As of June 2020, it will have been one year since the Financial Action Task Force (FATF) published Recommendation 16; it will also be the deadline for when countries should have entered the process of making these guidelines into laws.
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However, each country will have its own iteration of what those laws will look like; as such, the respective cryptocurrency industries in each of the countries that makes the decision to comply with the FATF guidelines will have its own unique set of regulations.
Recently, Finance Magnates sat down with Elsa Madrolle, General Manager of blockchain security company CoolBitXs International department, to speak about the effects of the possible effects of implementing the guidelinesspecifically, in Canada.
In many ways, Canada has sort of flown under the radar when it comes to the crypto world. While countries across Asia and Europe, and certain parts of the United States, have earned recognition as cryptocurrency hubs, most people in the cryptosphere primarily associate Canada with the QuadrigaCX scandal that came to light in early 2019.
However, the quiet North American country does have a considerable cryptocurrency industry: for example, the Canada Energy Regulator reported in February of this year that crypto-currency mining is booming in Canada.
How will the FATF guidelinesand the changes in AML laws that they will bringaffect the cryptocurrency industry in Canada and beyond?
This is an excerpt. To hear Finance Magnates full interview with CoolBitXs Elsa Madrolle, visit us on SoundCloud or Youtube. Special thanks to Elsa and to the CoolBitX team.
Elsa explained that her company, CoolBitX, has had its eye on Canada for quite some time; now that the FATF deadline is imminent, the company is hoping to become a go-to solution for the countrys crypto exchanges.
Essentially, CoolBitX is a blockchain security company, Elsa explained. Our mission is to grow mainstream and institutional adoption of the asset class. In order to do that, weve got two main lines of business: the first is a hardware, credit [card]-sized wallet that people can use to hold their cryptocurrency in, called the CoolWalletS.
The other line of business is more targeted toward institutions, Elsa continued. Its an investment sharing platform that we call Sygna Bridge, that allows exchanges to start communicating the data required by regulators. She added that this is particularly relevant in the current moment, as were seeing new laws across the world that govern crypto starting to be implemented.
Specifically, Sygna Bridge was built to address the Financial Action Task Force guidelines that were published last June in Recommendation 16, which recommend legislation that will require cryptocurrency exchanges to adhere to the Travel Rule, which states that inter-exchange transactions must include personal identity data about the sender.
CoolBitX is working on developing relationships with cryptocurrency exchanges around the world that may be interested in adopting Sygna Bridge as a compliance solution to get in line with the FATFs recommendations.
And theres one place that Elsa pointed to in particular: Canada is very interesting to us, Elsa said.
We have Canadian clients and targets for both lines of business, she continued. The CoolWallets been around for a while; this year is really the Sygna Bridge year, [and were] very interested in moving to North America.
But why Canada, say, before the United States? The US market has its own idiosyncrasies, Elsa said. However, [its] less onerous from a regulatory standpoint for Canadian firms to comply with regulation than for US firms to comply with US regulation, so its a good place for us to start.
There has already been some progress on the regulatory front in Canada ahead of the FATFs deadline: FinTRAC announced an enhanced AML regime in March that requires cryptocurrency exchanges to be considered henceforth as money service businesses (MSB).
That now requires registration as an SMBand thats not just any Canadian firm, Elsa explained; it also includes any firm globally that has Canadian clients. These firms will have to register as FMSBs (foreign money service businesses).
This effectively means that securities law applies, she continued; in other words, the Travel Rule isnt just a compliance recomme
ndation for Canada any longerits the law.
But it may be some time before FATFs recommendations are signed into law elsewhere in the world. FATF is a supranational organization that has countries [as] members; therefore, its audience is regulators, Elsa explained.
Therefore, the timeline that the FATF originally sent out for when countries should be compliant with its guidelines was for the regulators; Recommendation 16 set June of 2020 as an ostensible deadline for regulatory adoption.
On a practical level, this means that regulators have until June of this year to demonstrate the fact that if they want to remain a part of the club, that they are issuing regulations.
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Thats why FinTRAC went ahead with the crypto exchanges-as-MSBs law earlier this year: the Canadian government has to issue regulation ahead of that June deadline, Elsa said.
However, this doesnt mean that exchanges need to be compliant by June 1st, she continued. Instead, FATF is primarily concerned about regulatory actions: it wants to see that countries have complied with the timelines that they were suggesting.
Additionally, these werent necessarily hard timelines, because they will meet again to decide whether the timeline sticks, or whether that timeline could be moved back, Elsa explained.
However, Elsa doesnt believe that FATF is likely to kick the can down the road any furtherin other words, the original deadline is likely to stick.
I think FATF was very active in actually speaking to industries, speaking to regulators, getting feedback throughout the course of the year to make sure that the technology might be available, and that it wasnt too onerous for firms to start to comply.
When the FATF guidelines were released last June, there was quite a bit of a stir around the possible effects that enforcing the travel rule on cryptocurrency exchanges could have on the ways that exchanges operateand thereby, cryptocurrency markets.
How could the adoption of the FATF guidelines onto cryptocurrency exchanges in Canada and beyond affect cryptocurrency markets?
What were dealing with here are really institutions, or exchanges that should be deemed institutions, Elsa said. Youre not covering non-custodial wallets, which is probably where the majority of trading actually happens: it doesnt happen on an exchange, it largely happens on OTC [mediums] and between large individual [traders] transacting with each other.
Therefore, Elsa any regulation that only applies to transactions sent to and from cryptocurrency exchanges likely doesnt have a major impact on cryptocurrency markets, as most cryptocurrency trading volume arguably happens outside of cryptocurrency exchanges.
The guidelines dont capture all of that, she said, so, I dont think its going to hinder the growth [of cryptocurrency usage] specifically, because the part that it does capture was already pretty compliantthe large exchanges tend to already require advanced KYC and AML [checks], et cetera.
Therefore, in spite of the fact that the FATF guidelines received negative press at the beginning, Elsa doesnt believe that there will be a huge change in the way that people transact, or in peoples appetite for coming onboard.
Elsa also argued that theres one area in particular where adoption of the FATFs guidelines could result in greater usage and adoption of cryptocurrencies: institutional investors.
Essentially, the enhanced KYC and AML standards that the guidelines would support could potentially make it a more attractive environment for institutions to start considering the asset class.
This is partially because custody is a major issue, and regulation does start to cover custody, Elsa said. Once you start addressing the concerns that institutions may have, you stand more of a chance for longer-term, broader adoption.
By comparison, if institutional flows start to come into the asset class, those would be much larger than retail flows, she continued.
However, the fact remains that while more institutional traders may foray onto cryptocurrency exchanges for the first time once the FATF guidelines are implemented, the majority of cryptocurrency trading will still probably take place on OTC trading desks.
In other words, [] the entities that are being asked to comply probably were not the ones that FATF should have been worried about, Elsa said.
This is problematic for several reasons. In addition to the fact that implementing the guidelines will take time and money, and may sink some businesses.
This is particularly true for small businesses in countries that will design laws that will stringently apply the FATFs guidelines, as opposed to those who may leave a bit more flexibility in the ways that the guidelines are implemented. This is also true in countries that already have onerous regulations in place for cryptocurrency exchanges.
Each country has quite a bit of wiggle room to decide how they are going to implement [the FATFs] guidelines, Elsa explained, ranging from the very relaxed to the very stringent.
For example stating that everybody who deals in crypto is going to be an MSB, as Canada has done, is a pretty stringent application of that guideline.
However, that being said, to be an MSB in Canada is much easier than to be an MSB in a country like the United Statesso, you have to define what being an MSB is by jurisdiction, she said.
In any case, though, Elsa believes that the guidelinesand their implementationis [only] a first step.
This is just warming the industry upthere are further regulatory changes that are going to be imposed.
This is an excerpt. To hear Finance Magnates full interview with CoolBitXs Elsa Madrolle, visit us on SoundCloud or Youtube. Special thanks to Elsa and to the CoolBitX team.
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FATF: How Will the Guidelines Affect Canadas Crypto Industry? - Finance Magnates
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