Among the biggest problems for cryptocurrency — if not the biggest — is legitimacy. The world seems to be divided into two camps, at least when speaking generally: Those who think bitcoin and other digital currencies provide the promise of transactional efficiency in the coming year, and those who view cryptocurrency as mainly a way for drug dealers, terrorists, fraudsters and others to operate in the shadows.
A big part of the problem, as Trulioo Chief Operating Officer Zac Cohen discussed in a new PYMNTS interview with Karen Webster, is the lack of global standards for those digital currencies, which hampers development of the cryptocurrency ecosystem and keeps some payments and commerce players on the sidelines thanks to fears of running afoul of anti-money laundering (AML) regulations.
Here’s the news peg upon which this latest PYMNTS discussion with Cohen hung: the Financial Action Task Force (FATF), a respected and influential global standards body that deals with AML issues, has published guidance on how its 37 members should regulate cryptocurrency exchanges. The move potentially represents one of the most significant regulatory-related actions involving cryptocurrency in the roughly 10-year history of that digital payment method. The guidance marks a step toward more clarity and consistency when it comes to digital currencies — which, in turn, could result in more use and innovation for those payment methods.
Digital currency exchanges reportedly are not happy with this move, given that the guidance seems sure to lead to more expense on the part of those companies in making sure they comply with the new rules.
At issue most of all is Recommendation 16 in the FAFT guidance, a so-called “travel rule.” That recommendation sets a requirement for those cryptocurrency exchanges and other financial institutions and payment services providers involved in such transactions to meet “obligations to obtain, hold and transmit required originator and beneficiary information in order to identify and report suspicious transactions, monitor the availability of information, take freezing actions and prohibit transactions with designated persons and entities.”
In doing so, the FAFT guidance reflects regulatory pushes from other national and international bodies involved in payments, which are trying to get their hands around cryptocurrency and restrict its use in money laundering. FATF, for its part, is calling for more information to accompany such transactions and transfer of funds, information that includes the name of the sending customer, the originator’s account number and the beneficiary’s name and account number.
“It feels counterintuitive,” Cohen told Webster, given that one of the main appeals of cryptocurrency is its anonymity, at least according to supporters of the payment method. Such new guidance as offered recently by the FATF would, in his words, create “a new audit trail to further reduce anonymity in this ecosystem.”
That said, it wouldn’t do all the heavy lifting around new regulations for digital currency. “Each jurisdiction would have to do some work in interpreting (the FATF guidance) and setting its own specific approach,” Cohen said.
Webster, for her part, is skeptical that without massive anonymity, cryptocurrencies can grow and thrive. She voiced the view that anonymity is, indeed, the main attraction of this particular digital payment method. Cohen disagreed, at least in part, saying that anonymity is not always the biggest draw for users and supporters of digital currencies. “I have a problem with reducing it to the single principle of anonymity,” he said.
Better Use Cases
Cohen said that such guidance — and incoming regulations — could help strengthen the case for cryptocurrency, and perhaps even gain new supporters of it, thanks in large part to having a record and audit trail. “You need a trust framework in order to get rid of those bad actors,” Cohen said, referring to those criminals commonly associated with the use of digital currencies. More transparency, according to such a view, will lead to more legitimate uses and more innovation for this payment method going into the 2020s.
The FATF has said it is worried about how stablecoins like Facebook’s Libra could be used for illicit purposes, and that’s what such guidance is meant to address. The group is concerned that the potential widespread adoption of stablecoins — a digital currency tied to real money — would cut out regulatory agencies and make it easier for criminals to break the law with the currency. The FATF echoes the sentiment of regulators around the world who want to stop the release of Libra, especially without more regulatory questions being answered.
“Build a better way,” is how Cohen put it during the PYMNTS discussion. “Create a better route that builds trust and privacy.” Indeed, a big challenge he acknowledged is to serve the needs of both security and privacy, which can be especially tricky in the world of cryptocurrencies.
But with guidance now coming from multiple payments-regulatory bodies — some with more pull than others — one can, at the least, see a trend developing that might lead to more transparency and trust.