If you haven't noticed, the cryptocurrency industry has moved into a new stage of development. It appears that we are now in the “ national security issue ” phase (paywall). Congratulations! We have gone through quite a transformation: from unknown, to nerd, to cool kid, and now to "public enemy No. 1." The first several drafts of this article contained long-winded rants about how much I disagree with the “national security issue” statement and how cryptocurrency is about natural rights. But, I’ll spare you all that and only talk about the most significant challenge the cryptocurrency ecosystem has faced to date.
Yes, this is bigger than the bitcoin civil war. The Financial Action Task Force (FATF) has thrown its hat into the ring. This intergovernmental organization you have probably never heard of is focused on combating money laundering and terrorism financing. That's a good thing. It's a group that includes 37 of the most influential and powerful countries in the world and has cooperation from many more. Think the U.S., Russia, China, most of Europe, plus almost any other country you can think of quickly off the top of your head. When the FATF says something, it’s worth paying attention to, because they have the power to bring the hurt. Failing a FATF audit can lead to being cut off from the global financial system.
The FATF has announced its guidance that transactions involving cryptocurrencies need to adhere to their banking travel rule (paywall), and the countries that don't comply can get in big trouble. The travel rule is not the same as the basketball term. The FATF requires financial institutions to send client information about funds transfers to other financial institutions. That may sound benign, as all banks have been compliant with this for years.
However, these rules now are going to be enforced on cryptocurrency. Cryptocurrency is supposed to work the opposite of that, anonymous and permissionless. What this means is that every country that is part of the FATF has to follow these rules and make cryptocurrency service providers like wallets and exchanges act in compliance, or they'll receive severe sanctions and fines from FATF. In the future, you will need to be known to send and receive cryptocurrency.
If you have been part of the cryptocurrency movement, you might need to take a few deep breaths. Arguing if an unelected foreign body — or anyone, for that matter — has the right to dictate innovation will only slow down what needs to happen next and quickly. If — and I know this is a big if — our industry can get past this attempt to seemingly destroy the fundamental principles of “decentralized” and “permissionless” that are key hallmarks of any crypto worth its salt, then we all have one more hurdle: our fierce desire for autonomy and independence.
The infighting that has occurred within the crypto space has been destructive and distracting but also one of its greatest strengths. It has driven innovation and creativity to the point where it feels impossible to keep track of every new blockchain and cryptocurrency that pops up. Everyone has one. I’m worried that we will stand by as each virtual asset service provider (VASP) gets picked off.
My dad taught me to embrace challenges and meet threats directly and quickly. This is a challenge that quick innovation can meet directly. Our industry has already been suffering from crypto winter. The travel rule could be the tipping factor in mass extinction. You see, the VASP that comply can’t interact at all with the other wallets that don’t comply. This new rule could divide the industry into two — compliant and noncompliant wallets. It could also drive centralization and raise the barrier to entry for new innovation.
To meet this challenge, we can’t back away from the strengths that attracted each of us to cryptocurrency: fast, secure, independent, open and permissionless. This solution has to work with both custodial and noncustodial wallets and all types of coins, including privacy coins. It must be peer to peer, not centralized, and with open standards. Let’s make sure that we aren’t recreating the same centralized mistakes that were made before where “trusted institutions” are only allowed to interact with each other.
We need to act on this now because they are coming. Sanctions are likely around the corner. We can get ahead of this storm and make sure we preserve what we have built and the freedoms and liberties it gives us. By acting now to build and implement solutions collaboratively, we can define our future and see our greatest builders and innovators succeed....