The convergence of traditional financial and cryptocurrencies has been deeper than ever this year. From the maturation of crypto-first digital commerce to the big Bitcoin purchase from MicroStrategy, it has been a year of rampant technological adoption.
With the professionalization of the crypto industry came regulatory challenges. Developing sectors such as decentralized finance (DeFi) and peer-to-peer transfers created new problems. Despite the great confusion, both the private and public sectors have made strides in developing legal frameworks and solutions that will affect the crypto industry for years to come.
This post is part of CoinDesk’s 2020 Year in Review – a collection of posts, essays, and interviews about the year in Crypto and beyond. Michael Ou is CEO of CoolBitX, an international blockchain security company, and developer of the FATF Travel Rule solution Sygna Bridge.
FATF’s “travel rule”
One of the key metrics for the maturation of the global crypto asset sector this year was the Financial Action Task Force’s (FATF) first review of Recommendation 16, or the “travel rules” policy for the crypto asset industry, in July.
Following its adoption in June 2019, the FATF carried out a 12-month assessment of the regulatory progress made by member states and the private sector, in particular VASPs (Virtual Asset Service Providers) and technical solution providers, to address the travel rule. The rule requires VASPs like crypto exchanges or wallet providers to collect the names of transaction senders and recipients, as well as the national IDs of the former.
See also: How a Company Addresses the Interoperability Issue Arising from the FATF Travel Rule
The FATF found that jurisdictions from every corner of the world map were close to or had enforced alignment rules in July and noted a second review in June 2021. The focus was on emerging sectors such as stablecoins and central bank digital currencies (CBDC). The FATF made it clear that its second review of the implementation of the travel rule was no sign that it would no longer have the industry under control.
As innovations and emerging financial products in crypto like DeFi – a challenge that, due to its decentralized nature, require effective regulation – continue to flood the market, the FATF appeared to have recognized the need to monitor and identify emerging risks. This will have to be taken into account in the second review in July 2021.
Asia continues to lead the way in adopting crypto
In 2020, Asia continued to lead in cryptocurrency adoption and effective regulation.
Jurisdictions such as Singapore, South Korea, Japan and Hong Kong have recognized the benefit of being a pioneer in crypto regulation and have considered the travel rule when developing regulatory frameworks.
This year we saw the importance of Singapore’s progress as the financial center of Asia with its regulatory developments in the field of crypto assets. The city-state even exceeded the requirements of the FATF travel rule with the Payment Services Act (PSA) enacted earlier this year, and has been widely lauded as an example of comprehensive regulations that do not hinder the industry’s progress.
See also: Leah Callon-Butler – Inside the Osaka conference where Crypto took the FATF travel rule seriously
As a result, the nation has attracted large numbers of VASPs made up of crypto exchanges like Huobi, Binance, and numerous other companies. Leaked screenshots also revealed that major banks and financial institutions like DBS Bank have plans to start exchanging digital assets, signaling the increasing appetite of traditional institutions in the region for digital assets and cryptocurrencies.
In North America, proposed changes to the Bank Secrecy Act (BSA) requirement that financial institutions and VASPs collect and retain information about money transfers and money transfers would lower the threshold for money transfers from $ 3,000 to $ 250. Although the US election results were clarified by November, uncertainty remains about the direction of the next administration as none of the candidates express firm stance towards the industry.
In the meantime, the European Commission has proposed a new framework for regulating cryptocurrencies in the form of its digital finance strategy. Uncertainties such as the current Brexit agreement are making the European landscape more difficult given the importance of the British market for Europe.
In Africa and Latin America – regions with the most pressing use cases for cryptocurrencies and digital assets – regulations have lagged as governments take a wait and see approach to crypto. South Africa is an exception after it released a draft statement on crypto assets as a financial product.
Private Sector Interoperability
As nations and jurisdictions progressed toward crypto regulation at different rates, the private sector responded more consistently to the FATF guidelines. On the technical solution side, we saw many working groups such as the Joint Working Group (JWG), which consists of several Travel Rule solutions that create and implement new data standards for information exchange such as InterVASP Messaging Standard or IVMS101. Such standards accelerate implementation progress and interoperability between solutions, which is welcome for VASPs who may be working with different solutions.
When it comes to meeting the requirements of the travel rule, the number of potential solutions in the market makes the need for interoperable practices necessary, and larger VASPs are likely to sign up with multiple vendors.
Given that the FATF stressed the need for interoperability across the private sector in July 2020, the trend towards enterprise and partnerships between solutions and VASPs is likely to continue into the second term of the FATF guidelines.
As COVID-19 hit the global economy with market downturns, lockdowns and the reversal of progress in virtually every nation, the FATF conducted the first review of its travel policy guidance to regulators and the crypto industry, and found that full implementation was still ongoing the horizon.
At the second FATF review in July 2021, we can expect some countries to accelerate their efforts to implement alignment rules, although full alignment may not be achieved by that date. However, since we expect the private sector to make further advances in implementing interoperable solutions that enable a better experience for VASPs, conversely, we can expect VASPs to craft their AML strategies in anticipation of greater regulatory scrutiny.
Year in Review is a collection of posts, essays, and interviews about the year in Crypto and beyond.