<aside> 💡 A glance into the difficulties of regulation. By: @Larry Peng
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To understand Cryptocurrency regulations, one needs to understand traditional safeguards against financial crimes.
Founded in 1989, the Financial Action Task Force (FATF) is an intergovernmental body intended to provide international recommendations to counter money laundering that threatens banking and financial institutions around the world.
Financial Action Task Force (FATF)
Then came in 1990 a report with 40 recommendations to counter the issue of money laundering. However, after the terror attacks of 2001, a goal to counter terrorist financing was also added to this body along with 8 additional recommendations that year then a 9th in 2003.
If you are interested in reading the 40+9 recommendations with its most recent revisions, you can take a look here:
https://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF Recommendations 2012.pdf
Although the FATF is merely a body that recommends international standards, it continues to play an important role in setting these standards and serving as a watchdog for nations around the world. In their April 2022 Report on the State of Effectiveness and Compliance with the FATF Standards, they note widespread regulation adoption or adherence to their standards.
Not only do many of the existing 40+9 recommendations and accompanying definitions have implications in decentralized finance, the FATF has urged nations to expand or reapply their traditional Anti Money Laundering and Countering the Financing of Terrorism (AML/CFT) frameworks to account for the intrinsic decentralization and anonymity of cryptocurrencies.
We will take a brief look at some of the original recommendations and how those relate to cryptocurrencies.
Countries should adopt measures similar to those set forth in the Vienna Convention, the Palermo Convention, and the Terrorist Financing Convention, including legislative measures, to enable their competent authorities to freeze or seize and confiscate the following, without prejudicing the rights of bona fide third parties: (a) property laundered, (b) proceeds from, or instrumentalities used in or intended for use in money laundering or predicate offences, (c) property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organisations, or (d) property of corresponding value.
International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation - the FATF Recommendation
One important recommendation is for nations to retain the ability to confiscate, freeze, or seize assets for the purpose of recovering laundered funds or preventing the financing of terrorism.
This directly runs counter to the ideals of privacy and ownership guaranteed by cryptocurrencies. The separation of private and public wallet keys is a major part of Web3’s concept of security and privacy. While conventional banking systems often have centralized entities that control accounts and can be subject to direct seizures through court-approved warrants, the decentralized nature of cryptocurrencies makes a unilateral seizure of assets more difficult.
Bitfinex Cryptocurrency Exchange
However, that does not mean enforcement is impossible. An example is the recent seizure of over $3.6 Billion in stolen Bitcoin from a 2016 hack of the Bitfinex Cryptocurrency Exchange announced by the US Department of Justice in Feburary 2022.
Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency
Agents were able to seize private key information of a wallet involved in the hack through executing a search warrant on known online accounts and data of one of the parties involved. While enforcers were able to seize the stolen currency in the end, this calls into question the efficacy of future seizures should the private key of a user involved be solely stored offline. What can law enforcement do without a private key?