It is September of 2019 but crypto exchanges are still looking for a solution as they need to implement a new set of compliance guidelines issued by the Financial Action Task Force (FATF). Digital asset service providers are required to come up with the solution before January 2020.

Earlier this year, the FATF announced a Recommendation 16 which introduced the so-called “travel rule” requiring verification and record keeping of the crypto exchanges customer’s identities and passing the identity information together with funds transferred from one crypto exchange to another as well as on request to appropriate authorities This is very similar to what banks are required to do. The idea behind it is to prevent money laundering and financial crimes the number of which is rapidly growing in crypto domain.

Although the FATF’s recommendations are of advisory nature and do not have legally binding force, these regulations still possess power in relation to the financial systems. The FATF includes 36 economies – among them are the largest ones which have a significant impact on the global finance operations. This basically means that implementation of the FATF’s norms can change the game. Moreover, non-compliance can put disobedient jurisdictions to the FATF’s grey list and even become a subject to economic sanctions.

Applying the “travel rule” can be quite challenging: unlike the bank transactions containing IBAN code, there is no information about the identity and location of the customer in a crypto transaction. As cryptocurrency’s address (e.g. Bitcoin) consists of random characters, the only option to tie it with the identity of the owner is the owner’s consent to share his or her details. It explains why this task is next to impossible. Either way, the Regulation must be adopted and crypto-exchange companies along with other tech-companies are competing to build a solution. The FATF does not take part in creation of the solution directly but has established a Contact Group that observers the developments.

Industry’s analysts are concerned that due to the time constraints, not the best but the first solution will become a standard. Experts also highlight the possibility of adoption of a solution which is not that good in an essence but the one which wins owing to a strong management team. If such solution will be adopted by the biggest players, others will also be forced to implement this particular standard. At the same time, the upcoming compliance deadline is the opportunity for crypto exchange companies to unite and collaborate for sake of the best global standard.

Some experts envisage that the industry will come up with multiple solutions. The variety of solutions will allow to apply the most optimal option (i.e., cost, performance, security, etc.) depending on a situation and switch between different technologies. On the other hand, there are analysts who insist that the only one standard must be adopted by everyone to encourage competition between the service providers.

At this point, the only thing we know for sure is that “time will tell”. Apparently, very soon we will see whether the industry was able to get through the challenge and adopt a decent solution.

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