The new FATF recommendations make life harder for centralised crypto exchanges and this could pave the way for decentralised exchanges (DEX).  

Indeed, these new guidelines, resulting from the fight against the illicit financing of criminals, terrorists and rogue nations, also contain a new regulation of all virtual resources, with particular reference to cryptocurrencies. These are new binding standards to be applied to virtual resources for all countries.

These standards are specifically aimed at providers of virtual asset services, including cryptocurrency providers (such as exchanges) and traditional financial institutions.

Under these new measures, virtual asset service providers will be required to implement the same AML/CFT requirements as traditional financial institutions, and will have to:

  • Identify who is sending funds and who is the recipient of those funds;
  • Develop processes to share this information with other virtual goods providers and law enforcement agencies;
  • Know their customers and conduct due diligence to ensure that they do not engage in illegal activities;
  • Develop risk-based programmes that take account of risks in their particular type of activity.

The reaction of the crypto community to this decision was not particularly positive, so much so that the CEO of Binance CZ said on Twitter:

“I see many rules being made that on first glance seems to be against crypto, but clearly by people who don’t understand crypto at all, and thus don’t consider the secondary effects, all of which actually will only accelerate crypto adoption”.

What CZ refers to is the fact that decentralised exchanges offer crypto investors and traders a viable alternative, with no possibility of applying or imposing KYC/AML.

In fact, in a real DEX, there are no intermediaries on which it is possible to impose such standards, because the exchanges take place directly between users, in a P2P way. It is technically impossible to impose KYC or AML procedures on such exchanges.

In addition, DEXs allow users to retain full and exclusive possession of their private keys, so as to limit any possible government interference: the recent FATF recommendations contradict this same idea that underlies the decentralised cryptocurrencies themselves, making it clear that these regulators have not fully understood their actual operation.

The Bank for International Settlements (BIS) has also published its annual report for 2019, entitled “Big tech in finance: opportunities and risks“, in which it expresses concern about the involvement of large tech companies such as Facebook in the financial sector.

The BIS says that these companies have developed huge customer bases and that they have the potential to become dominant thanks to the large amount of data they manage to acquire.

It, therefore, states that specific policies will be needed for a comprehensive approach to financial regulation and protection of data privacy.

If even the world’s largest financial conglomerates are targeted by institutions, then users could be increasingly pushed towards decentralised, not controlled by anyone, unstoppable and unrestricted solutions.