The Financial Action Task Force Bolsters Regulation for Cryptocurrencies
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*For some reason I can’t copy and paste with my links — but the actual paper is embedded with resources.*
The Financial Action Task Force Bolsters Regulation for Cryptocurrencies
The Financial Action Task Force (FATF), an international body that coordinates government policy on illicit finance, has released new guidelines for cryptocurrency firms to combat money laundering and prevent criminals and terrorists from using cryptocurrencies. Criticisms for the new guidelines range from they undermine privacy, stifle innovation, and would not work in the context of blockchain and digital asset technology. Are cryptocurrencies’ potential for terrorist financing being extrapolated?
The Financial Action Task Force (FATF)
The FATF is comprised of 37 member jurisdictions with 2 regional organizations which represent major financial centers in all parts of the globe. FATF objectives since its inception in 1989 has been to combat targets against the integrity of the international financial system with legal, regulatory and operational measures. As a result, countries like Turkey have added cryptocurrency trading platforms to the list of firms that include anti-money laundering and terrorism financing regulation.
Many more countries have solidified international cooperation against the evolving practices of illicit criminals and terrorists. FATF has monitored emerging risks especially to new technologies and has been a key leader in informing members of the risk assessment processes and in delegating resources to mitigate such risks.
Cryptocurrency and Terrorism
Recently, evidence that terrorist organizations have begun to employ cryptocurrency to finance their activities through fund transfers and fundraising poses challenges to the anti-terrorism actions of international regulators and countries. Terrorist organizations have been using cryptocurrency to trade various tools on the black market — from weapons to drugs. Some extremists have also been teaching their followers how to use Bitcoin and in countries like Syria, Bitcoin has been used for ransom payments in kidnappings.
Terrorist groups have long employed non-bank financial services to collect funds and have leveraged new financial technology services to fund their missions. The mainstream narrative is that cryptocurrencies such as bitcoin are attractive for illicit transactions as they are perceived as hard to trace, have low transaction costs, and are decentralized.
Except this is not the whole truth as the ‘black box’ reputation of blockchain technology has been debunked numerously with tools that have created transaction histories and have painted comprehensive evidence of the sources of funds and the exchanges.
The Justice Department in the United States (U.S.) was able to dismantle three terrorist financing cyber-enabled campaigns involving Al-Qassam Brigades. Along with other regulators, they tracked and seized 150 cryptocurrency accounts that laundered funds from and to the terrorist group accounts. They also succeeded in executing criminal search warrants relating to U.S.-based subjects who donated to the terrorist campaign. This is because most cryptocurrencies are pseudonyms with addresses that can be linked to identities.
FATF’s guidelines and lack of Social Media Mentions
The task force calls on governments to broaden regulatory oversight of crypto firms by taking more measures on checking the identities of customers and in reporting suspicious transactions to regulators. Yet research director at the crypto-advocacy group Coin Center claims that “It would be inappropriate for anything like these non-specific and confusing standards to replace the current law and regulations we have on the books here in the U.S.”.
There are a few points to consider.
First, FATF has produced guidelines provide a common ground by clarifying and setting common terms that can be adopted by all. This is a benefit as action can be coordinated against terrorist groups with a common understanding. Should the FATF not take action and promote some form of regulation, it could leave the space open for more abuse by terrorist organizations and illicit actors.
Secondly, further regulation from the ones already in place in different jurisdictions might not be the solution. This is because illicit activity will always exist but finding ways in which to combat such activity does not lie in regulating the crypto-platforms alone. There is widespread awareness that whilst terrorist groups have solicited cryptocurrency donations, it has majorly been via online social media campaigns. Contested terrorists like Hamas, are known to be actively soliciting donations in the form of bitcoin on platforms like Telegram and on their websites.
Funding for terrorism lies in the ability of terrorist groups to leverage social media and other platforms. The guideline made no mention of social media platforms’ role in terrorist use of cryptocurrencies in their Risk-Based Approach to Virtual Assets and Service Providers.
Terrorists Cryptocurrency Percentage
Although illicit cryptocurrency transactions have risen, an illicit activity made up about 1.1 percent of all activity in the crypto space in 2020. To further contextualize, transactions associated with terrorist financing represented less than 0.5 percent of all illicit volume in crypto.
Should regulations like the FATF’s guidelines be adopted considering that terrorist financing makes up such a small percentage of the total volume of crypto activity?
Crypto-assets are growing in a myriad of fields, with countries like El Salvador adopting Bitcoin as their legal tender as of 2021. A decentralized currency means that trading can be done freely across borders. Enabling financial revolution for many communities who might otherwise not have access to banks, the global financial markets, or monetary means for the high conversion fee rates in currency exchange and/or remittances.
The 0.5 percent and less that makes up terrorist financing has incited stringent regulation, but it could stifle the opportunities that could benefit such communities. Overly regulating the crypto space will simply drive terrorists to other means, and at the expense of communities who are benefiting from the crypto platforms.
An Old Story, with a New Twist
Traditional approaches have had difficulty in the very same guidelines mentioned by FATF in identifying and flagging terror-related transactions. Counterterrorism financing is old and approaches by regulatory bodies have constricted environments for terrorist groups, thwarting attacks and disrupting illicit networks. Yet the entry of terrorist groups into crypto platforms shows that terrorists will evolve and find different and more sophisticated ways to finance their acts.
It still stands that crypto firms’ self-regulation is not enough, governmental and international regulation is necessary. Therefore countries should consider the consequences of over-regulation. Whilst they pursue further regulation, they should also consider joining forces with social media platforms, with blockchain analysis firms who work with governments and other regulatory forces to promote transparency, cooperation, and regulatory stances that are dynamic. A multifaceted approach is necessary.
Luckily, the FATF guidelines for cryptocurrencies are not legally binding — which gives members the room to consider what to apply and what not to. Despite the criticisms and concerns, it is just a framework that can be used and altered to member states’ needs and used for their understanding.
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