each country to implement on its own, according to FATF spokeswoman Alexandra Wigmenga-Daniel. The organization will outline how governments should oversee businesses working with tokens and cryptocurrencies, including exchanges, custodians and crypto hedge funds.

Regulation Viewed as a Major Burden

The new FATF guidelines will require all companies to gather information on customers that initiate transactions in excess of $1,000 or 1,000 euros, including details about the funds’ recipients. This information must then be sent to the recipient’s service provider. While at face value this may seem simple, the process could prove extremely time consuming and inefficient.

This new burden involves pinpointing the recipient of funds in an industry wherein most wallet addresses on digital ledgers supporting cryptocurrencies are anonymous, per Bloomberg.

John Roth, chief compliance officer at crypto exchange Bittrex, which has about $58 million in daily-trading volume, offered a downbeat outlook on the new regulation. “It’s either going to require a complete and fundamental restructuring of blockchain technology, or it’s going to require a global parallel system to be sort of constructed among the 200 or so exchanges in the world,” he stated to Bloomberg. “You can imagine the difficulties in trying to build something like that.”

Mary Beth Buchanan, general counsel at Silicon Valley-based Kraken, an exchange with other $195 million in daily trading volume, says that there are a handful of U.S. exchanges that are attempting to create such a system.

“Without enhanced technology systems, this is a case of trying to apply 20th-century rules to 21st-century technology,” Buchanan said to Bloomberg. “There’s not a technological solution that would allow us to fully comply. We are working with international exchanges to try to come up with a solution.”

Such a system could result in a surge in person-to-person transactions for traders seeking to safeguard their privacy. In this regard, the application of bank regulations in the crypto world would result in less transparency for law enforcement.

“The FATF really needs to consider the many unintended consequences of applying this specific rule to virtual-asset service providers,” said Jeff Horowitz, the Chief Compliance Officer at popular crypto-exchange Coinbase, to Bloomberg, although he noted that he understands “why FATF wants to do this.”

Looking Ahead

Much still depends on how the FATF rules will be interpreted and enforced by country-specific regulators. Organizations such as the Financial Industry Regulation Authority (FINRA) are expected to start doubling down on enforcement and could be followed by state agencies, per the news report.

If there’s one thing that’s for certain, it’s that if a country does not comply with the new rules, it will be put on a blacklist and thus at risk of “essentially losing access to the global financial system,” according to Jesse Spiro, head of policy at crypto investigative firm Chainalysis Inc.

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