Remember how cryptocurrency was built for cheap, fast international peer-to-peer transfers? Being able to transfer cryptocurrency across long distances quickly and cheaply is a significant use case for cryptocurrency in general, and there are projects such as Ripple, Stellar, Litecoin, Algo, Nano and many others that were built for this exact use case.
An international advisory board has recently proposed a new cryptocurrency regulation that states that international transfers of over $1000 must be accompanied by personally identifiable information in order to combat money laundering. It would be hard to be more out of touch with what cryptocurrency is and how it works, but nevertheless the FATF have somehow managed to out Gary the Gensler.
This regulation is coming into effect in the UK today, September 1st 2023, and is expected to be adopted by other territories as well. Let’s take a step back to try and understand why a regulation like this is unnecessarily restrictive at best.
Cryptocurrency vs SWIFT
The reason projects like Ripple, Stellar, Litecoin, Algo and Nano exist in the first place is that the current standard for international transfers is ridiculously expensive. The SWIFT system was created to power most international finance and security transfers between Banks, and while it can deliver financial information and handle monetary transfers in a secure way, it has one significant issue. Because it is a technology that a banking group can own and modify to suit their own needs, there is no limit over how much a Bank can charge on a SWIFT transfer. That’s why most SWIFT transfers are subject to a 2 – 5% commission fee. This fee is not necessary to complete the SWIFT transaction, you’re not paying for compute, so realistically it doesn’t need to exist. The only reason it’s there is because Banks monopolised international transfers. “Because we can” would be the most accurate description for this commission fee. And you know it’s not needed when it’s a 2 – 5% no matter how much you transact.
Paying $5k on a $95k transfer makes Ethereum’s all-time high gas fees feel cheap by comparison, and Ethereum (L1) is considered one of the more Expensive chains to transfer, it is still dirt cheap compared to SWIFT.
The Financial Action Task Force (FATF)
Because the current global financial system is fundamentally flawed, cryptocurrency projects such as Ripple were created in order to facilitate cheap, fast and secure international transfers. International being the keyword that brings us to the the latest attempt square peg cryptocurrency once again. The Financial Action Task Force (FATF) is an intergovernmental organisation that designs, promotes and advises on regulation to combat financial crime. They describe themselves as “global money laundering and terrorist financing watchdog” and they lobby for governments and central banks in the same way that Grima Wormtongue would lobby for Sauron. More recently, they whisper in a government’s ear “cryptocurrency bad, need more regulation”.
It doesn’t always work out, but every now and again it sticks, and governments adopt this proposal, thereby growing the FATF’s sphere of influence. The problem with this latest proposal is that it once again attempts to square peg cryptocurrency into a financial paradigm that’s over 200 years old. A good amount of cryptocurrency regulations passed in recent years follow the same MO – Let’s try to make this completely new and revolutionary technology fit into our old, dusty financial system that’s written in a programming language older than Jesus.
The Crypto Travel Rule
Regulation for cryptocurrency should be created in a way that facilitates and helps this new technology achieve its true potential. But no, instead we pluck away at the feathers until the bird can no longer fly. And this latest regulation, originally proposed by someone at the FATF who objectively has no idea how cryptocurrency works, is dangerously close to achieving that.
The Crypto Travel Rule, also known as the FATF Recommendation 16 is the latest attempt to stop international money laundering and it applies to virtual asset transfers and crypto companies, collectively known as VASPs. The old financial system, naturally remains un-affected.
The suggestion is to limit the amount of international transfers sent through VASPs to a maximum of $1000 unless more information is provided. That’s bad enough as it is, but the bright minds at FATF also recommend collection personal information on amounts smaller than $1000. If the amount transferred is under $1000, VASPs must collect the names of the originator and beneficiary, as well as their virtual asset wallet addresses or unique transaction reference numbers. What exactly is a VASP can be interpreted but Metamask and Uniswap could technically fall under this category, with centralised Exchanges definitely being part of the affected group.
For transfers exceeding $1000 VASPs must also collect additional information, such as the originator’s account number, physical address, national identity number, customer identification number, or date and place of birth, as well as the beneficiary’s account number.
Do you remember the days when the General Data Protection Regulation (GDPR) came into effect in the EU? This law prohibited companies from sending marketing emails without the user’s consent along with enforcing a series of data housekeeping activities. This was generally seen positively by the general population only it remained largely unenforced across SMEs. The reason I’m bringing this up is because now, a transfer of over $1000 worth of crypto outside of the UK (and possibly other countries will soon follow) is going to contain all of your sensitive and personally identifiable information and there’s nothing you can do about it. What’s the point of discouraging companies from collecting data they don’t need, if you’re to force them to continuously and repeatedly collect and store data they probably don’t need?
There is obviously no long term regulatory plan or direction over how cryptocurrency is going to be integrated into the current system and SEC’s lost battles against Ripple and the Grayscale ETF has shown this. The only existing agenda concerns itself with controlling and limiting the potential of cryptocurrency and it often seems that regulators are playing Russian roulette but with exceedingly dumber regulations.
The reason given the FATF barely holds any water, as centralised exchange users must be fully KYCd in order to be able to transfer cryptocurrency anyway. At best, it forces exchanges to re-categorise the transfer data, at worst, it forces DeFi services such as Metamask and Uniswap to completely re-thing their entire product from the ground up. How is Uniswap or any other DeFi project going to collect all of this information for transfers both over and under $1000? Wouldn’t storing this information present a bigger data risk in itself?
Our trusted regulators have, once again proved that they have little to no understanding of cryptocurrency, and are unwilling to create a regulatory framework that could be considered remotely helpful. There is no hope lost because I little to start with, but I am getting tired of the sustained effort to control the general population.
When did we become so obedient, and content to just part with our freedom (whatever is left of it) and our privacy?
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