Tom Maxon, Head of US Operations and Business Development at CoolBitX, a Taipei-based firm focused on providing “secure and easy-to-use” blockchain-based solutions, has argued that FATF’s recent recommendation on the regulation of the crypto industry is “an undeniably positive development for the industry.”
New FATF Rules May Be “Avenue to Mass Adoption” of Cryptoassets
On June 21, 2019, the Financial Action Task Force (FATF) announced that virtual asset service providers (VASPs) - including crypto exchanges - must share customer details with each other when funds are being transferred from one platform to another.
According to Maxon, the new FATF rules may be an avenue to mass adoption of blockchain-based digital assets. In an exclusive interview with CryptoGlobe, Maxon also shared his views and insights about applying know-your-customer (KYC) and anti-money laundering (AML) laws to cryptocurrency transactions.
CryptoGlobe: What are the pros and cons of strictly implementing KYC/AML across all centralized exchanges?
Tom Maxon: “Let’s first talk about the disadvantages of collecting this information:
1. How can each exchange offer the same standard of KYC collection?
If there are uneven standards, then it would be difficult to trust the integrity of cross-exchange transaction. Merely accepting dirty bitcoin could be highly problematic for exchanges trying to create a good name within their regulatory jurisdictions. Perhaps the logic of “you are only as strong as your weakest link” applies here.
2. How much of a barrier to entry does KYC bring for the unbanked?
Many people entered the virtual asset space because of the promise that bitcoin had on delivering financial inclusion across the global south. Does comprehensive KYC slow adoption due to friction of onboarding onto platforms? Most definitely. Does virtual asset platform KYC bring the same problems that banks have had with onboarding the unbanked? Probably.
While these are critical disadvantages, not having KYC/AML programs may be the harbinger of the demise for virtual assets. It boils down to trust: while much of the engineering infrastructure in the space has been designed to remove trust from the movement of digital money (for an example see the concept of trustless), most of the activity in the space occurs on human-built institutions like exchanges, or even on human peer-to-peer wallets.
This is not a controversial statement; it’s a truism that many exchanges are not a safe place to store valuable assets. Phishing scams have ruined trust in many online wallets. Both of these issues have resulted in the widespread adoption of unhosted wallets.
Also, how do you know the address you see is the address of the person you want to transact with? Hackers and other bad actors are really relying on the entire industry remaining “trustless”. Blockchains and other underlying protocols are and should remain trustless, but the humans that interact with the technology must be trusted to ensure whomever bears the assets are the correct person. After all, virtual assets are basically the bearer bonds of the 21st century.
So how does trust relate to KYC/AML? It is central. First and foremost, KYC/AML procedures help to combat the actions of criminal actors and nefarious organizations from using digital assets to fund their activities and launder money.
Preventing criminal elements from doing so not only allows the cryptocurrency market to stay on the right side of regulators and governments globally, but it also helps to ensure the safety and security of millions of people around the world. This builds trust with governments and thus builds trust in the general population who certainly do trust those governments, once trust is established mass adoption will happen. And for those who have lost trust in their government, then they still need to trust virtual assets (which, as it currently stands, is hard to due to the many opportunities to lose their money).
Furthermore, adopting standardized KYC procedures allows exchanges to establish credibility with institutional banks and traditional financial actors, who will of course be instrumental in facilitating the growth of the industry moving forward, not to mention cryptocurrency’s entry into mainstream usage.
Three weeks ago in Montauk, New York, I heard Citigroup CEO Michael Corbat call himself a “true believer” in cryptocurrency. He would only consider offering crypto to his clients if “certain aspects of bitcoin” such as the “opaqueness around the sources of the money,” is solved. AML laws currently prohibit the bank from sending or receiving digital currencies.
In order to directly collaborate with traditional financial actors, exchanges must carefully ensure that they are regulatorily compliant -- otherwise partnerships with banking and investor institutions, or even availing of their service offerings, is very difficult.
This can be quite burdensome for the exchange itself, as well as its users -- who may have difficulty in converting their assets to fiat currency (if they want to). This would mean that the crypto economy is a wholly closed system, reducing its usefulness for consumers and its potential to serve as a legitimate means of financial exchange.”
CG: During our conversation, you said exchanges should not be prevented from accepting anonymous transfers (or something similar to that). Please explain why you do not support this.
Maxon: “I did not say that exchanges “should” or “should not” accept anonymous transfers but merely mentioned that in the future, their ability to allow anonymous deposits or withdrawals over $1,000 will make them non-compliant due to global wire transfer laws.”
CG: How can we implement a regulatory system that balances accountability and prevents illicit activities (money laundering, terrorism financing) - while also allowing traders and investors to benefit by trading cryptoassets?
Maxon: “Implementing basic KYC/AML laws (such as the travel rule) builds trust in institutions offering virtual assets. Trust in these institutions, in turn, builds trust in the flow of capital across these institutions. Trust in the flow of capital between institutions builds trust in the market.
Once trust is established at a market level, it can really take off among the general public. Only 3 percent of the world (by even our most optimistic models) is invested in virtual assets. Anyone who is interested in virtual assets for its early libertarian promises is most likely already in the market. How do we attract the remaining 97 percent of the world to join? We need to start building trust in our institutions.”
CG: What are your thoughts about FATF's stance regarding crypto transactions?
Maxon: “FATF’s recent recommendation on the regulation of the cryptocurrency industry are an undeniably positive development for the industry. While there have been suggestions that the recommendations are overreaching or burdensome, they represent the first truly international attempt to provide guidelines for industry institutions.
As FATF’s rules make their way into the law of member states, they will remove the frustrating lack of clarity which currently dominates regulatory landscapes in markets across the globe. This will leave company decision-makers in a much better position to innovate in the certainty that they are complying with national and international laws.
Furthermore, FATF’s increasingly vocal recommendations to its member states marks a change in regulatory bodies’ approach to cryptocurrencies -- as independent regulation, which was beset with inconsistency across regional associations, moves increasingly towards collaborative efforts on an international scale.
The fact that FATF hosted closed-door discussions with industry leaders to inform their proposal and stance is also surely positive, as they allow industry spokespeople a seat at the table to inform the regulations which will shape our industry. The full effects of FATF’s stance are yet to become clear, however, there are many positives to be drawn from their recent announcements and I believe that they could lead to industry growth and maturation in the long-term.
Even if the amount of money laundering or other illicit financial activity is lower compared to traditional fiat currencies (which while technically true, ignores the fact that traditional fiat has vastly more circulation than crypto), is that a good reason to not to do our best to stop crime?
Also, with the additional transparency of crypto combined with a few additional regulatory steps, we could make virtual assets the safest way to transact in the planet. This would catch the attention of everyone drawing attention to the inefficiencies of traditional fiat.”
CG: What products and services does your company provide? How are they beneficial to the crypto industry?
Maxon: “We are offering a software messaging interface to allow different exchanges to quickly comply with the travel rule and countries to comply with FATF recommendations. Additionally, we are offering the world’s first compliant personal custody wallet.
Both products will be highly regulated entities themselves to ensure user’s assets and privacy are never compromised.
Both services are the first of their kind and will help foster the development of a mature virtual asset market by, 1.) allowing businesses to better navigate new regulatory issues and keep compliance costs on particular laws extremely low and, 2.) providing consumers a better wallet than what was previously available in the market; one that combines the powerful peer-to-peer nature of virtual assets while offering users the streamlined experience from traditional finance.”