The radical idea hiding inside Facebook’s digital currency proposal
The radical idea hiding inside Facebook’s digital
currency proposal
Cryptocurrency exchanges are bracing for their first-ever
global regulations.
A powerful intergovernmental agency that polices money
laundering is moving forward with new rules meant to
deter the criminal use of crypto. International regulations may be needed if
crypto is ever to be broadly seen as legitimate outside its community of
enthusiasts. But industry insiders are already raising red flags. They warn
that the rules could have harmful unintended consequences.
The main source of consternation is a section in the
regulations, drafted by the Financial Action Task Force (FATF), that requires
cryptocurrency exchanges to share information about their users when
transferring those users’ funds between one another. This so-called “wire
transfer rule” is similar to something that banks that do business in the US
must follow, called the “travel rule.”
First proposed in February, FATF’s crypto rules also
introduce a new term: “virtual asset service providers,” or VASPs, a category
that appears to mainly include cryptocurrency exchanges (though critics say the
term has been too vaguely defined and doesn’t necessarily exclude other
entities). The wire transfer section states that countries must make sure that
VASPs, when sending user funds between one another, also “immediately and
securely” share information with each other that identifies the sender and
recipient. They must also make that information available to law enforcement
authorities who request it.
But there is a “substantial technical obstacle” to doing
this, according to influential blockchain analytics
firm Chainalysis. Cryptocurrency exchanges process hundreds of thousands or
millions of transactions per day, so this type of sharing will require them to
come up with new automated systems, Chainalysis’s COO Jonathan Levin and Jesse
Spiro, global head of policy, wrote in an April letter to FATF. Furthermore, in many
cases exchanges can’t tell if they are sending funds to another exchange or to
someone’s personal wallet. “Therefore, requiring a transmission of information
identifying the parties is not feasible,” they wrote.
In the letter, Levin and Spiro contended that the “onerous”
requirements might even defeat the rule’s purpose by driving activity to decentralized exchanges and other kinds of
peer-to-peer trading that are harder to police. Global Digital Finance, a
London-based trade group, argued in its own letter to FATF that the wire transfer
rule can be circumvented. For example, a customer could send money from an
exchange to a wallet they control, and then send those funds to another
exchange.
Though the new rules are technically non-binding, FATF’s members, which include the largest financial systems in the world, take its regulations seriously. This is almost sure not to go smoothly, however. The FATF seems intent on plugging cryptocurrencies into the existing system, and because of their nature they probably won’t fit. So something will probably have to give, and the outcome will have a lot of bearing on the future of the technology. In other words, all this regulation talk may seem boring, but it’s a huge deal.
The developers building the Libra blockchain aim to
revolutionize our digital identities. Since Facebook revealed Libra coin, most of the attention has
been focused on the coin itself. But tucked inside the technical descriptions
that Facebook published last week are two sentences that imply that the
long-term vision for new blockchain platform includes much more than a
currency: “An additional goal of the association is to develop and promote an
open identity standard. We believe that decentralized and portable digital
identity is a prerequisite to financial inclusion and competition.”
In fact, an easy-to-use system that would give everyday people the ability to control their own digital identity credentials, instead of trusting companies and governments to manage and secure them, is something of a holy grail in the world of internet technology. Developers have been pursuing it for years, but big technical obstacles still loom before the technology will be ready for mainstream adoption. Can Facebook get it there, and, even if so, why would it matter? I explore this question in my latest article.
More Libra stuff: Bank of England governor Mark Carney has announced that the
central bank will let Facebook and other payment processors hold accounts with
it. Traditionally it has only offered accounts to commercial banks. But the
tech companies won’t get access if they don’t meet strict standards: “Unlike
social media, for which standards and regulations are being debated well after
it has been adopted by billions of users, the terms of engagement for
innovations such as Libra must be adopted in advance of any launch,” Carney said. Like the FATF, he appears to
imagine that cryptocurrencies, at least those that come from big technology
companies, can be fitted into the existing financial system.
Meanwhile, the Bank for International Settlements, the central bank for central banks, is calling for international collaboration on new public policies that account for the entrance of “big tech” into financial services.
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