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Ever since the Financial Action Task Force, or FATF, introduced its controversial “travel rule” for companies into the crypto space, the debate over the suitability of regulatory frameworks established for cryptocurrencies has been inexorable.
Some experts, however, believe the industry’s experience with the FATF guidelines is just the tip of the iceberg and points to more significant challenges across the board.
During the closing panel of the V20 conference on November 18, Siân Jones said that the collision between new decentralized models of finance and old models of regulation has implications that both regulators and the community are not yet addressing head on.
XReg Consulting, of which Jones is a founding and senior partner, is a group of former regulators who have practical experience in developing public policies and regulations for blockchain and cryptocurrencies. During the panel, Jones said that the FATF general framework for preventing money laundering, and its travel rules in particular, emerged from an entirely different operational and technical era: the years in which facilities like SWIFT been widely adopted and globalized transactional finance has taken off.
SWIFT’s founding members, which number 239 banks in 15 countries, were all well-funded and part of a mature banking sector, Jones noted. In contrast, the entities that the FATF has defined as virtual resource service providers, or VASPS, come from a much younger and less established space. Because of this, the enforcement of the travel rule and the expectation that it can be implemented so quickly by these companies is “beyond me,” Jones said.
Despite these significant difficulties, Jones argued that the FATF framework, however narrow, could be reconcilable with the parts of the crypto industry that have become “industrialized”, ie mediated exactly by those entities defined as VASPs.
Over time, however, more and more participants in the space are attempting to restore the original vision of cryptocurrency, as it was initiated through projects such as Bitcoin (BTC) and Ethereum: a veritable disintermediation of transactional finance.
The nascent space of decentralized finance, or DeFi, is exactly this attempt to return to the original goals of cryptocurrencies, and as they grow, most cryptocurrencies will, once again, fall out of in-between structures.
DeFi developers and users, as well as regulators, must “wake up and smell coffee,” Jones said. This original ethos and decentralized model for cryptocurrencies, which aims to carry out truly trustless transactions, is “fundamentally at odds with how the FATF accomplishes its goals to prevent money laundering,” he said.
Moving on, Jones said DeFi developers and users will need to unite as one voice to provide effective feedback to the FATF.
Regulation is coming to DeFi, like it or not, he said, but if the people involved believe that frameworks such as the FATF travel rules are not proportionate to the level of money laundering risks in their space, they will have to “step up their game “and make the case yourself.
Regulators will also need to recognize that while the old models used by the FATF may only work for a still-intermediated crypto world, not necessarily for DeFi.
