This year, regulators and institutions have become increasingly close to Bitcoin. The travel rule could include recipient data in non-custodial wallets.
The last year has been positive for cryptocurrencies as there are clearer regulatory schemes and more institutional adoption, but regulations could become stricter. Jacob Farber, general counsel at the R3 consortium and a partner at blockchain-focused law firm Ouroboros, put it that way.
According to Farber, the regulatory frameworks for cryptocurrencies and blockchains, in general, have been clearer. He claims that there are proposals concerning cryptocurrency regulatory frameworks in at least 12 jurisdictions around the world.
Given that advances in cryptocurrency regulations have occurred in 2020, the specialist highlights as positive this year. Besides, institutional investors have begun incorporating Bitcoin into their portfolios, central banks have advanced their plans for CBDCs, and traditional banks have ventured into cryptocurrency custody.
Farber argues that this scenario was highly unlikely in 2014 or 2015, especially the fact that a traditional bank offered cryptocurrency-based services.
“A greater number of individuals and institutions have entered the crypto space. Several countries, including China, are implementing digital currencies that central banks are going to manage. In July, the comptroller of the currency announced that traditional financial institutions like banks will be able to hold cryptocurrencies,” says Farber.
The environment looks favorable to cryptocurrencies, but Farber expresses his concern. Regulatory frameworks seem to be increasingly pushing towards the core of decentralized cryptocurrencies, according to the specialist.
Regulators have adapted their approach to the projects, depending on whether they are decentralized or not, in the United States and other jurisdictions. Farber says that the general trend has been to not regulate a project if it is decentralized, as has happened with Bitcoin and Ethereum.
“If an identifiable person or entity is behind a private blockchain project, that means that it is really centralized and clearly subject to regulation.” Farber says that the concern arises as the criterion of not regulating decentralized projects could be “under a bit of pressure.”
Farber cited the SEC’s 2017 decision on the DAO organization, which he viewed as security in contravention of the US Securities Act. “However, they determined that the DAO operators and promoters were involved in facilitating the sale of securities and that this agency had jurisdiction over that.”
The specialist also mentioned the update of the recommendations that the US Financial Crimes Enforcement Network (FinCEN) made on cryptocurrency regulations in May 2019. In it, the agency included decentralized applications as an object of regulation.
Something that has become clear in national jurisdictions around the world is the fact that cryptocurrency exchanges are subject to regulation, usually because they are the entrance and exit ramp, according to the Orouboros partner.
Additionally, Farber noted that regulators in different countries have adopted the so-called travel rule in the last year. “In its simplest form, this rule requires a money transmitter to report transactions that exceed a certain limit to the regulator.”
“In the United States, the interim comptroller of the currency has said that there will be more regulation on cryptocurrencies, which could further push the transactions currently excluded under the travel rule.”
Regulators could require information about the destination of a fund transfer from an account on a regulated exchange to a non-custodial wallet, even though it is from the same sender. In other words, they will demand the identification of the recipient of the funds. “Anyone who is using cryptocurrencies and connects with the traditional financial system will be subject to the KYC procedures.”
By Alexander Salazar
