Libra’s New White Paper Makes Big Strides for Compliance. Here’s Why That Matters for Cryptocurrency.

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Last week, the Libra Association released version 2.0 of the Libra white paper, which contains several important updates addressing many of regulators’ concerns around the proposed cryptocurrency. That’s great news for the industry. If the project succeeds, Libra could offer hundreds of millions of people — including many who are unbanked or live in financially unstable regions — access to cryptocurrency, making it one of the biggest on-ramps for new users. But such a massive influx of new users introduces greater risk of money laundering, sanctions violations, and other forms of financial crime. While Libra’s first white paper didn’t clearly explain how the Association would address those concerns, the new one provides a highly detailed proposal for a compliance and safety program based on FATF standards. Below, we’ll explore some of the key elements of Libra’s proposed compliance plan.

Comprehensive compliance framework aligned with FATF

The new white paper provides a comprehensive blueprint of Libra’s compliance program, outlining specific policies steps the Association will implement, such as:

  • Designation of a Chief Compliance Officer, oversight committee, and independent audit group
  • A risk-based due diligence program for all Libra Members, virtual asset service providers (VASPs), and designated dealers
  • Establishment of a financial intelligence unit (FIU) for transaction monitoring and investigations

Perhaps most importantly, Libra makes clear its intention to align its compliance policies with those of FATF. For instance, as part of its risk-based due diligence approach, Libra outlines differing standards for evaluating VASPs and other participants depending on whether they’re headquartered in a FATF jurisdiction. The white paper also relays that the Libra protocol will require VASPs to comply with the FATF Travel Rule on all transactions. This strategic adherence to globally recognized regulatory guidance positions the Libra association to provide more financial integrity from inception than what we have seen 

Due diligence and VASP approval process

The Libra Association also lays out its proposed process for deciding which VASPs can operate on the Libra network. Initially, participation will be limited to a directory of regulated VASPs, meaning VASPs that are licensed in a FATF member jurisdiction and pass Libra’s enhanced due diligence process. Crucially though, VASPs outside of FATF jurisdictions will eventually have the opportunity to gain approval through a separate due diligence process based on those VASPs’ ability to prove their alignment with FATF regulations. All VASPs will also face a yearly audit process to confirm they continue to meet those standards. This whitelist-based model sets a high standard for the cryptocurrency businesses that can transact with Libra coins, which helps ensure the network remains as safe as possible.

Extra limits on unhosted wallets

While addresses at regulated VASPs will be allowed to transact with Libra coins freely, those associated with unhosted wallets will face stricter limits. This is in keeping with Libra’s risk-based approach, as unhosted wallets bring coins further away from the regulated side of the cryptocurrency ecosystem, inherently increasing the risk of financial crime. But in order to achieve the financial inclusion key to the project’s goals, unhosted wallets — often the only way for those without banking access to transact with cryptocurrency — must be able to participate in the Libra ecosystem.

Libra addresses this by putting balance and transaction limits on unhosted wallets, which will be enforced at the protocol level for all unhosted wallets. Again, in keeping with Libra’s risk-based approach, these provisions strike a balance between maintaining financial inclusion while mitigating the risks inherent to unhosted wallet participation. The white paper also acknowledges the risk of bad actors seeking to circumvent these limits using multiple unhosted wallets. However, Libra’s FIU should be able to detect and take action against such activity with the help of robust transaction monitoring tools.

This is a promising development

Libra can be a game changer for the cryptocurrency industry, but only if it establishes the compliance guard rails necessary to keep such a large network safe from illicit activity. The new white paper strongly suggests that the Association plans to do that. In fact, by skipping the “Wild West phase” and building FATF-based risk and compliance controls into the network from the ground up, Libra could put itself in position to be a uniquely safe part of the cryptocurrency economy. As Libra grows, those benefits can cascade to the rest of the ecosystem.

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