Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
The Financial Action Task Force (FATF)—an intergovernmental organization tasked with combating money laundering—issued its crypto derivatives over 15 months ago. Now, following a year-long moratorium on the compliance deadline set in June this year, a second review is fixed for 2021—and when that day arrives, it'll usher in the global enforcement of one of the most divisive edicts in bitcoin regulation: the Travel rule.
On June 21, 2019, the FATF published its crypto derivatives, dubbed "Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers."
The FATF's directives look to marry the crypto market into conventional banking policy. They compel crypto exchanges, and other such bitcoin brokerages, and virtual asset providers, to comply with the same rules as traditional financial institutions.
Initially, the FATF gave its 37 member states exactly a year to adopt the requirements. However, during a plenary held shortly before the 12-month compliance cut-off point, the FATF extended the review process to June 2021. And it's perhaps no surprise. Per the FATF's post-plenary report, just 35 out of 54 reporting jurisdictions have introduced regulation concerning the directives, leaving 19 jurisdictions, as of yet, uncompliant.
While the travel rule remains non-binding "guidance," the FATF can take punitive measures against countries that don't comply by placing them on the dreaded greylist—a roster of undesirable countries effectively barred from international trade and commerce.
What Is the Travel Rule?
The ‘Travel Rule’ detailed in Recommendation 16 of FATF’s guidance was instilled to mitigate the perceived “threat of criminal and terrorist misuse of virtual assets,” and "fight against tax evasion and money laundering." The travel rule is, by far, one of the most contested rules within the FATF directives.
Derived from an eponymous precept of the US' bank secrecy act (BSA), the travel rule has existed since 1996 as an anti-money laundering and anti-terrorist financing measure. As it relates to cryptocurrencies such as bitcoin, the rule requires crypto exchanges, or VASPs, to disclose information on transfers in excess of $1,000—an amount greatly reduced compared to BSA's requirement of disclosures on transfers above $3,000.
Disclosable information includes both the sender’s and recipient’s names, geographical addresses, and full account details.
Per the FATF guidance:
"Countries should ensure that originating VASPs obtain and hold required and accurate originator (sender) information and required beneficiary (recipient) information and submit this information to beneficiary institutions [...] Countries should ensure that beneficiary VASPs obtain and hold required originator information and required and accurate beneficiary information on virtual asset transfers, and make it available on request to appropriate authorities."
The Implications for Bitcoin
As you might imagine, privacy proponents aren't exactly thrilled with the terms.
The bitcoin ethos around anonymity, privacy, and decentralization are well entrenched. Unfortunately, it's these same ideals, and that bad actors and enforcement authorities alike lean on to misuse and misrepresent the sector.
As discussed in a previous piece, the stigma around bitcoin's usage within money laundering is misleading at best. In reality, bitcoin's inherent transparency makes it a pretty poor choice for both money launderers and terrorist financiers.
Hard facts don't seem to justify the move, either.
Various estimates place the total amount laundered via bitcoin at roughly $3 billion this year. Meanwhile, official estimates from the US treasury $300 billion is laundered annually in the US alone.
In fact, in another recent deep dive, we explored the FinCEN Files, a data dump of thousands of suspicious activity reports pertaining to trillions of dollars worth of potentially illicit bank transactions between 1999 to 2017, none of which were acted upon—all despite the BSA's own Travel Rule.
To top it off, the travel rule implementation represents another hazard. The rule could be near impossible for crypto firms to consistently implement. Unlike the traditional baking sector, the cryptocurrency market, decentralized and fragmented as it is, cannot easily collaborate to create such a framework, rendering likely compliance disparities when the need arises to share information.
Additionally, compliance costs could outweigh the causing some firms to move to unregulated countries and operate in grey markets, potentially creating a situation the FATF intended to avoid in the first place.
Still, besides the inherent privacy concerns and implementation qualms, there is a silver lining. Experts believe that with more stringent controls on the bitcoin market, institutional market participants would be more inclined toward adoption. Indeed, the travel rule attacks unregistered and unregulated exchanges. Additionally, while the privacy issue remains, the rule will undoubtedly dissuade money laundering and terrorist financing.
Either way, while the FATF has left their original guidance untouched since 2019, the next 12 months in crypto will be critical in deciding the direction of any new directives. All we can hope is that they end up more lenient toward preserving financial privacy.