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Beyond KYC: Regulators Set to Adopt Tough New Rules for Crypto Exchanges



The Takeaway

  • The Financial Action Task Force (FATF) is set to finalize new international standards for regulating cryptocurrency firms next month.
  • Those standards are widely expected to subject crypto exchanges, wallet providers and others to the “travel rule” long followed by correspondent banks.
  • Industry representatives say this requirement would be onerous if not unworkable for crypto businesses, and bad for user privacy.
  • FATF “recommendations” aren’t legally binding, but countries that don’t follow them get blackballed in the global economy.

The cryptocurrency industry is bracing for forthcoming international regulatory standards that would require exchanges to collect and share information about where and to whom they are sending money.

This would go beyond the basic “know your customer” (KYC) rules that bedevil many crypto users. In addition to verifying and keeping records of their own users’ identities, exchanges and other service providers would have to pass customer information to each other when transferring funds, just as banks are required to do. This is known in the U.S. as the “travel rule”.

Many in the blockchain industry have argued that this practice is at best onerous if not completely unworkable with cryptocurrency and apt to drive users away from regulated platforms.

Industry representatives recently made a last-ditch effort to persuade the Financial Action Task Force (FATF), an intergovernmental body, to reconsider or delay the proposed standard.

About 200 to 300 people, ranging from chief compliance officers of top exchanges to regional bitcoin brokers, attended FATF’s consultative meeting in Vienna, Austria, on May 6–7 to voice their concerns.

But the regulators – particularly those from the U.S., which holds the FATF’s rotating one-year presidency – appeared set on finalizing the standard with at most minor tweaks, according to four people who attended the Vienna meeting and spoke to CoinDesk on condition of anonymity.

Sigal Mandelker, the U.S. Treasury’s Under Secretary for Terrorism and Financial Intelligence, reinforced that impression in a speech last week at Consensus 2019 in New York.

For one thing, she said the standard was on track for publication next month.

“During its presidency of the FATF, the United States has worked with other countries to clarify how all countries should regulate and supervise activities and providers in the digital currency space,” Mandelker said, adding:

“We anticipate that in June the FATF will adopt a final version of its Interpretative Note, along with updated guidance to further assist countries and industry with their obligations.”

While Mandelker did not mention the travel rule, she referenced the 30-page clarifying guidance on cryptocurrency released May 9 by the Financial Crimes Enforcement Network, or FinCEN, a bureau of the Treasury Department. That guidance cites the travel rule throughout as something cryptocurrency businesses must follow.

“I encourage you all to read it closely,” she said.

Square peg, round hole

The Group of 7 (G7) advanced economies created the FATF to combat money laundering and terrorist financing, and the proposed standard seeks to prevent such actors from exploiting crypto.

“Some of the features of emerging technologies that appeal most to users and businesses – like speed of transfers, rapid settlement, global reach, and increased anonymity – can also create opportunities for rogue regimes and terrorists,” Mandelker said in her speech.

At issue is a single paragraph in the interpretive note on “virtual asset service providers” (VASPs), a category that includes exchanges and hosted wallet providers, that FATF put out for public comment in February.

Paragraph 7(b) reads in part:

“Countries should ensure that originating VASPs obtain and hold required and accurate originator [sender] information and required beneficiary [recipient] information on virtual asset transfers, submit the above information to beneficiary VASPs … and make it available on request to appropriate authorities.”

Likewise, when exchanges receive crypto payments on customers’ behalf, they should have to “obtain and hold originator information.”

To Joseph Weinberg, co-founder of the blockchain startups Shyft Network and Paycase Financial, this is shoehorning digital currencies into analog-era practices.

While the travel rule and similar regulations were written for a world when funds were always sent through intermediaries, “cryptocurrency transactions can occur from person to person, machine, smart contracts, and any other infinite set of potential endpoints – not just exchanges or businesses,” noted Weinberg, who is also an advisor on blockchain issues to the Organisation for Economic Co-operation and Development (OECD).

He added:

“This would become excessively onerous to manage and could drive the entire ecosystem back into the dark ages.”

A compliance officer at a U.S. exchange was more measured in his assessment, calling the pending requirements feasible, but a “paper-chasing exercise” and a “nuisance” that won’t further law enforcement goals.

“We’ll end up bothering good customers and asking them for information we can’t verify,” the executive said.

Illustrating the challenge, Global Digital Finance (GDF), a trade group based in London, noted in an April comment letter to the FATF that unlike a wire transfer, which by design requires bank, branch and account numbers for the recipient, a crypto transaction requires only an address.

Source: Global Digital Finance

Hence, an exchange sending crypto on a customer’s behalf “does not know with any certainty who the destination address is owned by, as there is no register of such addresses and new addresses can be created at any time.” Indeed, the sending exchange can’t be sure whether the recipient address belongs to another business, regulated or otherwise, or to an individual.

Further, the proposed reporting requirements could easily be circumvented, GDF argued. For example, a customer could send funds from an exchange to a non-custodial wallet (where the user controls the private keys). The owner of that wallet could then send the coins to someone at a different exchange, and neither platform would have captured both sides of the transaction.

Source: Global Digital Finance

As such, the standard could have the unintended consequence of “encouraging P2P transfers via non-custodial wallets, which are significantly harder for law enforcement to track or control,” warned the GDF letter, which executives from U.S. exchanges Coinbase and Circle and even bank-owned enterprise blockchain firm R3 co-signed.

FATF has teeth

To be sure, even if the FATF does adopt the guidance with the contentious part intact, the requirements wouldn’t take effect overnight. Member countries would first have to pass legislation or write rules putting the recommendations into effect.

But make no mistake: the oft-used phrase “FATF recommendations” understates the organization’s influence.

“The FATF recommendations are not legally-binding international law; however, because the FATF’s members – 36 economies and two regional bodies – include the largest and most important financial systems in the world, its rules have teeth,” said Julia Morse, Assistant Professor in the Department of Political Science at the University of California, Santa Barbara.

“When countries with large financial systems like the United States and the U.K. implement FATF standards, they change how international banks and financial firms do business globally. This creates downstream effects for countries that are not FATF members,” she said.

Further, the FATF examines member countries’ compliance with its standards, and those that don’t follow the standards can become pariahs in the global financial system.

“If non-compliance is severe enough, states/jurisdictions can be placed on a FATF graylist or, eventually, a blacklist. That serves as a strong warning to financial institutions around the world that transactions with those jurisdictions are suspect,” said Mark T. Nance an Associate Professor in the School of Public and International Affairs at North Carolina State University.

For now, industry members are awaiting the final guidance and hoping that governments will give them enough time to agree on a solution for sharing information among companies.

Industry leaders should be “recommending an extended adoption timeframe to ensure proper implementation and coordination across the industry implement,” Weinberg said.

There is some precedent for a grace period: FinCEN finalized the U.S. version of the bank travel rule in 1995 but due to required software changes it was not put into practice until 2004, according to American Banker.

Yet apart from the operational burdens on exchanges and hosted wallet providers, a travel rule-like requirement will likely be anathema to privacy-conscious crypto users.

Already uneasy entrusting their personally identifiable information (PII) to regular hacking targets, the cypherpunk crowd may chafe at having this sensitive data shared with yet more entities.

As Weinberg put it:

“This would eliminate pseudonymity as it pertains to any regulated entity and with it a significant portion of the basic appeal and premise of cryptocurrency.”

Sigal Mandelker image by Anna Baydakova for CoinDesk

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A New Bitcoin Exchange Point On the Colombian-Venezuelan Border Will Help Refugees




A new cryptocurrency exchange service is available on the border between Colombia and Venezuela and its aim is to help refugees traveling across the Simon Bolivar International Bridge.

Visitors are now able to use the point-of-sale service with cryptocurrencies to buy goods. The POS is located in Santander, Colombia, just across the border from Venezuela. Panda Group created the payment alternative with refugees in mind. The group, a Columbian-Venezuela joint venture, announced the implementation of the new service through their Twitter account.

According to the data published by, the service lets users exchange using bitcoin (BTC), bitcoin cash (BCH) and dai (DAI), and converts them into to Colombian Pesos (COP).

At the physical location – a small phone service provider in a mall called La Parada – customers can buy bitcoin with prices based on the Localbitcoins rate in pesos. The service will charge 10 percent above the market price and those who sell their bitcoins will do so for 5 percent more than the established market value.

This is not the first cryptocurrency service in the country. The Panda Group has already installed another five cryptocurrency exchanges in Colombia, most of them in the Colombian capital, Bogotá.

According to Panda CEO, Arley Lozano Jaramillo, their solutions are focused on helping the Venezuelan users and they announced the addition of a new service called Xpay.Cash to encourage adoption.

“This service is for all our brothers to pay directly in Cucuta with their cryptoassets and mitigate the loss of exchanging from BTC to COP, which represents a loss of at least 20%,” Jaramillo said.

Colombia has the highest rate of cryptocurrency investors in South America, next to Brazil. There are reportedly over 20 businesses accepting bitcoin payments in the country. The establishments are mainly focused in tourism, food and digital services.

Bitcoin At The Border

The ATM installed in Villa del Rosario City is connected to the Venezuelan border by the state of Tachira. The states are only separated by the Simon Bolivar International Bridge, one of the most heavily traveled borders used by Venezuelan refugees.

The refugee situation has also sparked a focus on the cryptocurrency, mainly for humanitarian aid purposes.

On the other hand, the last point of sale with cryptocurrency was implemented in Cúcuta, another border location with an growing Venezuelan population. The state also has a Bitcoin ATM, one of forty-two in the country.

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Fidelity-Backed Crypto Analytics Firm to Integrate Twitter-Based Crypto Sentiment Feed




Crypto analytics firm Coin Metrics partnered with Social Market Analytics (SMA) to collaborate on a feed of real-time sentiment towards cryptocurrency based on social media data, according to a press release on June 17.

The new partnership intends to collect and analyze data posted by crypto community on social media in order to provide a new tool to help crypto traders to track social media sentiment data to build their portfolio strategies.

The new product will initially target sentiment data solely on social media giant Twitter, Coin Metrics CEO Tim Rice confirmed to Cointelegraph, adding that the firms are currently not considering integration of the service into Facebook.

Specifically,Coin Metrics will incorporate the product into market data platform, called the SMA cryptocurrency Sentiment Feed, providing calculated metrics of data on Twitter, according to a report by crypto media outlet The Block. In the report, Rice said that the calculation algorithms would include relevant tweets and calculate “19 different aggregate sentiment metrics down to snapshots of one minute.”

Social Market Analytics is providing social media-powered predictive data analytics to traditional capital markets participants in various markets, including stocks, forex, Exchange-Traded Funds (ETFs), futures, among others. Since its establishment in 2012, SMA has been a Twitter Finance partner, the firm’s CEO Joe Gits stated in an email to Cointelegraph.

Meanwhile, Coin Metrics is backed by major American investment management company Fidelity in February 2019, which participated in a $1.9 million funding round in February 2019.

Earlier today, social media giant Facebook released the white paper for its long-anticipated cryptocurrency and blockchain-powered financial project known as Libra stablecoin.

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Bitcoin Falls Near $9,000 as US Stock Market Sees Gains




Monday, June 17 — most of the top 20 cryptocurrencies are reporting moderate losses on the day by press time, as bitcoin (BTC) falls Near $9,000 mark again.

Market visualization courtesy of Coin360

Market visualization courtesy of Coin360

Bitcoin is currently down about 3% on the day, trading around $9,045 at press time, according to Coin360. Looking at its weekly chart, the coin is up around 11%.

Bitcoin 7-day price chart

Bitcoin 7-day price chart. Source: Coin360

As Cointelegraph reported earlier today, bitcoin surpassed one million daily active addresses on June 14, according to blockchain statistics website CoinMetrics.

Ether (ETH) is holding onto its position as the largest altcoin by market cap, which currently stands at $28.2 billion. The second-largest altcoin, Ripple’s XRP, has a market cap of $18.1 billion at press time.

Coin360 data shows that ETH has seen its value decrease by about 2.27% over the last 24 hours. At press time, ETH is trading around $265. On the week, the coin has also gained almost 6.8% of value.

Ether 7-day price chart

Ether 7-day price chart. Source: Coin360

XRP is down by just over 0.43% over the last 24 hours and is currently trading at around $0.430. On the week, the coin is up about 6.7%.

XRP 7-day price chart

XRP 7-day price chart. Source: Coin360

Yesterday news broke that major money transmission network MoneyGram has entered into a strategic partnership with blockchain-based payments firm Ripple.

Among the top 20 cryptocurrencies, the only ones reporting gains are binance coin (BNB), which is over 1% up, and DASH, which is up over 2%.

At press time, the total market capitalization of all cryptocurrencies is $282.8 billion, over 11.6% higher than the value it reported a week ago.

As Cointelegraph reported earlier today, Social media giant Facebook has released the white paper for its long-awaited cryptocurrency and blockchain-based financial infrastructure project.

In traditional markets, the United States stock market is seeing gains so far today, with the S&P 500 up 1.17% and the Nasdaq up 1.73% at press time. The CBOE Volatility Index (VIX), on the other hand, has lost 0.46% on the day at press time.

Major oil futures and indexes are mixed movements today, with WTI Crude up 3.99%, Brent Crude up 2.43% and Mars US down 0.83% at press time. The OPEC Basket is up 0.57% and the Canadian Crude Index has seen its value increase by 5.57% in the 24 hours by press time, according to OilPrice.

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