With concerns growing over the use of cryptocurrencies to facilitate capital flight and money laundering, governments are banding together to share personal user data involving cryptocurrency transactions.
When Roger Dudley first opened his video rental store in 1987 in the small rural town of Ashton, Idaho, his first thoughts were of putting in an “adults only” section.
Despite Ashton’s staunchly Christian underpinnings, Dudley knew that there was a current of repressed sexual energies flowing within the community, something which the enterprising 40-year-old had every intention of harnessing for profit.
Whether men or women, Dudley knew that there would be demand for “adult” films in VHS format so he converted a back room with a big “adults only” sign hung on the top and some beaded curtains to veil the entrance.
And while the number of people walking into the “adults only” section and browsing was high, the number who actually made it to the cashier to rent the “adult-only” videos was very small — those who did rent the videos tended to come at odd hours when the store was near empty and also tended not to make eye contact with Dudley.
Reviewing closed-circuit surveillance footage of the backroom, Dudley noticed that when people picked out a VHS they wanted to rent, they had a habit of walking a couple of rounds around the backroom before realizing that the cashier was out front and then putting the videos back on the shelf.
It was then that Dudley recognized what the issue was.
In prudish Ashton, people were too embarrassed to be seen carrying these videos out the front door and they didn’t want to use their real names when renting them out.
Dudley saw an opportunity where others would have seen failure.
First, he added a second cashier to the “adults only” backroom. Then, instead of asking for people to produce their IDs, they would have their video rentals tied to a unique ID number that was then tied at the front cashier to their real IDs.
And while this may not seem like a big deal today, in 1987, the idea of a secondary ID at a video store in the middle of nowhere, was revolutionary.
So anytime a customer at the store wanted to take out an “adult-only” video for an evening of bawdy entertainment, they only needed to quote their pseudonymous ID number and pay at the back cashier, making the process seamless and discreet.
Soon, Dudley’s backroom was making in one month, what his front room was making in three.
It’s not as if the pseudonymous nature of Dudley’s customer ID offering made his “adult-only” content any more desirable, it’s that customers, even if what they’re engaging in is not particularly nefarious, can and will appreciate being discreet when it comes to certain matters.
So when it was announced that the Financial Action Task Force (FATF), an international organization comprising of over 30 member countries and economies, would be managing a new system to collect and share personal data on individuals who conduct cryptocurrency transactions, the move was met with more than a little bit of skepticism as to its efficacy and reach.
To be sure, the stated goal of the FATF is to prevent funds from being laundered or feeding terrorist organizations and other nefarious uses by shedding more light on those who would use cryptocurrencies, but the devil as always will be in the details and executing such a plan is no mean feat.
Many cryptocurrency purists had long foreseen this day and even more had prepared for it, which is why decentralized exchanges — near anonymous forums for cryptocurrency trading — think of it as Craigslist for your cryptocurrency — have been on the ascendancy.
Even one of the world’s biggest centralized cryptocurrency exchanges Binance has launched a decentralized exchange.
And the ability of digital assets to leap across artificially constructed political boundaries as well as formidable geographical ones, with both impunity and anonymity, amidst a backdrop of patchy cryptocurrency regulation (where available), means that the FATF’s challenge will always be a formidable one.
For now, 15 countries will join hands, including the G7 countries (France, United States, Italy, Canada, Germany, Japan, United Kingdom), Australia and Singapore, to develop the FATF’s cryptocurrency monitoring system.
The most obvious place to start of course would be centralized exchanges, a move which Japan spearheaded when cryptocurrencies first became more visible, by being the first country to introduce a legal framework for cryptocurrency exchanges and setting up a registry in 2017.
But because cryptocurrency exchanges have always been able to engage in regulatory arbitrage, given the non-geographically tied-down nature of their business, enforcing rules to govern cryptocurrency exchanges has always been a challenge.
And while G20 finance ministers and central bank governors meeting in June this year agreed to work toward introducing licensing and registration systems for cryptocurrency exchange operators — history has demonstrated how slow multilateral co-operation is in reality when national interests prevail.
For one thing, just as weaker policing of environmental laws draws polluting companies to relocate their operations to certain countries, even if these globally-harmonized laws regarding cryptocurrencies are brought into force, the economic incentive for countries to look the other way in their enforcement is huge.
Cryptocurrency exchanges are vastly complex technological operations, providing employment for a legion of coders, software developers, marketers, and business developers — all of which are generally high paying, high value jobs and which can provide ancillary benefits in the form of the services which these professionals demand — housing, restaurants, entertainment — all of which contribute to a country’s economic activity.
The economic incentives for jurisdictions to simply pay lip service to these expanded international regulations on cryptocurrencies just won’t work unless every country in the world has an incentive for it to work — like how it has for aviation.
Globally, aviation regulations are harmonized through ICAO — the International Civil Aviation Organization, a specialized agency of the United Nations, which codifies the principles and techniques of international air navigation and helps to ensure the safe and orderly management of the global aviation environment.
Countries may have some local deviations from ICAO regulations, but for the most part, it’s in the interests of countries to comply with ICAO rules — and indeed, 192 out of 193 United Nations member countries (Lichtenstein has no international airport) are members of the organization.
And the incentive to play by ICAO rules is far greater than to ignore them.
Airlines won’t want to fly into airports that engage in regulatory arbitrage and passengers won’t want to fly on airlines that do so either. Airports with more lax safety regulations don’t make them more attractive to fly to.
But for cryptocurrencies, there are strong economic incentives to disregard international rules — cryptocurrency exchanges, mobile as they are, will necessarily gravitate towards countries with more friendly regulations.
And then there’s the issue of enforcement.
While regulators can target centralized cryptocurrency exchanges to insist on adherence to know-your-customer (KYC) and anti-money-laundering (AML) rules — decentralized exchanges, platforms where no corporate entity may exist or for which no centralized organization controls, will be far more difficult to police.
Then there’s the murky world of cryptocurrency-fiat off-ramps, where such transactions can be completed in the shadows.
The very nature of cryptocurrencies and the technology upon which they were built on makes the industry challenging to regulate, regardless of global harmonization of laws.
Where cryptocurrencies are used for nefarious purposes, the bulk of such transactions rarely, if ever, occur on centralized and highly visible cryptocurrency exchanges.
And ironically, the global push for greater transparency in managing cryptocurrency transactions and their actors may have the unintended effect of pushing cryptocurrencies closer into the mainstream — you can’t regulate what you don’t recognize.
For governments to push for harmonizing cryptocurrency laws is an admission that cryptocurrencies are a force that requires regulation — validating their existence and in a very perverse way, recognizing their significance.
Nonetheless, governments are choosing to work together to create a regulatory framework for cryptocurrencies should be welcome. To ignore the industry altogether would be willful blindness to the potential harm that the misuse of cryptocurrencies could perpetuate.
But regulators are well-advised to study the extent and nature of the beast that they are attempting to cage, because arguably, current technologies and regulatory channels are ill-equipped to tame it.
Patrick is an innovative entrepreneur and a lawyer passionate about cryptocurrencies and the business world. He is the CEO of Novum Global Technologies, a cryptocurrency quantitative trading firm. He understands the business concerns of founders and business people helping them to utilise the legal framework to structure their companies to take advantage of emerging technologies such as the blockchain in order to reach greater heights. His passion for travel, marketing and brand building has led him across careers and continents. He read law at the National University of Singapore and graduated with Honors in the Upper Division and joined one of Singapore’s top law firms, Allen & Gledhill where he was called to the Singapore Bar as an Advocate & Solicitor in 2005. He created Purer Skin, a skincare and inner beauty company which melds the traditional wisdom of ancient Asian ingredients such as Bird's Nest with modern technology. In 2010, his partner and himself successfully raised $589,000 from the National Research Foundation of Singapore under the Prime Minister’s Office. He has played a key role in the growth of Purer Skin from 11 retail points in Singapore to over 755 retail points in Singapore and 2 overseas in less than a year. He taught himself graphic design, coding, website design and video editing to create the Purer Skin brand and finished his training at a leading Digital Media Company.