Chainalysis Advises FATF to Reexamine Data Requirements on Crypto Exchanges

Blockchain analytics firm Chainalysis has responded through an explicit letter to suggestions by the intergovernmental organization for preventing financial crimes, the Financial Action Task Force (FATF).

According to Chainalysis, it is preposterous and awful for the crypto sector to anticipate exchanges to transmit know-your-customer (KYC) data to receiver platforms for each transaction.

The letter Chainalysis forwarded to the FATF, an inter-governmental organization which is committed to fighting money laundering as well as other financial fraud, condemns requests by the organization to maintain the identity and record of buyers and sellers engaged in cryptocurrency trades. The FATF had earlier asked the public to comment on its report in the last week of February.

A possibly controversial recommendation came in section 7(b) of the document, where the FATF said that “countries should ensure that originating VASPs obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers, submit the information to beneficiary VASPs … and make it available on request to appropriate authorities.”

The recommended demands have several issues, Chainalysis COO Jonathan Levin and global policy head Jesse Spiro penned on April 8. One thing is that the “beneficiary” of a trade – the beneficiary of the funds – cannot be some other crypto exchange.

Chainalysis states that such demands would force exchanges that the FATF labels “Virtual Asset Service Providers (VASP)” to shut down and reduced visibility into likely unlawful activity. Should exchanges cease because of non-compliance, unlawful activities would be carried out in decentralized platforms, making the fight against crime difficult, rather than simpler, for officials, argues Chainalysis.

Chainalysis letter further says

“There is no infrastructure to transmit information between VASPs today, and no one has the ability to change how virtual asset blockchains work. Forcing onerous investment and friction onto regulated VASPs, who are critical allies to law enforcement, could reduce their prevalence, drive activity to decentralized and peer-to-peer exchanges, and lead to further de-risking by financial institutions. Such measures would decrease the transparency that is currently available to law enforcement.”

The FATF has in the meantime kept pushing regimes on its list of nations with inadequate progress in the fight against problems such as as money laundering and terrorist funding.
Levin and Spiro wrote that the transparency inherent in a blockchain does provide a “technical opportunity.” Exchanges can use data stored on a blockchain “to form an effective risk-based approach.”

By saving KYC information in their own servers, exchanges can hand over law-enforcement agencies, regulatory authorities and financial institutions with details on certain trades or persons to deter any illegal activity, they argued. Chainalysis actively partook in various inquiries using blockchain information to distinguish wallets and funds that might be engaged in illegal exercise.

The other suggestions of the company include the establishment of computerized client due diligence initiatives to ‘validate destinations for illegal activities’ along with the beneficiary exchanges monitoring for same kind of problems from any exchange that remits funds over.

If the suggestions of the FATF are implemented, they will become effective in June 2019 as an international standard. While the faction invited public comments on paragraph 7(b), the suggestion period ended on 11 April, and it is uncertain whether the objection from Chainalysis will be adapted.

As a reply to condemnation that an unmonitored environment promotes financial crime, Pakistan recently revealed that it is implementing cryptocurrency rules. In April 2018, the central bank of Pakistan prohibited cryptocurrency buying and selling.