NEW FATF REGS: Will crypto exchanges be forced to share your data with the government?

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NEW FATF REGS: Will crypto exchanges be forced to share your data with the government?

New regulations from the Financial Action Task Force may require exchanges and other crypto businesses to share user data with government agencies.

Stripping away anonymity

The focus of the recommendations, which are expected to be released on June 21st, will be the requirement that crypto exchanges, hedge funds, and other similar businesses in the cryptocurrency ecosystem will have to share transaction data with government agencies.

In a nutshell, if someone sends crypto worth at least US$1,000 or €1,000, then the entity (exchange, custodian, hedge fund, etc.) will have to send details about the sender, along with those of the recipient(!), to the appropriate overseeing agency.

This new regulation is being proposed in order to combat money laundering and the use of cryptocurrency in financing terrorism.

Massive impact

The Financial Action Task Force is a multi-government agency whose recommendations are followed by roughly 200 countries around the world, including the United States, Australia, Germany, France, Brazil, China, Japan, United Kingdom, Singapore, Israel, New Zealand, and India.

Compliance with these new regulations by FATF member countries is highly likely as failure to comply can result in a country being added to the agency’s blacklist, effectively cutting off its access to the global financial system.

Pros and cons of increased oversight

Pros and cons of increased oversight

Reaction to these impending regulations has been mixed, with some voices saying such oversight is unavoidable and could benefit the industry in the long run.

“While it may be a hardship, it seems to be something that’s necessary. The road map at the end of the day after this is less arduous for this industry,” says Jesse Spiro of Chainalysis.

“People in crypto like to make a big deal about giving personally identifiable information to the government, but I don’t see a whole lot of disruption for legitimate players if the proposal is enacted,” adds Phil Liu, chief legal officer at Los Angeles-based hedge fund Arca.

Opponents point out that such regulations could drive people to make direct transactions away from exchanges, which would then defeat the stated purpose of combating money laundering and financing terrorism.

“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,” says Jeff Horowitz of Coinbase.

Crypto hedge funds would also be severely impacted due to trading delays and increased transaction fees.

CryptoFundResearch CEO Josh Gnaizda estimates that as many as 500 such funds could have their returns significantly reduced as a result.

'Fundamental restructuring of blockchain'

‘Fundamental restructuring of blockchain’

From a technological and financial standpoint, many industry leaders are concerned that compliance with the new cryptocurrency regulations will be very difficult and quite expensive.

“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,” notes Bittrex’s John Roth.

Mary Beth Buchanan, general counsel for Kraken, is even less optimistic:

“Without enhanced technology systems, this is a case of trying to apply 20th-century rules to 21st-century technology. There’s not a technological solution that would allow us to fully comply.”