To keep my imaginary audience of readers on their toes, I would like to talk about a very important topic today. I’m 100% sure that you have missed that Binance has joined the Global Travel Rule Alliance to ‘advance interoperable compliance and strengthen security’ in alignment with the Financial Action Task Force’s recommendations, later just FATF.
Well, that’s a very fancy way of saying that the biggest crypto exchange in the world will be cracking down on money laundering by monitoring all transactions over $1K. Yep, each day we stray further from Satoshi’s vision and witness the crypto industry moving to full centralization.
But before we get to the nitty-gritty, we have a lot of new terms to push into our think tanks…
FATF, VASP and Other Offensive 4-Letter Words
FATF is the main international institution involved in the development and implementation of international standards in the field of anti-money laundering.
It was established in 1989 by G7 countries. The creation of the group was a response to the increased volumes of criminal proceeds being laundered around the world. Given the complexity of identifying ‘dirty money’ in the international financial system, there was an understanding of the urgency of developing collective measures to combat financial crimes.
Remember the times when some of us were afraid that crypto will be banned? It won’t happen. But crypto will be overregulated by those who facilitate virtual asset transactions, designated Virtual Asset Service Providers, or VASPs. Binance is certainly a VASP, because they:
I. exchange virtual assets and fiat currencies;
II. exchange between one or more forms of virtual assets;
III. transfer virtual assets;
IV. safekeep and/or administrate virtual assets or instruments enabling control over virtual assets;
V. participate in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
Fast forward to last week, Binance has reported that making crypto compliant with existing regulatory frameworks and interoperable with traditional legal and financial systems is an “enormous yet hugely worthwhile task”.
Yeah, let me save you from the barrage of buzzwords in their blog post by highlighting the key part:
“This strategic move is designed to keep us in alignment with the Financial Action Task Force’s Recommendation 16, a reporting requirement also known as the Travel Rule, which is already being enforced across various countries and is set to become the universal standard within the coming years.”
Travel rule, another pesky term… yeah, it’s not about flying to Panama for a pair of cocktails. FATF recommends applying traditional bank wire transfer requirements on crypto currency transactions.
‘Travel Rules’ + ‘The Wild West’ = ?
Travel rules require financial institutions engaged in virtual asset transfers to obtain required and accurate originator and beneficiary information and share it with counterparty VASPs or financial institutions during or before the transaction.
The FATF recommends that countries adopt a de minimis threshold of 1,000 USD/EUR for such transfers. While the transfer of personal data between financial institutions has been a long-established process, it is still a relatively new requirement for the crypto industry – one that entails building an unprecedented communication network between crypto platforms.
Cryptocurrency exchanges and service providers will be obligated to gather information and apply rigorous due diligence measures to such transfers, based on risk assessment. Consequently, they might reject transactions and subject funds to automated checks.
Honestly, this regulatory framework appears to stem from the perception of cryptocurrency users as adversaries, prompting centralized entities to impose restrictions. It grants more authority to these entities to freeze or seize user funds under the guise of complying with AML regulations. This could lead to situations where funds are held hostage if exchanges refuse to process certain transactions.
The stringent regulations impose limitations on individuals’ use of their own funds to accommodate their own bureaucratic preferences. To summarize, these new regulations intend to:
- Force those active in crypto to be licensed and regulated as banks;
- Create full transparency for major transactions;
- Exclude and freeze assets of persons, activities, and countries labeled a risk;
- Force the inclusion of user information with transactions;
- Revoke the license of those who don’t comply.
And believe me, with times, the regulations will silently transition to a massive overreach and force all service providers in the industry to:
- Record ALL crypto trades on exchanges;
- Record purchases from private wallets;
- Record all transfers to cold storage and make lists with private wallet addresses;
- Send all this info annually to the tax authorities;
- And finally, the G20 will force governments to pass these rules into domestic law.
Will this help fight organized crime? Time will tell, but one thing is for certain – something is fundamentally wrong with regulations if you bar billion people from global finance in order to catch 0.1% of small/middle criminals while allowing the big boys to launder billions of dollars.
Maybe they have changed their ways. In my article about CZ I said that Binance will pay some fines, and will be forced to start playing by the rules because in any other event they’ll go ‘belly up’. And now we see that they’re strengthening internal controls to comply with all requirements for compliance, regulations, checks, and other AML activities. They are actually washing their hands after juggling dirty money for years!
But here’s the truth, criminals are always one step ahead and the regulators are busy making roadmaps. So let’s talk about what it really means for simple folks like you and me.
The War On Privacy Will Never Stop
Make no mistake about it, Binance is transforming into a fluffy harmless sheep not only to get rid of the criminal stench that has followed them for a decade.
The aim of these standards is to get automatic insight into all your trades, even laying the foundation to prevent you from spending coins anonymously. This means in practice that although you can hold coins in your private wallet, in a few years you won’t be able to spend or exchange them anonymously. Expect far more scrutiny on transactions. From exchanges, but also from the people and businesses you are dealing with for everyday crypto activity.
Secondly, as compliance costs would escalate, VASPs will find themselves burdened with unpaid financial surveillance and troves of data to inspect. This will compel them to make tough decisions regarding customer acceptance, often leading to the exclusion of small businesses, deemed “high risk,” and individuals in developing nations.
“We froze your money because you’re from a war-torn country, and we don’t have time to check the details, NEEEEEXT.”
Maybe I’m being too dramatic, but this trend sets a precedent for centralized surveillance of individual transactions. International law frameworks that supersede national legislation will demand every country in the world to comply.
This pervasive surveillance not only jeopardizes privacy of regular people, but also challenges the fundamental concept of
an open payment system conducive to free economic exchange. It is a sad state of affairs, my dear friends, and only a massive and radical decentralization can prevent this dystopia.
This big cowboy adventure is running to its end. Exchanges are building railroads and enforcing travel rules, laws are getting stronger, and there will be more sheriffs to keep things in order.