FATF Makes Small Crypto Platforms Easy Prey For Big Players | Blockchain Progress
FATF Makes Small Crypto Platforms Easy Prey For Big Players
As the cryptoasset industry grows, it’s only inevitable that it attracts more regulatory attention. The truth of this assumption was highlighted in March, when the Financial Action Task Force (FATF) published an update for its guidance relating to the money laundering risks posed by cryptocurrencies.
There’s nothing particularly surprising about this update, which mostly expanded the definition of virtual assets (VAs) and virtual asset service providers (VASPs) to include more of the overall crypto ecosystem (e.g. stablecoins, peer-to-peer transactions). However, observers have noted that the FATF’s guidelines could have a negative impact on the competitiveness and inclusivity of the international crypto industry, insofar as it may be easier for larger companies to comply with a growing number of strict guidelines than smaller startups.
This is also the view taken by a variety of industry players speaking, who said that the costs of compliance are more affordable for already established firms. That said, principles of proportionality indicate that smaller companies in developing nations may not have to uphold the same standards as others.
FATF guidelines impose barriers to entry
As Blockchain Association of Kenya founder Michael Kimani noted recently, the FATF’s (updated) guidelines are likely to provide established, larger firms with a competitive edge:
This kind of view is shared by players from across the industry, with Dr. Scott Grob of ACAMS (Association of Certified Anti Money Laundering Specialists) telling that the FATF guidance will target both small and large VASPs and crypto companies, irrespective of size.
“Unfortunately, many smaller VASP and crypto firms will struggle to integrate these anti-financial crime requirements into their systems and find the technical resources to maintain them,” he said.
It’s not only exchanges in developing nations and smaller markets who may struggle with the guidelines, but also customers.
“Adoption and enforcement of the FATF guidance can be expensive on the one hand and not appealing for the customers seeking privacy on the other hand. Therefore, it is reasonable to believe most of the exchanges, wallet providers, and custody platforms are not pleased to adopt the guidance,” said Or Lokay, Vice President of crypto tax consultancy Bittax.
Given that the FATF’s guidelines will be implemented differently according to the specific laws of each jurisdiction, companies in certain nations may have an easier time than others.
“VASPs operating in multiple jurisdictions will be under increased scrutiny and need more robust internal controls, systems for know-your-customer (KYC), detection, and better resources,” said Scott Grob.
“Subsequently, larger VASPs with simpler operating models in accommodating regulatory jurisdictions, such as Singapore and Japan, will benefit the most.”
Basically, increased costs will inevitably result in some smaller startups being priced out of the market. Hence, the worry that the guidelines could impact diversity and inclusivity.
“Since the guidance requires that VASPs collect specific additional information on customers and transactions (including but not limited to ‘the travel rule’), compliance with the guidance is likely to result in additional costs for VASPs. In general, higher compliance costs can potentially result in barriers to entry,” said Robin Newnham, the head of policy analysis at the Alliance for Financial Inclusion.
Or Lokay pointed out that, according to data from Thomson Reuters, established financial institutions “spend up to USD 500m annually on KYC and customer due diligence, and the average annual spending is USD 48m.” This provides some indication of the scale of labor and resources needed to comply with regulations, and of the fact that the regulation tends to lead to at least some degree of consolidation.
