With bitcoin and the cryptocurrency market, in general, becoming more popular, it comes as no surprise to see an uptick in government oversight. The Financial Action Task Force (FATF) is set to issue guidelines to over 200 countries on how to police the virtual currency scene in their respective nations.
These new rules could impose extra regulatory restrictions on cryptocurrency exchanges especially as they affect privacy. In response, the digital trading market could begin to put greater emphasis on decentralized exchange (DEX) platforms.
FATF Bitcoin Regulations Imminent
By June 21, 2019, the intergovernmental body – FATF, will issue guidelines to the 200 countries that follow its rules on how to govern the virtual currency industry. This move is part of the FATF’s anti-money laundering (AML) and terrorist financing efforts.
Alexandra Wijmenga-Daniel, a spokesperson for the agency in an email to Bloomberg said these new guidelines will cover exchanges, custody platforms, and hedge funds to mention a few. Reports also indicate that these new provisions will mirror many of the longstanding laws already governing the mainstream banking and finance sectors.
According to Bloomberg, the FATF guidelines will advise countries to impose strict Know-Your-Customer (KYC) protocols on all participating entities in the cryptocurrency space. These laws will apply to cryptocurrency transactions that exceed $1,000 or 1,000 euros.
Governments will also have access to customer data about the individuals on the receiving end of such transactions to track potential money laundering or terrorist financing activities. Such large-scale data collection laws would seriously impact the privacy of bitcoin transactions.
Compulsory KYC Could Mean More Headaches for Exchanges
These new FATF guidelines could mean extra compliance headaches for bitcoin exchanges across the globe. Apart from the cost of compliance, platforms will also have to go the extra mile in determining who transaction recipients are, which means developing bespoke technologies.
John Roth of Bittrex identifies this same issue, saying:
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. You can imagine difficulties in trying to build something like that.
As previously reported by Blockonomi, Japan is already taking steps to impose stricter laws on cryptocurrency exchanges operating in the country. These new measures come as the country tries to obtain a favorable FATF rating when the intergovernmental agency comes calling in the Fall of 2019.
Like Japan, other jurisdictions will most likely come down hard on errant platforms leading to shutdowns on these noncompliant exchanges. Stricter KYC protocols also add to the list of compliance issues many platforms face in different countries.
Unclear securities laws have seen three major exchanges – Binance, Poloniex, and Bittrex, geofence U.S. traders since the start. Depending on the extent of the impending FATF mandate, more platforms might be forced to geofence American traders as well.
Pivot to DEX Highly Likely
Privacy is arguably one of the fundamental bedrocks of cryptocurrency and the institution of compulsory KYC laws might cause participants to move away from centralized trading avenues subject to government laws. This pivot could open the way for peer-to-peer (P2P) trading via DEX platforms to become more popular.
Jeff Horowitz of Coinbase speaking to Bloomberg makes a similar observation, saying:
“I get why the FATF wants to do this, 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).”
DEX platforms usually do not involve fiat transactions thus removing the need to comply with KYC. However, for such a pivot to become mainstream, then DEX platforms will require improved user interfaces as they are notoriously difficult to use when compared to their centralized counterparts.