What the Blxck?! | Regulation Coming for DeFi and NFTs...
And governing bodies appear to be setting the stage to put the squeeze on the "little guy."
Topic at a Glance…
· Under new guidance for proposed regulations by the FATF, they broaden the classification for VASPs to include: DeFi/DEx Protocols, P2P Exchange Platforms, and NFTs.
· Regulation would also be applicable to all cryptocurrency projects not-yet-formed, stifling innovation from the industry.
· Guidelines also outline potentially deadly practices to the usage of self-hosted wallets.
On March 19, the FATF released an update to the guidelines that they had originally proposed for the regulation of VASPs. The move was touted as expanding the definition to also include non-custodial cryptocurrency services in order to require the adherence to AML/CFT regulations. This proposal would put an undue strain, not only on current cryptocurrency startups, but any potential new project that may launch in the marketplace.
DeFi/DEx Protocols
Claiming that the “decentralization of any individual element of operations does not eliminate VASP coverage if the elements of any part of the VASP definition remain in place,” the new guidelines clearly target the rapidly expanding DeFi/DEx marketplace. This would freshly place a nearly $130 billion industry (at the time of writing), under the umbrella of the VASP regulation, hindering the growth and adoption of these platforms.
P2P Exchange Platforms
New direction also puts P2P exchange platforms in the scope of financial regulators: “For self-described P2P platforms, jurisdictions should focus on the underlying activity, not the label or business model.” Essentially, this means that your business is going to pay the price for the potential that someone could utilize your service with malicious intent. This applies even if the platform operates autonomously, creating a whole new layer of complexity and headache.
NFT Exchange Platforms
Seeming to take a shot directly NFTs, the new guidelines also conclude: “Some items—or tokens—that on their face do not appear to constitute VAs may in fact be VAs that enable the transfer or exchange of value or facilitate ML/TF.” This appears to be a clear attempt to reign in the brand-new, nearly $30 billion industry of NFT and collectibles that has exploded in recent months, though it would also seem to apply to video game currencies. Adding financial market regulations to these niche industries would seem a prime way to impede growth in the marketplace.
Self-Hosted Wallets
One of the most detrimental pieces of this release is the effect on self-hosted wallets. The stepping stones appear to be getting laid for a path to centralization of wallets and transactions to just a few, large blockchain institutions. They propose that VASPs that conduct transactions with self-hosted wallets should be required to go through a whole new set of regulations, including: (1) providing file currency transaction reports for transactions with self-hosted wallets, (2) have enhanced regulatory supervision, (3) be subjected to additional compliance requirements, and (4) be denied licensing for allowing these transactions. Essentially forcing the hand of these VASPs, self-reliance in the cryptocurrency world appears to be on the way out.
Though the task force does go so far as to make it clear that “this is not meant to implicate those developing software code, but rather the decision-making entity that controls the terms of the financial service provided,” this is hardly a cause for celebration. Coupling this with the fact that there is an apparent squeeze on those business conducting transactions with self-hosted wallets, it appears that there are hard-fought regulatory battles on the horizon.
Hopefully the HODLers are ready to make their voices heard.