Episode 2.02 // FOLLOW THE MONEY

The Financial Action Task Force (FATF) just made it harder to fund terrorists with cryptocurrencies – and made it safer for banks to trade them, changing the cryptocurrency business forever.

Roger Wilkins AO is a former president of the FATF.
Senior Policy Analyst at the FATF, Tom Neylan, worked with a team to develop recommendations (here’s a PDF of the full recommendation) that will make cryptocurrencies safer to exchange.

TWELVE DAYS THAT SHOOK THE WORLD

Three things happened in the space of twelve days that pretty much changed everything about cryptocurrencies.

What you need to know: Cryptocurrencies are going legit, and they’re integrating into the financial system.

How can we tell?  Let’s examine the events of the twelve days from 18-29 June:

ONE: Facebook’s Libra cryptocurrency

Facebook released details of it’s new Libra cryptocurrency on 18 June.

The Calibra wallet shows Facebook is serious about making digital currencies easy.

Libra has been examined in some detail already — perhaps the most interesting point to note is that every central banker of consequence has made a statement about Libra. Why? Because it is the first cryptocurrency that has the scale to be competitive (potentially) with central bank-issued currencies.

Central bankers have never had competition before. They’ve never really had to be technological innovators (except to keep ahead of counterfeiting) and they’ve never been truly comfortable with cryptocurrencies like Bitcoin – because of their deflationary design.

Libra is probably the beginning of a process that will see state-backed ‘digital currencies’ enter the market over the next several years.  

Sweden’s e-Kronor is furthest along – because Sweden wants to move to a cashless economy https://www.riksbank.se/en-gb/payments–cash/e-krona/

TWO: The Financial Activities Task Force Guidance on Cryptocurrencies

Almost no one has heard of the FATF. They’re an international body that makes ‘recommendations’ to national governments that inevitably become enshrined in law, because FATF recommendations are aimed at preventing money laundering and the funding of terrorist activities through the formal banking system.

On 21 June, FATF issued new rules for cryptocurrency exchanges – where you convert your Bitcoins into dollars and vice versa – that require them to comply with the ‘travel rule’ – which means the exchanges have to do just what the banks do – make sure you’re not sending funds to a terrorist or terrorist organisation, or a state that’s been sanctioned (Iran, North Korea).

The exchanges have hitherto operated in a largely regulation-free environment. That’s been fun for them, but also made them radioactive to the formal financial system. A bank can’t work with an exchange because it can’t ever know whether it’s facilitating money laundering by doing so. This new FATF recommendation means that exchanges and banks will be able to work together, and banks will be able to offer their customers cryptocurrency services and exchanges.

THREE: The V20 Summit

The V20 summit (disclosure: I served as Summit Chair) was called almost as an ‘emergency’ meeting for the exchanges, so they could work together to map out how they would comply with these new FATF recommendations. It means exchanges (or ‘VASPs’, Virtual Asset Service Providers, in FATF lingo) have a need to work together on common standards on how they can share the data required by the ‘travel rule’ – for example, common formats for sender and beneficiary details, or how you can tell whether another VASP is authentic, etc…

That level of cooperation and compliance has never been needed before, so at V20 the VASPs mapped out their first steps toward a system that looks a bit like SWIFT – which is how banks manage relationships with thousands of other banks internationally – but designed specifically for VASPs and cryptocurrencies.

It’s early days, but if this succeeds (failure means that the exchanges are all driven out of business by the regulators, based on FATF guidance, so that’s not really an option) then we’re seeing the birth of a big and brand-new part of the global financial system.

That’s why V20 was compared to the Bretton Woods summit that created the modern financial system:

In this new system, the leading participant is likely to be Facebook’s Libra. Quickly followed by digital dollars, Yuan, Yen, Euros, and so forth…

A world almost inconceivable just a fortnight ago has become the next stage in our global financial future. Twelve days that truly shook the world.

Opening Address to the V20

Good morning, ladies and gentlemen.

To set the scene for us today, I’d like to take us back 25 years.

The end of May, 1994. Geneva.

Another smallish gathering of experts.

Working on another problem.

A quarter of a century of work on computer hypertext systems had created a fragmented landscape of commercial products that had all failed to gain traction.

But a new technology had come along. One that could fix all of that.

Known as the World Wide Web.

The Web was open to all, free to all, useful to all – and still needed some basic agreements on how page layout should work, how to display images, and a hundred other points that we never even consider today.

Because they got sorted out at that gathering.

I know this because I was one of the experts at that meeting, invited by Tim Berners-Lee, father of the Web, to drive standardisation of the display of three-dimensional images inside the Web browser.

I did that work – it’s known as VRML – with two collaborators: Tony Parisi, and Gavin Bell.

You’ve probably not ever heard either of those names before.

But that’s not exactly true.

Gavin Bell changed his last name a decade ago. An unusual thing for a man, but it does happen.

He’s known today as Gavin Andresen.

For a long time, Gavin was chief scientist of the Bitcoin Foundation.

It was a good role for him, because he’s always understood the need for standards, solutions – and consensus.

He’s always understood the need to design for the future.

When we reconnected a few years back, I asked him what he spent most of his time working on at the Foundation.

He said, “Quantum cryptography. And what happens to the blockchain once you can factor large numbers quickly.”

Esoteric, to the layperson.

But to someone who understands how cryptocurrencies work, absolutely vital.

A problem worth solving.

Gavin had his eyes on the future.

That future is our focus today.

Now here’s the truth — whenever you come upon an undiscovered frontier, first you send out the explorers.

They don’t know what they don’t know.  They learn a few things, and use that to send out the scouts.

The scouts map the terrain.  But they don’t linger.

Then come the pioneers.

It’s often said that pioneers can be identified by the arrows in their backs.

But pioneers also get to live by their own lights – and their own wits.

There are no rules, other than the ones they make for themselves.

That gives every pioneering frontier an anarchic feel.

A ‘Wild West’.

But those halcyon days don’t last forever.

Pioneers are eventually overrun by settlers.

Settlers need infrastructure.

And they need security.  Stability. Safety.

They need rules.

They need laws.

They need all the perks of civilisation.

And that pretty much sums up where we are today.

Almost everyone in this room is a pioneer.

You have the arrows to show for it.

And the settlers are all queued up.

Ready to stake their claims.

That’s going to change the landscape.

Forever.

Cryptocurrencies have changed the world.  They’re the most significant financial innovation of the 21st century.

We’re finding a growing number of uses for them.

As they become more useful, they become more attractive to the highly regulated formal financial system.

So we’re here, in this room, today, to bring a little order to the chaos.

And lay down a welcome mat for the settlers.

But first we have to come to an agreement about what that means.

And that’s why we’re here.

This V20 summit has one goal — to provide a clear roadmap toward full compliance with the new recommendations of the Financial Action Task Force.

That will happen across three workshops.

These workshops are the reason we’re all here.

We have to come out of these workshops with consensus on how to address the FATF recommendations, technically and procedurally.

Now people hear consensus and they think ‘unanimity’.

It’s not. Not anything like that.

Consensus means that it’s ‘good enough’ — that no one is willing to throw their body in front of a proposal in order to stop it.

No one has to love it. Or even like it.

It just has to get the job done.

And if we do it right – what happens here will have a lasting impact not just on the world of cryptocurrencies, but the entire world of finance.

Between the announcement of the V20 summit and this morning’s commencement, the entire cryptocurrency landscape has undergone a fundamental shift, because of Facebook’s Project Libra.

Nearly every Central Banker of consequence has an opinion on Libra – but whether they like it or not, all have stressed that Libra must comply with all relevant KYC and AML regulations.

And that  just happens to be our job here.

What we’re doing – like it or not – is too important to fail.

Let me conclude with another story from that first Web conference, 25 years ago.

Tim Berners-Lee opened the the event – then immediately handed the podium over to Dr. David Chaum.

Dr. Chaum is one of the fathers of cryptocurrency.

Before Bitcoin, there was Digicash, created by Dr. Chaum.  

Money designed for the Web when the Web was still very young.

The very first public demonstration of the very first digital currency was the very first keynote at the very first conference on the Web.

The connections between digital currencies and the Web, they go all the way back to the beginning.

With V20, it’s now our turn to honor that tradition – and take it forward.

So let’s get to work.