Anonymity is about to get (even more) important

Members of the Financial Action Task Force (FATF) could soon start implementing its ‘Travel Rule’ that could see vast amounts of personal data associated with crypto addresses collected from exchanges.

Bitcoin has a reputation for being anonymous online cash, but it’s far from that. Since the blockchain is transparent, it’s possible to see exactly where money is flowing. If you have information about an address, gained in one way or another, you can start to make associations, linking owners in a vast web of financial transactions.

A bit like 1984, I suppose.

Well, it’s on the way if the Financial Action Task Force (FATF) have anything to do with it. The organisation is a group of 37 member countries, put together to combat money laundering and financial crime.

A couple of months back, the FATF put forward the ‘Travel Rule’, which states that financial organisations have to identify both sender and recipient for transactions of $3,000 or more. For the crypto sector, that means exchanges will be required to make information available about their users every time a moderate deposit or withdrawal is made.

We’re talking about a huge amount of information here. And while member countries will need to enforce this regulation, it’s not what many crypto traders have signed up for. The task force’s stance also raises important questions about the fungibility of crypto: whether money can move freely or whether certain addresses will be considered ‘tainted’. For example, what if only whitelisted addresses are allowed by exchanges? Or if a large number are blacklisted?

While addressing financial crime and terrorist financing are important, this risks a massive adverse effect on the crypto sector, choking the flow of funds to and from exchanges and dissuading crypto users from moving money — especially when they know those transactions will be tracked and personal information handed to a shadowy supranational agency.

What will be the likely outcome? Well, a few things:

• Greater use of unregulated exchanges
• Increased peer-to-peer transactions and trading
• The continued rise of decentralised exchanges
• Greater adoption of ever-improving privacy protocols
• More ways to spend crypto on goods and services, side-stepping the mainstream financial sector entirely

In the medium-term, the FATF’s initiatives may well be harmful to crypto. In the long run, though, if crypto is to survive, it will evolve. Robust privacy and a stronger crypto economy are two obvious ways it will do this.

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