Outlawing Anonymity
When law meets cryptocurrency.
As the market appetite for cryptocurrency and blockchain technology persists, existing standards bodies, such as the Financial Action Task Force (FATF), are beginning to recognise the importance of moving quickly to regulate.
In particular, we are beginning to see a healthy growth in their interest in maintaining a level of regulatory coherence across not only physical and digital currency but also now covering cryptocurrency. Importantly, the recent recommendations made by the FATF not only aid in facilitating improved security, but perhaps even more significantly shows that cryptocurrency is here to stay.
Recent G20 statements and the United Nations Security Council resolutions recognise the FATF’s important role in protecting the integrity of the financial system.
— FATF Plenary, 16–21 June 2019
Examining the conclusions of the FATF plenary in June of this year, it has now clearly been indicated that there is a strong need to accelerate regulation in the cryptocurrency market, particularly with respect to mitigating the risks of money laundering and terrorist financing. The recommendations, made by the FATF, bolster their previous AML/CFT obligations and provide guidance for member countries to implement changes to the law in their own local consituencies.
The report, addressed to all 37 members, details one significant refinement concerning ‘virtual asset service providers’ (VASPs), recommending that:
‘VASPs should exchange information promptly and constructively with their foreign counterparts, regardless of the supervisors’ nature or status and differences in the nomenclature or status of VASPs’
This means that cryptocurrency exchanges should be required to share information concerning their customers when transactions are made between firms, helping to mitigate the risks of money laundering and terrorist financing.
It is worth mentioning that these recommendations, despite not being legally binding, typically carry significant weight in influencing member countries to adopt their recommendations, as failing to comply would render themselves vulnerable with the potential to lose foreign investment.
This new set of guidelines has proved particularly testing for so-called ‘privacy coins’, such as Monero (XMR) and Zcash (ZEC) with their promise for greater security failing to match standards set by the FATF. These privacy coins natively encrypt transaction data which prohibits exchanges from indirectly collecting metadata from exchanges, such as names and addresses, of both senders and receivers of such coins, the result of which leaves users and systems more susceptible to abuse.
Anonymous Cryptocurrencies
Generally, such cryptocurrencies as Monero and Zcash have chosen to brand themselves as ‘privacy coins’. This is, however, a fairly disingenuous term that has been used to market these coins in a more palatable manner.
So-called ‘privacy coins’ are designed to be anonymous.
The fact of the matter is that these coins are intended not to support a reasonable level of privacy, but instead to allow transactions to be made between parties in an entirely anonymous way. Achieved by means of encryption, this means that these coins obfuscate a number of important pieces of information:
- Payment sources;
- Payment destinations; and
- Amounts transacted.
Clearly, by intentionally masking these parts of financial transactions, these anonymity-focused cryptocurrencies are in direct conflict with the legal and requirements for both ‘Know Your Customer’ (KYC) and ‘Anti Money-Laundering’ (AML) regulations. This has the knock-on effect that such currencies can be used directly for illicit purposes, without any of the transacting parties having to comply with financial regulations.
Thankfully the FATF guidelines that reiterate these requirements have spurred a number of exchanges into taking action to combat the illegal activities made possible by anonymous cryptocurrencies. We can already see the effects of these recommendations taking hold, in particular with the South Korean branch of OKEx exchange announcing that it will be delisting 5 of the most popular anonymous cryptocurrencies, Monero (XMR), Zcash (ZEC), Horizon (ZEN), Dash and Super Bitcoin (SBTC), from the 10th October 2019. This, coupled with the decision by Coinbase to prevent UK users buying Zcash (ZEC) from the 26th August this year, suggests that we are heading for a more transparent market whereby users can confidently exchange with a diminishing need for centralised exchanges.
These changes, recommended by the FATF, signal a shift in the wider cryptocurrency ecosystem that will mean cryptocurrencies are properly scrutinised for their properties and ability to comply with KYC and AML financial regulations. This can only be good news for standard digital assets, such as Bitcoin and Bitcoin SV, which promote privacy while never advocating anonymity, and are perfectly able to comply with such regulations on both technical and conceptual levels alike.
