22 May 2020
Could an overbearance of regulation divide the crypto space and create a “gray” market composed of unregulated exchanges, where digital assets trade at lower prices?
At a panel at Consensus: Distributed exploring the impact of the Financial Action Task Force (FATF) “Travel Rule,” Bakkt President Adam White said yes.
“We are going to see a bifurcation in the crypto space,” said White. “We are going to see white crypto; we are going to see gray crypto. And those different forms of crypto will most likely trade at different prices.”
The FATF, a kind of global anti-money laundering (AML) watchdog, makes recommendations on how best to fight financial crime, which countries and their regulators then implement. There has been some progress with the licensing and regulation of crypto in places like the U.S., Europe and some parts of Asia, but experts believe it could take years for straggling jurisdictions to catch up.
The Travel Rule was issued by U.S. regulators in 1996 and requires all financial institutions to pass on information to their peers when funds over the amount of $3,000 are being transmitted, identifying the originator and beneficiary and preserving an information trail about persons sending and receiving funds.
Applying this rule to crypto is complex since it involves grafting something like SWIFT’s interbank messaging standards onto a system designed to be pseudonymous. That said, a messaging standard, to which virtual asset service providers (VASPs) can defer, has been proposed, and a promising array of technical solutions have been presented.
Fade to gray
The FATF, when it began consultation on crypto back in 2017, was not ignorant of the ways regulatory arbitrage might play out in the crypto space, said Jesse Spiro, global head of policy and regulatory affairs at Chainalysis.
“[The issue of] potential gray markets where people are moving away from the traditional exchange ecosystem was raised in relation to the adoption of FATF recommendations, including concerns there would be an impact on liquidity and potential impact in the market,” Spiro said.
In the extreme case imagined by Bakkt’s White during the Consensus workshop, such a bifurcation of crypto would affect fungibility of coins (the property of money or commodities to be exactly interchangeable).
“I think a lot of people will say, ‘Hang on, you’re going to lose fungibility,’ and that’s a core tenet of crypto: One bitcoin is the same as another. Certain freshly minted coins will trade at a premium,” said White. “You will see the Travel Rule-compliant VASPs continue to operate and do business. But you will also certainly see offshore, unregulated exchanges that are not compliant with the Travel Rule, and I think you will see assets trade at a different price on them.”
The FATF did not reply to requests for comment.
It’s an interesting question, and expert opinion is divided on how it might play out.
We are entering a “sunrise period” where some jurisdictions will have regulation and some will not, but it will only be in the short term, said Malcolm Wright, chief compliance officer at Diginex.
By Ian Allison, CoinDesk, 21 May 2020
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