What Does FATF Mean for Me?

There have been a number of concerns regarding the impact of the Financial Action Task Force Travel Rule, with added emphasis on restrictions to private wallet transactions. We opted to write this article to explain the TLDR (too long, didn’t read) requirements. Regulations go against Bitcoin’s libertarian roots however it could be argued that if cryptoassets have any chance of competing with traditional finance, the industry will have to play by their rules for now.

The Financial Action Task Force (FATF), established in the 1989 G7 summit, is an important international financial body. It is responsible for setting standards and promoting effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system. Countries that are “blacklisted” – such as Iran and North Korea – are deemed high-risk and receivelimited access to international financing. The FATF Travel Rule, an update to the existing FATF Recommendation 16 which was designed to prevent money laundering and terrorist financing concerning cross-border and domestic wire transfers, requires 39 member-countries to ensure their virtual asset service providers (VASP) -- such as crypto exchanges or money transmitters -- collect and exchange origination and beneficiary information with counterparties for transactions exceeding US$1,000.

What does this mean for me or for individuals?

A FATF-compliant VASP can only withdraw to another FATF-compliant VASP, or to an address that satisfies self-ownership (i.e. you control the wallet). Assuming your cryptoassets reside on a regulated VASP when requesting a withdrawal, the provider will prompt you: “Are you withdrawing to a VASP or a wallet in your control?”

Let’s go through both scenarios:

1. Withdrawing to a VASP: For example, you’re sending from Coinbase and select the option that you’re withdrawing to Kraken. You’d input the destination address, beneficiary information, and the amount you want to withdraw. There’s a ‘behind the scenes’ function which will allow the originating VASP to verify with the destination provider that the address submitted does indeed fall under their management. If Kraken confirms, Coinbase will then ping Kraken “Does the address belong to (the beneficiary specified)?” If Kraken confirms, then the withdrawal is approved.
   Currently, this ‘behind the scenes’ function is still under study.
2. Withdrawing to a self-custody wallet:Let’s suppose you want to send crypto to a new address or wallet that you control. After supplying the destination wallet address and amount, the VASP will prompt “We have sent you a test withdrawal containing a unique test amount. The same instruction will request that you return it to a specified address (and thus, “proving control” of the wallet managing the specified address. Once the process is complete the VASP will whitelist that address for future use and process the pending withdrawal