New FATF Rule Recommends Cryptocurrency Exchanges Collect Customer Information

Call it the mainstreaming of cryptocurrencies.

The Financial Action Task Force (FATF), an inter-governmental body tasked with combating money laundering, has finalized a new set of recommendations that includes a requirement for cryptocurrency exchanges to gather customer information per KYC requirements and to share it with their counterparts. The news was first reported by Coindesk.

Cryptocurrency exchanges will have to collect the following information:

  • Originator’s name
  • Originator’s account number used to process the transaction.
  • Originator’s physical address or national identity number or customer identification number.
  • Beneficiary’s name
  • Beneficiary’s account number used for processing the transaction.  

Financial services organizations operating within existing regulatory frameworks already follow this rule, otherwise known as travel rule. Because they operated largely outside the purview of regulation, most cryptocurrency exchanges and offerings did not bother to collect customer identification information.

Anonymity has been a unique selling point for cryptocurrencies. But it has also caused problems. According to a draft proposal circulated by the Paris-based agency earlier this year, anonymous transactions enabled money laundering and illicit financing risks in “a comparatively easy, cheap, and secure manner.”

A Contentious Proposal

The rule has been in the works for some time. Representatives from the cryptocurrency industry attempted to persuade the FATF to reject the proposal in May. They argued that such requirements were created for an analog era, when intermediaries were required to transmit money across borders.

On the other hand, cryptocurrencies enable direct transfer of money and value, without intermediaries. Collecting and verifying customer information also makes the process inefficient, introducing bureaucracy and extending the time period required to open an account, they argued.  

Cryptocurrency exchanges became centralized intermediaries for trading in crypto during a price boom in 2017. They raked profits charging commissions from retail users who flocked to buy cryptocurrencies from them. To be sure, prominent exchanges, such as Coinbase, already follow existing KYC and AML regulations.

But information sharing between them has been limited. A series of hacks last year resulted in governments cracking down on crypto exchanges in their jurisdiction and mandating information sharing between them. For example, Japan and South Korea have encouraged crypto exchanges to form associations to self-police their practices and share information regarding customers and security practices with each other.

Why is the Ruling Significant?

The ruling is significant because it recommends de-anonymizes cryptocurrencies, making it mandatory for exchanges and other businesses to verify important customer information. It also applies broadly to the cryptocurrency ecosystem and brings a slew of businesses, including Bitcoin mixers, under its purview. The FATF has 37 member countries, which represent an overwhelming majority of the world’s financial centers.

That said, nonprofit and crypto advocacy organization Coincenter has pointed out the FATF does not issue rulings. Its latest document is a set of recommendation that member countries jurisdictions can use as guidance. One of them, the United Kingdom, has used the guidance to enlarge its scope to cryptocurrency services providers that are non-custodial (providers of crypto services in which the private key is with the owner and not to the exchange), Coin Center stated.

It’s timing is also interesting since it comes on the heels of Facebook’s announcement of its Libra token, which will, presumably, be used to transmit money and value across borders. Facebook has said that transactions on the Libra blockchain will be pseudo-anonymous, meaning transaction information will be broadcast across its network but identification information will not be publicly available.   

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