The fate of Privacy-focused digital coins amid the FATF’s “travel rule”
The controversial rule forces the Crypto exchanges to make full disclosure of their Clients’ transactions
The decentralization and privacy of the cryptocurrencies have irked the financial regulators from Day one. Most of the financial authorities actually blame that cryptocurrencies are used by malicious actors for money laundering & other illegal activities. While there is some truth to the fact that cryptocurrencies are the preferred choice of monetary exchange in places like the dark web, mainstream money movement still predominantly takes place across legitimate channels in fiat money.
The real problem arises from privacy-centric coins like Monero(XMR), Dash (DASH) & Zcash(ZEC), which have features that let them avoid any external intrusion or oversight in their transactions. And this where the FATF guidance has become a challenge for cryptocurrency exchanges. FATF or the Financial Action Task Force is an intergovernmental organization of 39 member states created in 1989 to combat money laundering around the Globe.
Back in June of this year, The detailed recommendations were made by FATF in response to the threat that malicious actors might use the virtual assets for their criminal activities. It enforces the so-called “travel rule” saying all jurisdictions should make sure that they collect detailed information about the sender/s & receiver/s which includes the following information. The Crypto businesses or Virtual Asset Providers (VASPS) are to enforce this rule.
- Sender’s name
- Sender’s account number which is used to process digital transactions, such as the digital wallet
- Sender’s physical address, National identity number or customers identification number — something which identifies the sender with the ordering institution
- Receiver’s name and
- Receiver’s account number if it is used to process the transaction
The FATF gave till June 2020 to countries at the time of this declaration to enforce the guidelines in the travel rule. The rule has been a long-standing requirement for all monetary transactions taking place between international banks, but it may be a problem for Crypto exchanges as it undermines the principles of decentralization & privacy that the blockchain technology is based on.
With less than 7 months remaining for the VASPS to comply with the travel rule guidelines, the situation got further complicated with a recent Anti-Money Laundering (AML) Report by CipherTrace — a renowned blockchain compliance solutions provider.
The report highlights the fact that 65% of the top 120 digital exchanges that traded privacy coins had weak or porous KYC (Know Your Client) implementation (left chart above), let alone enforce the stringent rules under the new “Funds Travel Rule.” While only 32% of the top 120 crypto exchanges trade privacy coins, 63% of such VASPS had weak or porous KYC.
The general Crypto market has weakened significantly post-summer, the price movement & the trendline in the privacy coins, nonetheless, shows that the transactions have dropped significantly (right charts above). The worrisome part, however, is not the price drop or the loss of interest in transacting in privacy coins but that some of the VASPS have taken the easy way out — by delisting the privacy coins.
Recently, Cryptocurrency exchange BitBay announced that it would be delisting the biggest privacy-centric coin Monero due to money laundering concerns. Back in September, one of the biggest crypto exchanges OKEx delisted a number of privacy coins like Monero, Dash, Zcash, Horizen & Super Bitcoin (SBTC) on a similar pretext that they were unable to implement the FATF guidelines.
Is this the end of the rope for the privacy-focused cryptocurrencies? I hope not, but time will tell…