Why Government Will Never Take Down Cryptos
The Financial Action Task Force on Money Laundering (FATF) is perhaps the most important organization you’ve never heard of. The G-7, which is essentially a club for the world's wealthiest nations, set up the FATF in 1989. The mandate of the FATF is to create a global legal and surveillance infrastructure to combat money laundering.
Since then, the FATF has churned out one report after another to encourage member countries to enact stricter anti-money-laundering rules.
The FATF’s most recent initiative has been to call for a global crackdown on cryptocurrencies, which it calls virtual currencies. It characterizes virtual currencies as an increasing threat for money laundering and terrorist financing. The “best practices” the FATF has developed require countries to register virtual currency exchanges and custodians. These companies will be obligated to follow the same detailed “know your customer” rules traditional financial institutions like banks must already enforce.
Another far-re China, India, and Egypt forbid virtual currencies from being traded or used for payments.aching requirement will be to initiate a “travel rule” for every transfer of value in virtual currencies. Exchanges and custodians will have to determine the beneficial owner of both the sender and recipient in any such transfer. They’ll also need to pass this information along to each other when transferring funds.
If that’s too much trouble and a country doesn’t want to deal with virtual currencies, the FATF guidance suggests it’s OK to ban them altogether. Countries like Saudi Arabia, Vietnam and Pakistan have already done this. China, India, and Egypt forbid virtual currencies from being traded or used for payments.
But the FATF’s heavy-handed attempt to force crypto exchanges to abide by the same rules as banks isn’t going to work. That’s because crypto transactions occur peer-to-peer, without a middleman. While many individuals and companies who use cryptos use exchanges for convenience, many transactions occur outside the exchange environment.
Even if a transaction originates on an exchange, what the FATF calls the “beneficiary” might not be a cryptocurrency account on another exchange. For instance, the value could be transferred into a digital wallet on a flash drive that’s unable to accept identifying information. Moreover, it may be impossible to reprogram blockchains to incorporate the data the FATF insists should be conveyed with each transfer.
The new standards will force many if not all crypto exchanges to shut down. Jarek Jakubcek, a strategy analyst at Europol, the European Union law enforcement agency, says that would be counterproductive to law enforcement efforts. As he puts it:
The majority of exchange-to-exchange transactions are related to trading activities that are naturally not criminal … Reallocating compliance resources at a high number of relatively low-risk transactions will move the emphasis away from flagging criminal transactions to focusing on low-risk transactions, which will naturally hurt crime prevention … The only benefit for the exchange will be a formal check in a compliance checkbox.
Still, I think there’s a high probability most countries will adopt the FATF standards, including the travel rule.
Treasury Secretary Mnuchin seems to agree. In a press conference July 19, he told reporters that both the G7 and the G20 (a larger group of wealthy countries than the G7) were on board with greater regulation of the crypto market.
Mnuchin went on to highlight the work of the Financial Stability Oversight Council Working Group on Digital Assets, which the Treasury Department created last year. If Uncle Sam plans a frontal assault on crypto, the working group will likely coordinate the attack.
One proposal that will likely be resurrected is a 2017 bill called the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act. It would expand the current anti-money-laundering rules and require travelers who cross a US border to include “any prepaid access device” such as a prepaid debit card, gift card, phone cards, and of course, cryptos in their calculation of carried value. All travelers must report a combined value of $10,000 or more when they cross a US border. The new rules would change border crossing requirements for thousands of travelers.
If you’re arrested for failing to comply with the new rules, Uncle Sam could file a secret motion in federal court for a restraining order that would confiscate every asset you own under federal civil forfeiture laws. Even your safe deposit box could be cleaned out. You could lose all your property without being tried or convicted of any crime. The restraining order could be extended indefinitely.
But it will be impossible for any government to put the crypto genie back in the bottle. Even if every country simultaneously shuts down every crypto exchange in the world, crypto won’t die.
Crypto exchanges represent only a small portion of the crypto ecosystem. If exchanges are shut down, crypto transactions will revert to the way they were originally envisioned by bitcoin’s inventor, who called himself (or herself) Satoshi Nakamoto. They will occur peer-to-peer, with no middleman standing in the way. And peer-to-peer crypto exchanges can be virtually untraceable.
No wonder the political establishment is scared. It should be.
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