Global monitoring of cryptocurrency users on the horizon

16 August, 2019

The day many cryptocurrency users had been hoping would never arrive now appears on the horizon. According to multiple news reports, some 15 nations are gearing up to create a global database for monitoring cryptocurrency transactions. The database will be populated with information on individual crypto transactions as well as the personal information tied to each one.

As yet, there is no word about how the maintainer of the database, the Financial Action Task Force (FATF), will procure the information it tracks. But the goal of the project is clear: participating nations want to know who is using crypto so they can prevent it from being utilized for illicit purposes. The 15 nations behind the project include all G7 members as well as Australia and Singapore.

In a perfect world, we would like to think it possible to share cryptocurrency information with the FATF in complete confidence that it wouldn't be used for anything other than necessary law enforcement. But this is not a perfect world. Governments the world over have a history of obtaining information on people, ostensibly under the guise of keeping them safe, only to turn around and use that information against them.

The whole point of cryptocurrency is to keep economics decentralized. It is to keep governments and central banks out of the lives of individual citizens so that they are free to manage their own economic situations without interference. Global monitoring flies in the face of everything cryptocurrency stands for.

More about the FATF

The FATF is an intergovernmental organization originally established in 1989 by the nations of the G7: Canada, France, Germany, Italy, Japan, the UK, and the US. At the time, establishing the FATF was justified as being necessary to combat money laundering around the world. The group expanded its own mandate in 2001 to include fighting terrorism.

There are 30 member countries of the FATF today, plus the original seven. There are also more than 15 countries that, for whatever reason, refuse to join and/or cooperate with the organization. These have been blacklisted as a result.

It should be noted that the FATF blacklist does not carry the force of law. In fact, nothing the FATF does is legally enforceable. And yet, being blacklisted almost always results in dire consequences. No FATF member wants to do business with a blacklisted jurisdiction, so being blacklisted essentially cuts that jurisdiction off from the rest of the world's economics.

What you essentially have is an intergovernmental agency able to impose its will through blackmail. How this plays out in the cryptocurrency arena is anyone's guess. Will FATF member nations compel cryptocurrency exchanges and merchants to submit transaction information? Will cryptocurrency networks be forced to reveal who is doing what, and when?

Recommended regulations

It would appear as though the FATF is hoping all of its member nations will adopt recommendations issued this past June (2019). Those recommendations include standards intended to guide nations in crafting their own cryptocurrency regulations. Among them is a proposal to force virtual asset service providers to report information on every cryptocurrency transaction, including:

  • The sender's name and physical address.
  • An approved ID number tied to the sender's date and place of birth.
  • The sender's account number (ostensibly tied to a digital wallet).
  • The recipient's name and account number.

It is clear the FATF wants to know just who is spending cryptocurrency, where they are spending it, and to whom they are sending it. They believe the information they want is critical to fighting global terrorism financed by digital assets.

Should the 37 participating countries enact legislation crafted after the FATF guidelines, cryptocurrency's privacy will immediately disappear in some jurisdictions. In others, the rules will undoubtedly wind up in litigation. Perhaps the first place to see litigation will be the U.S.

Unfortunately, it is highly unlikely such litigation will succeed in stopping the FATF's agenda. When you have that many countries on board with an idea, it is extremely difficult to find courts willing to buck the system. So now it is really a question of whether or not member countries will adopt the recommendations.

Beyond money laundering and terrorism

We human beings have a tendency toward being willing to sacrifice freedom and liberty in exchange for safety. Getting through a major airport these days is a time-consuming nightmare because of what happened in the U.S. on September 11, 2001. And though there are few who would say we should go back to the way things were prior to that fateful day, many people are still frustrated by what they have to go through just to get on a plane.

The problem with these sorts of far-reaching government actions is that they negatively impact far more honest people than criminals. How many millions of people will have their financial transactions tracked and stored in the database just to catch a comparatively small number of terrorists and criminals?

More importantly, handing over cryptocurrency transaction information to government organizations strips cryptocurrency of its decentralized freedom and puts its fate in the hands of government. A government capable of tracking every single crypto transaction is also capable of shutting the entire system down on a whim.

The fact is that the FATF's recommendations go beyond money laundering and terrorism if taken to their fullest extent. They will not just be tracking money launderers and terrorists. They will also be tracking people who use their Bitcoin to buy a cup of coffee or play a few video slot games online.

Cryptocurrency's economic freedom

Cryptocurrency brings a lot to the table for people disaffected by the traditional financial sector. It gives people the opportunity to buy and sell without having to involve banks and all that come with them. And of course, crypto is seen as a security and a store of value for big-time investors.

There is a lot of economic freedom attached to digital assets. For example, people not allowed to enjoy online gambling due to banking regulations can get around those regulations by using cryptocurrency instead. Furthermore, they can do so anonymously. That will cease to be the case if the FATF recommendations become reality. Any global system tracking cryptocurrency transactions would include personal information relating to those who use cryptocurrency to gamble.

Tracking makes crypto more vulnerable

Something else to consider here is that tracking cryptocurrency transactions makes the entire system more vulnerable. That is the last thing the industry needs. Crypto networks and exchanges are already working overtime to prevent hackers from doing what they do. A global database will only make it more difficult for them to prevent fraud.

If we have learned anything over the last 20 years of internet connectivity it is the fact that compiling large databases of personal information is an open invitation to hacking. Rest assured there will be some hackers who go after the FATF database just to prove they can break-in. There will be others looking to steal the information the database contains.

This is especially disconcerting when you consider that cryptocurrencies are digital assets. As such, they are represented by numbers in a blockchain ledger. Once stolen they are extremely hard to recover due to the nature of how blockchain works. If you think hackers currently have a lot of motivation to go after crypto networks and exchanges, just wait. A global database of transaction information will attract hackers like flies on manure.

There may be a silver lining

There may be a silver lining in the FATF's plans. Assuming their member countries go along with said plans, mandated reporting will force cryptocurrency exchanges to come clean. There is nothing wrong with that, especially in light of evidence showing that some of the most popular exchanges are manipulating trading volumes for their own gain.

Unfortunately, the current lack of regulation allows virtual asset service providers to pretty much do whatever they want to do. We generally trust that is a good thing in a free enterprise economy. In other words, customers will not patronize exchanges they believe are dishonest. Yet reality tells another story.

Most people do not know whether or not their exchanges are above board. Big-time investors certainly keep track of things so that they can avoid being ripped off. But the little guy, the guy who just buys Bitcoin every now and again so he/she can play his/her favorite online casino, does not.

It would be nice if virtual asset service providers voluntarily cleaned up their acts. It would be nice if everybody in the crypto arena were above board and honest. But they are not. Wherever there is money to be made, there will be people with no integrity trying to get their piece of the pie. Forcing them to come clean via mandated reporting would eliminate much of that dishonesty.

It appears as though global tracking of cryptocurrency transactions is on the horizon. Reports suggest that the FATF database will be well on its way by sometime in 2020. Full implementation is expected within 2 to 3 years. By 2025, all of us who dabble in cryptocurrency are likely to be monitored by the FATF.