As the G20 summit approaches, member countries have been discussing how to implement the standards set by intergovernmental organizations such as the Financial Action Task Force. While there may be some challenges in complying with the standards, the European Central Bank says the risks crypto assets pose to the euro area’s financial stability are manageable.
G20 Implementing Global Standards
The G20 countries have reaffirmed their support for the Financial Action Task Force (FATF) as the global standard-setting body in areas such as anti-money laundering. They have also agreed to follow the FATF recommendations including those concerning crypto assets.
The FATF held its annual Private Sector Consultative Forum in Austria earlier this month with its members and over 300 representatives from the private sector participating. Members of the FATF are 36 countries and two international organizations including the European Commission. The FATF explained:
The discussions focused on the mapping of virtual asset services and business models … and on the implementation of specific FATF recommendations.
In its April report to the G20, the FATF outlined its work on crypto asset standards and promised to update its guidance “to continue assisting jurisdictions and the private sector, in implementing a risk-based approach to regulating virtual asset service providers, including their supervision and monitoring,” the report describes. “This will help countries in exercising oversight of this sector.” While emphasizing various risks such as money laundering, the FATF also recognized:
Technological innovations, including those underlying virtual assets … may deliver significant benefits to the financial system and the broader economy.
Russia Has Issues to Resolve
Among countries that have announced their plans to implement the standards set by the FATF is Russia. The country has yet to finalize the regulatory framework for cryptocurrency, which President Vladimir Putin originally said must be done by July last year. Since no crypto regulation had been introduced, the Russian president signed another order for his country’s crypto regulation to be implemented by July this year.
However, another delay may also be in the cards as the Chairman of the State Duma Committee on Financial Market, Anatoly Aksakov, has revealed that “The adoption of the law on digital financial assets is ‘stuck’ because of the requirements of the FATF,” Tass reported on May 21. Speaking at the Russian Stock Market 2019 conference, he explained that the requirements will either be implemented in the law on digital financial assets or in a separate bill, elaborating:
The law on digital financial assets has been suspended … There were FATF decisions that require us to resolve issues related to bitcoins and so on.
The news outlet also reported first deputy chairman of the Bank of Russia, Olga Skorobogatova, indicating that the law on digital financial assets could be adopted in the Spring session. “The law on digital financial assets, on crowdfunding, etc., all these bills are in a fairly high degree of readiness,” she told the State Duma. “Colleagues from the State Duma committees are very helpful, we expect that these laws can be passed during the Spring session.” She further stressed that these laws “are extremely important for the country and will provide an opportunity to implement new projects.”
Japan Collaborating With Other G20 Countries
The host of the June G20 summit, Japan has been actively working on implementing global standards on crypto assets. Last week, the country’s House of Representatives passed a crypto bill with a number of required resolutions. According to Impress publication, one of them reads:
We have fully grasped the regulatory trends of G20 countries, and cooperated with each country to achieve international harmony.
In April, local media reported that the Japanese government is preparing to offer a handbook to the G20 countries to help them with their own crypto regulations. This matter will be discussed at the June summit along with a wide range of regulatory measures relating to crypto assets.
In December last year, Japan’s top financial regulator, the Financial Services Agency (FSA), released a report stating:
To manage and mitigate the risks emerging from virtual assets, countries should ensure that virtual asset service providers are regulated for AML/CFT purposes.
They should also be “licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF recommendations,” the report details.
South Korea Wants Regulatory Consistency
South Korea has announced several times that it will comply with the unified crypto regulatory standards. At the FSB plenary meeting in April, the progress report to be delivered to the upcoming G20 meetings in Japan, vulnerabilities in the global financial system, and global standards of crypto regulation were discussed. “Transnational cooperation is necessary to regulate virtual currencies,” Choi Jong-ku, Chairman of the Financial Services Commission, was quoted as saying. He emphasized the importance for each country to consistently implement international standards prepared by the FATF “to minimize regulatory inconsistencies.”
Possible Challenges Ahead
Blockchain analysis firm Chainalysis provided feedback to the FATF on its guidance for crypto assets in April. “FATF’s guidance, as it is currently drafted, would have profound implications for the cryptocurrency industry,” the firm wrote.
“There are clear technical obstacles that prevent cryptocurrency businesses from being able to comply with these standards,” Chainalysis detailed. Citing that “Cryptocurrencies were originally designed as a peer-to-peer financial system that has no central authority and no intermediaries,” the firm asserted that in most cases crypto exchanges “are unable to tell if a beneficiary is using another exchange or a personal wallet,” adding:
Requiring a transmission of information identifying the parties is not technically feasible.
The firm proceeded to discuss “technical opportunities,” suggesting that in order to meet the FATF’s goals, “Cryptocurrency exchanges can use the transparency of the shared ledger to form an effective risk-based approach.” They explained that it should be the job of exchanges to collect and store know your customer (KYC) information of each transaction’s originator, and clarified that “While the transactions themselves are public, exchanges should also link their customers with their specific transactions as this information is not available on the public ledger.”
Another point highlighted by the firm, which they referred to as “unintended consequences,” is that “There is no infrastructure to transmit information between cryptocurrency businesses today, and no one has the ability to change how cryptocurrency blockchains work.” The firm elaborated:
Forcing onerous investment and friction onto regulated businesses, who are critical allies to law enforcement, could reduce their prevalence, drive activity to decentralized and peer-to-peer exchanges, and lead to de-risking by financial institutions.
Chainalysis noted that “Such measures would decrease the transparency that is currently available to law enforcement.”
Manageable Financial Stability Risks
The European Central Bank (ECB) monitors crypto assets and analyzes potential implications for monetary policy and the risks they may pose on market infrastructures, payments, and the stability of the financial system. Its report published earlier this month entitled “Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures” summarizes the outcome of the analysis of its Crypto Assets Task Force. The report reads:
At present, crypto-assets’ implications for and/or risks to the financial stability of the euro area, monetary policy, and payments and market infrastructures are limited or manageable.
Noting that crypto assets cannot be used to conduct money settlements in important financial market infrastructures in the EU, the bank states that “they do not qualify as securities … [and] central securities depositories (CSDs) cannot undertake settlement of crypto-assets.”
Even if crypto-based products were to be cleared by central counterparties, they would need to be authorized and to satisfy existing regulatory requirements, the bank clarified, adding that “Even at their peak in early 2018 the outstanding value of crypto-assets was too small to give rise to concerns for the EU financial system and the economy.” Stressing that “Crypto-assets market developments are dynamic and links to the financial sector and the economy may increase in the future,” the bank claims:
It is therefore important that the ECB continue to monitor the crypto-assets phenomenon, raise awareness and develop preparedness for any adverse scenarios, in cooperation with other relevant authorities.
The ECB concluded that “Financial institutions investing directly or indirectly in crypto assets should have in place relevant governance arrangements, also in line with the licensing criteria, and commensurate to the materiality of investments in crypto-assets and/or crypto-assets-related activities.” The bank added that many factors ranging from market developments to “unintended ‘legitimising’ effects” of crypto regulation could result in greater exposures to crypto assets.
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Images courtesy of Shutterstock, the FATF, and Korean government.
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