U.S. financial regulator FinCEN published a guidance report yesterday on how cryptocurrencies are currently regulated to prevent financial crime. It provides advice for businesses across the crypto industry including crypto wallets, exchanges and ICO issuers.
The FinCEN guidance came out ahead of a scheduled report by the Financial Action Task Force (FAFT) which held a controversial consultation in February. The most worrying element of the FAFT proposals is regulation 7, clause b, which would require crypto exchanges to submit personal financial data for all transactions.
At the time, many in the crypto industry argued that the approach is infeasible and would require a new infrastructure layer to be built across cryptocurrencies. The new FinCEN report includes the FAFT proposal, suggesting the decision has already been made—the wrong way.
To understand how this will affect the crypto industry, Decrypt spoke to Teana Baker-Taylor, executive director of industry membership body Global Digital Finance, at the Ethereal Summit today:
“The timing of the FinCEN guidance is curious,” she said, adding, “I would have thought that they might have waited until after FATF published their further guidance. The question is, was the U.S. already resolute on implementing [these requirements]?”
Regulation 7b says that “virtual asset service providers”—that is, crypto exchanges—should be held to the same standard as other financial-service providers, such as banks or money-transmitter services. The result would be that cryptocurrency transactions must also contain relevant information regarding the sender and the receiver.
For example, an iBan number contains the relevant country code, bank code, branch number and account number. By comparison, cryptocurrency transactions are identified by a random string of alphanumeric digits. Crypto industry activists have argued that including this information would require a radical overhaul—one that goes against the principles that this industry was founded upon.
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“It would certainly be expensive. It would require the development of some interoperable platform layer that doesn’t exist today. And you would need a third party in there,” Baker-Taylor said. “It is also a question of ideology. If you don’t want to rely on a trusted intermediary, which is kind of what fiat relies on, there are people who would say that’s not what crypto was built for.”
Preventing financial crime is important, but that there are better ways than through this specific regulation, she said. She argued that it would be better for exchanges to have and retain this information—and provide it to law enforcement when required—but that it doesn’t need to be implemented into the cryptocurrency transactions themselves.
FAFT is set to meet in June to decide whether its proposals, including regulation 7b, will be implemented. That is, unless the decision has already been made.