2019-04-01 —

Last month, the Financial Action Task Force (FATF) proposed updated standards that would require virtual asset providers (VASPs), including cryptocurrency exchanges, not only to verify their customers' identities, but also to identify the recipients of their customers' transfers. FATF is an inter-governmental body that sets global standards relating to anti-money laundering and combatting the financing of terrorism (AML/CFT). Last year, it announced that member states would have to start regulating their virtual asset markets and signaled that more precise instructions would be coming in 2019.


In most well-regulated jurisdictions, crypto exchanges already verify their customers' identities. This new FATF standard would mean that crypto exchanges would also need customers to name any person to whom they transfer funds. Assuming the recipient uses a digital wallet provided by another crypto exchange, the originating exchange will have to give the receiving exchange identifying information on the originating customer.


As good as an approved wallet system might sound, it will likely push a significant amount of transactions out of the regulated, custodial service provider environment and into spaces where regulators and law enforcement have little reach. As I wrote last year, two crypto ecosystems are evolving; one above board and AML/CFT-compliant, and the other one underground and relatively anonymous. New decentralized exchanges, the experimental crypto trading platforms that usually do not verify customer identity, fall into the latter category, although it is possible to build compliance layers for them. Also, so-called "privacy coins" will likely proliferate more in the unregulated space.

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