On June 21, the Financial Action Task Force (FATF) released its final guidelines for the cryptocurrency industry. In this document, the FATF required bitcoin exchanges and other cryptocurrency service providers (VASPs) to comply with AML and CFT procedures similar to those of traditional financial companies.

At the G20 summit in Osaka, member countries supported these recommendations, formally launching the process of developing corresponding regulatory requirements.

A Game of Cat and Mouse with Regulators: What the New FATF Recommendations Mean for the Bitcoin Industry

Russia is among the countries developing legislative norms for the digital currency industry. In May, the adoption of the draft law On Digital Financial Assets was postponed due to FATF requirements to include the concept of cryptocurrency. Later, the State Duma prepared proposals for regulating cryptocurrencies in line with FATF recommendations.

ForkLog analyzed the potential consequences of these decisions for the industry, collecting opinions from experts with differing views.

Many cryptocurrency proponents have long advocated for integration into the global financial system. Proper regulation has been seen as essential for mass adoption, as regulatory restrictions have often hindered progress.

However, while the FATF had previously announced these recommendations, their final adoption still came as a shock to much of the industry.

FATF Background

Founded in 1989, the FATF combats money laundering and terrorist financing, monitoring compliance across its 39 member countries. Over the past 30 years, FATF has developed a framework of 40 recommendations, outlining legal and regulatory measures for financial institutions.

In 2012, Recommendation 15 was introduced, requiring states and financial institutions to assess money laundering and terrorist financing risks related to new products, practices, and technologies.

Applying Recommendations to Cryptocurrencies

In October 2018, Recommendation 15 was amended to explicitly include virtual assets. The FATF glossary introduced two key concepts to its framework: virtual asset (VA) and virtual asset service provider (VASP).

A virtual asset is a digital representation of value that can be transferred or traded electronically for payment or investment, excluding digital forms of fiat currency, securities, or other assets already covered by FATF standards

A virtual asset service provider is defined as any individual or entity involved in exchanging virtual assets and fiat currencies, exchanging between virtual assets, or transferring virtual assets on behalf of others.

Transfer of virtual assets refers to moving them from one address or account to another, holding them, managing tools that control them, providing financial services for issuers, or selling virtual assets.

The Travel Rule

The new FATF guidelines require VASPs to comply with Recommendation 16, known as the Travel Rule. It mandates that financial institutions include information about senders and recipients in transactions, including physical addresses, passport details, or user IDs.

These requirements apply to transactions exceeding $1,000 or €1,000.

Many analysts, including Chainalysis, argued that complying with banking-style regulations is difficult, if not impossible, for the blockchain industry. They warned that such measures might push cryptocurrency businesses into the shadows, harming user privacy and law enforcement efficiency.

Nevertheless, the recommendations were adopted and approved by G20 countries, giving businesses and governments 12 months for implementation. The initial FATF review was scheduled for June 2020.

Regulators' Perspective

Regulators argue that these standards will legitimize cryptocurrencies, foster broader adoption, and improve transaction security.

US Treasury Secretary Steven Mnuchin stated that FATF’s new standards would ensure VASPs operate transparently and avoid dealings with illegitimate regimes or criminal actors.

Although FATF recommendations are not legally binding, countries that fail to comply risk being placed on a blacklist, facing penalties such as restrictions on foreign investments.

Industry Reaction

Despite regulatory optimism, many in the crypto community criticized the FATF recommendations. Experts argued that their implementation would be difficult and might harm custodial service providers.

Eric Turner, head of crypto research at Messari, called this one of the most serious threats to the crypto industry, potentially more impactful than actions from the SEC or other regulators.

Some predicted that stricter FATF rules might drive crypto companies into the black market, reducing transparency and increasing fraud and money laundering risks.

Coinbase CCO Jeff Horowitz warned that applying banking regulations to crypto could lead market participants to transact directly, decreasing overall transparency.

Bittrex CCO John Roth pointed out that identifying wallet owners is technically challenging. He suggested that either blockchain technology would need to change or a parallel blockchain would need to be created for exchanges — both problematic solutions.

Kraken's chief legal adviser, Mary Beth Buchanan, remarked that applying 20th-century regulations to 21st-century technology is unworkable.

Sergey Mokhnev, regulatory adviser at CEX.io, agreed that most blockchain architectures are incompatible with FATF requirements. He cited Europol strategic analyst Jarek Jakubcek, who argued that forcing businesses to do the impossible is pointless.

Jakubcek noted that reallocating resources to track many low-risk transactions would divert attention from detecting truly criminal activity, weakening law enforcement efforts.

Ultimately, exchanges might comply merely to satisfy regulatory checkboxes, while significant transactions shift to the grey zone, leaving law enforcement empty-handed.

Read more : Cryptocurrency Security Enhancement

Mixing Services and P2P Platforms

The FATF recommendations also mention mixing services, suggesting they should collect user data. However, this is technically unclear because such services aim to anonymize users without holding their funds.

Adam Ficsor, lead developer at Wasabi Wallet, argued that while custodial services should be regulated due to holding client funds, FATF's recommendations are unrealistic for non-custodial services.

The new rules could drive users away from centralized exchanges. Max Keidun, CEO of p2p exchange Hodl Hodl, argued that regulators are copying outdated norms onto innovative crypto businesses without fully understanding the market.

He noted that small exchanges with limited resources are being required to meet the same standards as large banks, while those larger institutions often negotiate partial compliance or pay fines.

Large exchanges might manage to cope with FATF's demands due to their existing infrastructure and cooperation with regulators, though even they will face significant challenges.