Can a Major Regulatory Breakthrough Boost Crypto Prices?

The Financial Action Task Force (FATF), the international policy-making organization designed to “[combat] money laundering, terrorist financing and other related threats to the integrity of the international financial system,” announced in October an initial set of cryptocurrency-centric rules, with a more comprehensive set to follow by June 2019.

The preliminary regulations require countries worldwide “to license or regulate cryptocurrency exchanges and some firms providing encrypted wallets, to help stamp out the use of digital money for money laundering, terrorism financing or other crimes,” said a Reuters report. Initial coin offerings (ICOs) are also responsible for complying with the provisions. FATF president Marshall Billingslea declared countries “will be subject to periodic reviews,” and “be added to an FATF blacklist that restricts access to the global financial system” for noncompliance.

While FATF policies are non-binding, instead focused on “[generating] the necessary political will to bring about national legislative and regulatory reforms in these areas,” they would represent a significant step forward in codifying a fragmented regulatory landscape, exacerbated by the lightning-fast rise of cryptocurrencies.

Government bodies were suddenly confronted with a business model both new and unfamiliar to regulators after the 2017 crypto boom, but cryptocurrencies have been on the FATF’s radar well before then. The FATF noted in a 2014 report that two parallel narratives exist about digital currencies – that they are both “the wave of the future for payment systems”; and “provide a powerful new tool for criminals, terrorist financiers and other sanctions evaders to move and store illicit funds, out of the reach of law enforcement and other authorities.” This duality means some countries, focusing more on the first narrative, have moved to embrace digital currencies; others have shunned them, put off by both crypto’s inherent price volatility (cast in stark relief by the crypto boom’s increased media coverage) and a wild west-like environment of theft and fraud.

The FATF has long expressed concern that some of the properties that make crypto attractive to holders – its inherent anonymity; the lack of a central governing body overseeing its ecosystem; the rapid evolution of decentralized systems made accessible via the internet – means it may be outside of the regulatory scope of any country, citing the infamous Silk Road illegal goods and services exchange (which only accepted bitcoin for payment) as an example. 

But the FATF also acknowledges that the positives presented by legitimate use – an ability to “improve payment efficiency and reduce transaction costs for payments and fund transfers” by virtue of its low processing fees and ability to circumvent exchange fees; strong use potential for micropayments that are currently unfeasible because transaction fees make suitably low prices impossible; and possible uses in financial inclusion efforts for people with limited access to the resources of traditional banking – mean they could not be written off wholesale.

While not yet comprehensive, the initial steps towards bringing order to the international regulatory landscape are good ones. Regulation is inevitable – clarifying those rules means a faster path to large-scale adoption of cryptocurrencies and bringing their benefits to the world.

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