G20 approves rules to shake up cryptocurrency industry
New rules aimed at fighting money laundering and terrorism have been met with criticism from industry leaders
Leaders attending the G20 summit on Osaka, Japan last week have officially welcomed the adoption of cryptocurrency guidelines that could see a significant change in how digital currencies afford protections for criminals.
The global money-laundering watchdog the Financial Action Task Force (FATF) finalised its official guidelines on 21 June that would see all cryptocurrency exchanges compelled to collect and send personal information of the originator when conducting transactions to reduce anonymity.
Dubbed 'the travel rule', section 15 of FATF's G20 report (PDF) states that exchanges must collect and transmit personal information such as the originator's name, bank details, location information and the recipient's account number during transactions.
The personal information would have to be sent from the originator's service provider to the recipient's service provider. These rules wouldn't affect person-to-person transactions made away from a cryptocurrency exchange, but information about each trader of a transaction would be collected and transmitted.
It's thought that exchanges will have to establish an encrypted messaging system to communicate the necessary information but doing so will demand a huge collaborative effort.
The finalised rules were presented to leaders at the G20 summit held between on 28-29 June who said: "We reaffirm our commitment to applying the recently amended FATF Standards to virtual assets and related providers for anti-money laundering and countering the financing of terrorism".
"We welcome the United Nations Security Council Resolution 2462, which stresses the essential role of the FATF in setting global standards for preventing and combatting money laundering, terrorist financing and proliferation financing," said Prime Minister Shinzo, sitting alongside President Trump.
"We reiterate our strong commitment to step up efforts to fight these threats, including by strengthening the FATF's global network of regional bodies. We call for the full, effective and swift implementation of the FATF Standards."
The comments made at the summit mark the first time the world leaders have officially voiced their support for the guidelines and call for their swift adoption.
Many industry leaders have spoken out against the FATF rules, claiming that the effort it would take to become compliant would be gargantuan as well as being hugely expensive.
"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," said John Roth, chief compliance and ethics officer at Biitrex, speaking to Bloomberg. "You can imagine difficulties in trying to build something like that."
While FATF's idea is sound, the oversight of the guidelines is that they have a good chance of driving people away from exchanges and into person-to-person transactions which would retain the anonymity criminals seek in cryptocurrencies.
"I get why the FATF wants to do this," Jeff Horowitz, chief compliance officer at San Francisco-based Coinbase, speaking to Bloomberg. "But applying bank regulations to this industry could drive more people to conduct person-to-person transactions, which 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 (VASPs)."
Although the rules won't be legally binding, if VASPs fail to apply the rules then they could be locked out of the global financial network which could ruin an exchange.