The Regulated cryptocurrency industry is getting closer to cross another threshold that has nothing to do with the price breakthrough. The slow and steady advance of know-your-customer (KYC) requirements and regulations for firms that handle digital assets are now at the threshold of self-hosted crypto wallets. This shift, which has already begun in Singapore and Switzerland, starts with the regulated exchanges that are a requirement on non-custodial wallets that firms are connected to. Bitcoin, and the cryptocurrencies that followed, were designed for self-custody and peer-to-peer transactions that provide unrivaled security and privacy. While the Financial Action Task Force (FTAT) is trying to imposed traditional Anti-money laundering (AML) frameworks on providers of virtual asset providers, the crypto community is less than impressed.
The Financial Action Task Force’s Steps to AML
While the crypto community has been up in arms about one of the core functions of Bitcoin being altered by imposing regulators, the FATF has taken steps to impose its regulatory framework on providers. In the middle of this standoff are blockchain analytics companies and firms such as CipherTrace, Elliptic, and Chainalysis. These analytics companies are guided to investigate transactions by red flags that are found when trying to track funds and are actively seeking our regulatory risks as transfers take place with self-hosted wallets, peer-to-peer exchanges, privacy coins, and bitcoin ATMs. While self-hosted wallets are currently still outside of the FATF’s jurisdiction, the amount of funds that are moved between exchanges and private wallets has become a point of focus for analytics firms. CipherTrace has commented that these red flags are not assumed to be criminal or illegal activities but it gets flagged because authorities are unable to see where the funds are going and why which proves that FATF’s main concern is the uncertainty that bitcoin presents to regulators and money-laundering preventative measures.
ShapeShift
ShapeShift, a non-custodial exchange that was established in 2014 by Erik Voorhees, has been making headlines recently as a result of CipherTrace giving the exchange low KYC scores. In 2018, the exchange began requesting that clients reveal their identities. ShapeShift lost many clients as a result of this, who migrated to other bitcoin services such as immediatebitcoin.io . However, the company considered the loss to be necessary as its KYC score has since been upgraded, and ShapeShift has been awarded a positive green by CipherTrace, who acknowledged that grading the KYC system and processes of exchanges such as ShapeShift is a dynamic state of affairs. ShapeShift has shared the firm’s revamp measures with the public that involves a collection of personally identifiable information (PII) as well as screening measures for sanctions and Politically Exposed Persons (PEPs) which has warranted an independent audit. However, when it comes to private wallets, ShapeShift is non-custodial with users typically making use of their wallets as opposed to transferring between exchanges.
Privacy Coins
ShapeShift is in the middle of the crypto regulation battle as it has recently made the decision to remove its support of privacy coins like dash and monero. The privacy coins were removed as a result of the regulator concerns and will not be working with them for the time being. Both privacy coins and privacy-enhancing services, such as the wallets Wasabi and Samourai, have a range of valid uses. However, they also present some definite red flags. In order for ShapeShift to remain compliant with privacy coins and the regulations, the company would have to make them safe and adherent by establishing the source of funds. This goes to show that the coins are not always bad but these extra steps, which are sometimes denied by clients, carry additional risks.
