FATF Recommendations Harmful for Crypto Transparency Says Chainalysis

News and Analysis

Blockchain analysis company Chainalysis has criticized recent draft document of the Financial Action Task Force (FATF), in which the organization gives the national governments recommendations for more effective supervision of crypto transactions.

In the document, published in February, the intergovernmental financial anti-crime organization outlined a number of measures, including demands to make crypto exchanges (“virtual asset services providers” (VASPs) in FATF wording) identify and keep records of senders and recipients of cryptocurrency transactions.

The controversial recommendation came in section 7(b) of the document, where the FATF said that “countries should ensure that originating VASPs obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers, submit the information to beneficiary VASPs … and make it available on request to appropriate authorities.”

In Chainalysis’ view, such measures may result in decreased visibility into potentially illicit activity or even exchanges winding down their activities.

Should crypto trading platforms shut down due to non-compliance, illicit activity would be driven underground to decentralized platforms, making it much harder for authorities to fight crime, Chainalysis COO Jonathan Levin and global head of policy Jesse Spiro argue in a letter to FATF dated April 8.

“There is no infrastructure to transmit information between VASPs today, and no one has the ability to change how virtual asset blockchains work,” the letter reads. “Forcing onerous investment and friction onto regulated VASPs, who are critical allies to law enforcement, could reduce their prevalence, drive activity to decentralized and peer-to-peer exchanges, and lead to further de-risking by financial institutions. Such measures would decrease the transparency that is currently available to law enforcement.”

Levin and Spiro also noted that virtual assets are designed to provide a way to move value without the need to identify the participants in a transaction, adding that funds may be moved into a personal wallet or another type of recipient unable to accept identifying information.

The company’s other recommendations included setting up automated “customer due diligence” programs able to “screen destinations for known illicit activity,” as well as have beneficiary exchanges look for similar issues from any exchanges sending funds over.

If the FATF’s recommendations are adopted as it is, they will go into effect as a global standard in June 2019. While the group did invite public comment on section 7(b), the comment period was closed as of April 11, and it is unclear whether Chainalysis’ response will be incorporated.

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