[2019-06-11] Crypto Exchanges Are Facing Their Biggest Regulatory Hurdle Yet

[squatter]

The FATF is planning to publish guidelines for cryptocurrency oversight on June 21st. This is notable because the G20 has affirmed its intention to enforce these guidelines in their own countries. The guidelines will apparently require exchanges to move beyond customer KYC and begin collecting information about the recipients of withdrawn funds.

Countries that don't comply by forcing these rules upon exchanges can be blacklisted by the FATF, essentially turning them into banking pariahs.

Bloomberg reports:

On June 21, the Financial Action Task Force -- a multi-government effort that develops recommendations for combating money laundering and financing of terrorism that’s followed by about 200 countries including the U.S. -- will publish a note to clarify how participating nations should oversee virtual assets, FATF spokeswoman Alexandra Wijmenga-Daniel said in an email. The new rules will apply to businesses working with tokens and cryptocurrencies, such as exchanges and custodians and crypto hedge funds.

Much depends on how the rules -- long governing traditional bank wire transfers -- will be interpreted and applied by country-specific regulators, but they are “one of the biggest threats to crypto today,” Eric Turner, director of research at crypto researcher Messari Inc., said in an email. “Their recommendation could have a much larger impact than the SEC or any other regulator has had to date.”

The guidelines will require companies ranging from exchanges Coinbase Inc. and Kraken to asset manager Fidelity Investments to collect information about customers initiating transactions of over $1,000 or 1,000 euros, as well as details about the recipients of the funds, and to send that data to the recipient’s service provider along with each transaction.

While that may sound simple, compliance will be costly and technically difficult, said John Roth, chief compliance and ethics officer at Seattle-based exchange Bittrex, which has about $58 million in daily-trading volume. After all, wallet addresses on digital ledgers supporting cryptocurrencies are largely anonymous, so an exchange currently has no way of knowing who the recipient of the funds is.

“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,” Roth said. “You can imagine difficulties in trying to build something like that.”

A handful of U.S. exchanges are discussing how to set up such a system, said Mary Beth Buchanan, general counsel at San Francisco-based Kraken, which does about $195 million in daily volume.

Just how soon these consequences start to hit home will depend on the individual agencies. Groups like the Financial Industry Regulatory Authority (FINRA) are expected to start to vigorously enforce the rules. Financial Crimes Enforcement Network (FinCEN) recently issued interpretive guidance that looks similar to those being considered by FATF. Some state agencies could follow suit, raising the risk that non-compliant businesses will lose money-transmitter licenses.

If a country doesn’t comply with FATF rules and is placed on its blacklist, “it can essentially lose access to the global financial system,” said Jesse Spiro, head of policy at crypto investigative firm Chainalysis Inc.

Link to the full article

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[chaoscoinz]

The FATF is planning to publish guidelines for cryptocurrency oversight on June 21st. This is notable because the G20 has affirmed its intention to enforce these guidelines in their own countries. The guidelines will apparently require exchanges to move beyond customer KYC and begin collecting information about the recipients of withdrawn funds.

Countries that don't comply by forcing these rules upon exchanges can be blacklisted by the FATF, essentially turning them into banking pariahs.

Bloomberg reports:

On June 21, the Financial Action Task Force -- a multi-government effort that develops recommendations for combating money laundering and financing of terrorism that’s followed by about 200 countries including the U.S. -- will publish a note to clarify how participating nations should oversee virtual assets, FATF spokeswoman Alexandra Wijmenga-Daniel said in an email. The new rules will apply to businesses working with tokens and cryptocurrencies, such as exchanges and custodians and crypto hedge funds.

Much depends on how the rules -- long governing traditional bank wire transfers -- will be interpreted and applied by country-specific regulators, but they are “one of the biggest threats to crypto today,” Eric Turner, director of research at crypto researcher Messari Inc., said in an email. “Their recommendation could have a much larger impact than the SEC or any other regulator has had to date.”

The guidelines will require companies ranging from exchanges Coinbase Inc. and Kraken to asset manager Fidelity Investments to collect information about customers initiating transactions of over $1,000 or 1,000 euros, as well as details about the recipients of the funds, and to send that data to the recipient’s service provider along with each transaction.

While that may sound simple, compliance will be costly and technically difficult, said John Roth, chief compliance and ethics officer at Seattle-based exchange Bittrex, which has about $58 million in daily-trading volume. After all, wallet addresses on digital ledgers supporting cryptocurrencies are largely anonymous, so an exchange currently has no way of knowing who the recipient of the funds is.

“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,” Roth said. “You can imagine difficulties in trying to build something like that.”

A handful of U.S. exchanges are discussing how to set up such a system, said Mary Beth Buchanan, general counsel at San Francisco-based Kraken, which does about $195 million in daily volume.

Just how soon these consequences start to hit home will depend on the individual agencies. Groups like the Financial Industry Regulatory Authority (FINRA) are expected to start to vigorously enforce the rules. Financial Crimes Enforcement Network (FinCEN) recently issued interpretive guidance that looks similar to those being considered by FATF. Some state agencies could follow suit, raising the risk that non-compliant businesses will lose money-transmitter licenses.

If a country doesn’t comply with FATF rules and is placed on its blacklist, “it can essentially lose access to the global financial system,” said Jesse Spiro, head of policy at crypto investigative firm Chainalysis Inc.

Link to the full article

And so it begins, I don't know who it was that called it, but I distinctly remember them saying that 2019 would be the year of regulation for crypto. I guess once they iron out rough parts, confidence might build and hopefully we will see more healthy growth within the market.
   The chances of an ETF passing at this rate this year, seems pretty good, I hope so before the end of the year. I know the bear has alot of people feeling down, including myself. Eerily similar to how the wild west was won, one regulation at a time
time.

[Schirer]

I am all for regulation, but isn t this a step too far?

I think that enforcing KYC and AML is enough to enforce to exchanges, the hurdle of gathering txs data would not bee forced on them. If necessarily, agencies can track these transactions for them selves.

I think that this organization should focus more on scams which includes exchanges, they should introduce guidelines for wash trading and some kind of registry for exchanges.

[1Referee]

I am all for regulation, but isn t this a step too far?

I think that enforcing KYC and AML is enough to enforce to exchanges, the hurdle of gathering txs data would not bee forced on them. If necessarily, agencies can track these transactions for them selves.

I think that this organization should focus more on scams which includes exchanges, they should introduce guidelines for wash trading and some kind of registry for exchanges.

If you're all for regulation then there is no such a thing as a step too far.

Governments more than ever are out to obtain as much of your infomation as possible, and they won't shy away from using ugly methods to get what they want. Bitcoin threatens the control they had for a long time through the banking system. Now there is a decentralized way to store wealth outside the banking system they have to adjust their game plan.

Governments care little about scams and shady activity on exchanges. It's being used as an excuse to take away as much of your freedom as possible. You having financial freedom and a certain degree of privacy is more harmful to them than a bunch of con artists stealing people's money.

[dunfida]

Governments care little about scams and shady activity on exchanges. It's being used as an excuse to take away as much of your freedom as possible. You having financial freedom and a certain degree of privacy is more harmful to them than a bunch of con artists stealing people's money.

Bolded part.

This is indeed the reality where they dont really care with those scams lies around but they do focus out on who are the ones who uses up
crypto.

Cryptocurrency is the biggest threat to them and as been said they do need to adjust everything with having those desperate moves to be taken
no matter how it would be done.

[bbc.reporter]

Was it not avoidance of regulatory resistance where the cryptospace was founded? I reckon the FATF's plan will push some cryptocoin trading in exchanges with no KYC or the darknet, creating another free cryptospace. The governments will be back to a similar problem again hehehe.

[Vishnu.Reang]

Someone please correct me if I am wrong. The article says that only transactions that are worth more than $1,000 will be monitored. So what will happen if an user makes multiple transactions of $999.99 during the same day? Also, since these regulations are applicable only to such users, if I have only $100 in my exchange wallet, do I have to undergo KYC?

[DooMAD]

Someone please correct me if I am wrong. The article says that only transactions that are worth more than $1,000 will be monitored. So what will happen if an user makes multiple transactions of $999.99 during the same day? Also, since these regulations are applicable only to such users, if I have only $100 in my exchange wallet, do I have to undergo KYC?

And also, is it $1000 at the precise moment of the withdrawal?  Or could you withdraw $950 at one point in the day and then there's a massive price spike and suddenly your transaction is worth more than $1000?  The exchanges will struggle to know which ones to report on when the price is volatile.  Seems pretty dumb to measure it in fiat like that.  It's going to cause all sorts of perceived indiscrepencies.

[hv_]

Someone please correct me if I am wrong. The article says that only transactions that are worth more than $1,000 will be monitored. So what will happen if an user makes multiple transactions of $999.99 during the same day? Also, since these regulations are applicable only to such users, if I have only $100 in my exchange wallet, do I have to undergo KYC?

And also, is it $1000 at the precise moment of the withdrawal?  Or could you withdraw $950 at one point in the day and then there's a massive price spike and suddenly your transaction is worth more than $1000?  The exchanges will struggle to know which ones to report on when the price is volatile.  Seems pretty dumb to measure it in fiat like that.  It's going to cause all sorts of perceived indiscrepencies.

This is a cumulative threshold per day, same as for fiat. And yes, there are bagatelle amounts where nothing happens.

The roadmap is clear, any any try against this , mostly by bad protocol or mixer apps or shady hooks, will be bad for the global adoption, which is now starting top down and will pave the road for a very few cryptos (I bet Bitcoin impl bsv) accepted, promoted and really used (not only speculation).

[webtricks]

~

Governments more than ever are out to obtain as much of your infomation as possible, and they won't shy away from using ugly methods to get what they want. Bitcoin threatens the control they had for a long time through the banking system. Now there is a decentralized way to store wealth outside the banking system they have to adjust their game plan.

Governments care little about scams and shady activity on exchanges. It's being used as an excuse to take away as much of your freedom as possible. You having financial freedom and a certain degree of privacy is more harmful to them than a bunch of con artists stealing people's money.

What do you mean by financial freedom? Evading tax is called financial freedom? Governments are asking for multi-country exchange details in order to curb malpractices and tax evasion on large scale. I don't feel anything wrong in that. I am always open to pay any tax liability payable on my earnings.
When it comes to cryptocurrencies, governments can only act as watch dogs, not greyhounds. They can only surveillance crypto movements but can't control them. No matter what kind of regulations governments bring, using Bitcoin still provide financial freedom. No government can devalue bitcoin according to its own economy, no government can ban circulation of bitcoin, so bitcoin still maintains its freedom.

[figmentofmyass]

And also, is it $1000 at the precise moment of the withdrawal?  Or could you withdraw $950 at one point in the day and then there's a massive price spike and suddenly your transaction is worth more than $1000?  The exchanges will struggle to know which ones to report on when the price is volatile.  Seems pretty dumb to measure it in fiat like that.  It's going to cause all sorts of perceived indiscrepencies.

it's based on the time of withdrawal, which is not ambiguous. this can be timestamped to the millisecond. given that we're talking about exchanges, it should be easy enough to coordinate the exchange price to a timestamp. i don't think that's the struggle for exchanges.

the struggle has to do with establishing an "enhanced due diligence" and "know your customer's customer" system among all the exchanges. this requires lots of third party coordination and might raise legal privacy issues depending where customers live.

[Schirer]

Governments care little about scams and shady activity on exchanges. It's being used as an excuse to take away as much of your freedom as possible. You having financial freedom and a certain degree of privacy is more harmful to them than a bunch of con artists stealing people's money.

That is actually accurate , that they care little about people scamming thru cryptos.

So what you would suggest? Total privacy with cryptos so that government tax agencies would not see those who are using crypto to avoid taxes?
Just trust everyone that they will pay their taxes?

[1Referee]

What do you mean by financial freedom? Evading tax is called financial freedom? Governments are asking for multi-country exchange details in order to curb malpractices and tax evasion on large scale. I don't feel anything wrong in that. I am always open to pay any tax liability payable on my earnings.
When it comes to cryptocurrencies, governments can only act as watch dogs, not greyhounds. They can only surveillance crypto movements but can't control them. No matter what kind of regulations governments bring, using Bitcoin still provide financial freedom. No government can devalue bitcoin according to its own economy, no government can ban circulation of bitcoin, so bitcoin still maintains its freedom.

It goes way further than tax evasion and malpractices. Governments are desperately trying to regain the control that they lost by restricting the centralized ecosystem around Bitcoin as much as possible. Financial freedom doesn't stop with Bitcoin being decentralized and them not being able to seize your coins.

The main thing is that our transaction history in Bitcoin and other crypto currencies will dictate how much freedom we will have outside the Bitcoin ecosystem. You still use a bank account right? Or PayPal, MasterCard, etc. One transaction to an entity they don't like might result in you being dumped off their service and potentially others too if these institutions share data with each other.

Coinbase is dumping off users from its platform because they withdrew Bitcoin to a service their banking partners don't like. It's only a matter of time before they will dump you off their service if the address you deposit coins from contains transaction activity between you and a party their banking partner doesn't like. It's a teaser. Prepare for worse.

So what you would suggest? Total privacy with cryptos so that government tax agencies would not see those who are using crypto to avoid taxes?
Just trust everyone that they will pay their taxes?

There is no such a thing as total privacy in crypto unfortunately, and as I have said above, it's not just about tax. I would suggest for now that you split your funds into wallets each with its own purpose (e.g. one as cold wallet, one to use on a daily basis, one for the coins you speculate with, etc).

The goal is to not signal to centralized entities that your daily use wallet is linked to your cold wallet and vice versa. All we can do at this point is minimize the amount of data governments will be able to extract from us.

[Sithara007]

Someone please correct me if I am wrong. The article says that only transactions that are worth more than $1,000 will be monitored. So what will happen if an user makes multiple transactions of $999.99 during the same day? Also, since these regulations are applicable only to such users, if I have only $100 in my exchange wallet, do I have to undergo KYC?

And also, is it $1000 at the precise moment of the withdrawal?  Or could you withdraw $950 at one point in the day and then there's a massive price spike and suddenly your transaction is worth more than $1000?  The exchanges will struggle to know which ones to report on when the price is volatile.  Seems pretty dumb to measure it in fiat like that.  It's going to cause all sorts of perceived indiscrepencies.

This is a cumulative threshold per day, same as for fiat. And yes, there are bagatelle amounts where nothing happens.

The roadmap is clear, any any try against this , mostly by bad protocol or mixer apps or shady hooks, will be bad for the global adoption, which is now starting top down and will pave the road for a very few cryptos (I bet Bitcoin impl bsv) accepted, promoted and really used (not only speculation).

OK... In case it is the cumulative threshold per day, then we need to be careful about it. That means that someone trading as little as BTC0.08 can come under the radar of FATF. Now the option left for us is to use multiple exchanges, if we want to trade more than $1,000 worth of coins. In case I split $2,000 worth of coins to four exchanges, then they don't need to report it, right?