The Financial Action Task Force recommended that national anti-money laundering regimes be extended to the digital asset markets. IntelAlley caught up with Philippe Bekhazi, CEO of XBTO Group, to discuss the knock-on effects of such regulatory changes.

By extending AML rules to the digital asset markets and those firms servicing those markets, what impact do you expect to see?

It is too early to note any actual effect on the digital asset market since the FATF’s first announcement with regards to digital assets AML guidelines. However, given the weakness in the overall digital asset marketplace, I can speculate that participants are gearing up for a challenging 2020, as exchanges revamp their AML procedures to attempt to put digital assets in a virtual box, while holders of digital currencies get spooked by incompatible regulation.

Why do you believe that the FATF set the bar for digital assets to one-tenth of what it has for fiat currency under the ‘Travel Rule?’

Digital assets are bearer assets, just like cash. They can be moved very quickly with little to no friction under the right setup. This feature could create higher money laundering risks that the FATF would like to counter.

Most successful digital assets in their current form are peer-to-peer, highly divisible, portable, borderless, censor-resistant, inexpensive to send, transparent (if on an open public ledger), and relatively high speed (less than an hour for most transactions to settle). Very few assets in the world have those kinds of properties, so, understandably, they elicit concerns at various law enforcement organizations and government levels.

Adequate legislation will be necessary to make sure the risks don’t outweigh the benefits; there should be a concerted effort to understand how this technology can natively help solve these AML problems. We are on the cusp of a significant paradigm shift that needs to be embraced and optimized, not stymied.

Will this push liquidity away from digital exchanges to decentralized trading venues?

It is possible that centralized digital exchanges that adopt ill-conceived regulation put their business at risk and inadvertently push liquidity to decentralized exchanges that have no face, no actual owners, and answer to no regulatory bodies. In such a scenario, the fight against money laundering would be lost entirely and irreversible. If we agree with the premise that too much taxation kills taxation, it might be wise to wonder what too much AML regulation does to money laundering.

Can we realistically eradicate money laundering? As the adage goes, “Perfect is the enemy of good.” This is not to say that we should be content with what we have today, but we should think hard about the right tools to employ to achieve our collective goals of a safe financial system that disincentivizes ill-doing.

How might this affect institutional investors’ willingness to participate in these markets?

Institutional investors abide by a laundry list of various regulations that are rooted in traditional assets, which means they are tied down by incompatible or generally unclear laws when applied to digital assets. We do not know how most institutional investors will react to these new regulations, and it is yet one more item in a long list to consider when allocating capital. In any case, institutional adoption has been slower than expected, and the current institutional base is small, albeit still growing.

What should the FATF consider if/when it revisits the Travel Rule?

Instead of applying current banking rules that may make sense on the surface but are mostly incoherent and logistically challenging to implement, FATF should seek to understand the technology and use it to educate people and organizations on how to solve particular money-laundering issues.

Blockchain technology will eventually solve most know-your-customer issues and, therefore, most AML ones as well.

Digitizing identity can, under the right construct, allow for full privacy of transactions, while enabling full traceability and efficient enforcement of laws across borders. Moreover, this could be done without the abuse, fraud, or general failure of gatekeepers who have unfortunately demonstrated time and again that they were inept at combating money laundering in the first place. For example, major multinational banks are fined billions every year for allowing such money laundering to happen.

At the end of the road, the equation to solve should be viewed simplistically: if we believe money is an important social construct used by humans to elevate their quality of life, any barrier or filter that is erected should have a demonstrably positive risk/reward, as money is decidedly global. Given the approximately 1.7 billion underbanked adults and the additional burden that AML/KYC imposes, trickling down to individuals, I posit that current regulations are inadequate and will result in a (perhaps unintended consequence) of favoring the rich and powerful at the expense of the less fortunate.