The Financial Action Task Force (FATF) is out with their “Guidance for a Risk-based Approach: Virtual Assets and Virtual Service Providers.” This guidance, which was widely expected to be released today, should be rubber-stamped at next week’s G20 meeting in Japan.
The proposals included in the document have been a point of contention for the nascent Virtual Asset Service Provider or VASP sector – which includes crypto exchanges, OTC platforms and other digital asset service providers that operate in the realm of crypto transactions.
The concern, as we understand it, is the requirements as stated are excessively draconian. In the fervor to stamp out any and all nefarious crypto activity, such as money laundering and illicit activity like terrorist financing, FATF has really tightened the screws.
So what does the Guidance have to say?
It is embedded below so you review it for yourself, but to summarize, FATF states that Virtual Assets (VAs) have certain characteristics that may make them:
“more susceptible to abuse by criminals, money launderers, terrorist financiers, and other illicit actors, including their global reach, capacity for rapid settlement, ability to enable “individual user-to-individual user” transactions, and potential for increased anonymity and obfuscation of transaction flows and counterparties.”
Specifically, FATF is concerned about the “rise of anonymity-enhanced cryptocurrencies” (AECs) or privacy coins that seek to obfuscate origins. Additionally, there are mixers and tumblers, decentralized platforms and other ploys available to cover one’s tracks if you are up to no good:
“activities such as initial coin offerings (ICOs) that present ML/TF [money laundering – terror financing] risks, including fraud and market manipulation risks. Further, new illicit financing typologies continue to emerge, including the increasing use of virtual-to-virtual layering schemes that attempt to further obfuscate transactions in a comparatively easy, cheap, and secure manner.”
The borderless nature of crypto makes the sector “more susceptible to abuse by criminals, money launderers, terrorist financiers, and other illicit actors.” This includes rogue nations.
In light of the possibility for abuse, FATF is making recommendations as to how to crush potential criminals by requiring “Customer Due Diligence” or CDD on ALL transactions of USD/EUR 1000 or more. CDD entails all identifying information of a transmitter and receiver. Name, address, the public keys, amount and date of transaction, etc.
Regarding VASPs, FATF requires these entities, at a minimum, to be licensed or registered in the jurisdictions where they are created. FATF demands that nations regulate all VASPs – “supervised or monitored by a competent authority, not a self-regulatory body (SRB).” [emphasis added]
Countries should designate one or more authorities that have responsibility for licensing and/or registering VASPs. They must also ensure VASPs have procedures in place to identify and verify, on a risk basis, the identity of a customer. Supervisors should monitor compliance.
VASPs must also maintain records of all transactions for the past 5 years while assuring they report any and all suspicious transactions. VASPs must obtain and hold required originator information and required beneficiary information and submit the information to beneficiary institutions documenting the trail of transactions. This information could be coded into the distributed ledger protocol or not. They just want the info.
The required information includes the: (i) originator’s name (i.e., the sending customer); (ii) originator’s account number where such an account is used to process the transaction (e.g., the VA wallet); (iii) originator’s physical (geographical) address, or national identity number, or customer identification number (i.e., not a transaction number) that uniquely identifies the originator to the ordering institution, or date and place of birth; (iv) beneficiary’s name; and (v) beneficiary account number where such an account is used to process the transaction (e.g., the VA wallet).
Countries should have in place the tools necessary to co-operate with one another, provide mutual legal assistance and help each other “identify, freeze, seize, and confiscate the proceeds and instrumentalities of crime that may take the form of VAs as well as other traditional assets associated with VASP activities.”
As the requirements have emerged, the global crypto industry has pushed back. Not on the goal to adhere to strict anti-money laundering and KYC requirements, but how FATF is going about it and the challenge it contributes to the emerging sector.
Originally, proposed standards emerged this February which requested feedback from interested parties. A meeting followed in Vienna where the FATF proposals were discussed. As we have heard, some crypto advocates were up in arms.
Crowdfund Insider has been told by some attendees it appeared the discussion was more a fait accompli driven by aggressive US leadership and a cabal of bankers – perhaps seeking to stymie looming competition; a real concern for traditional banks. As we were not present we cannot confirm this statement.
Next week, simultaneously to the G20, the V20 will take place – an event organized by digital asset proponents as a forum for crypto advocates.
As we understand it, some FATF members, as well as some policymakers, have indicated their concern that the announced guidelines are excessively stringent and may dim the nascent industry. But the US is riding roughshod on the process.
Many innovation advocates believe it is important to let a new industry develop before excessive regulations kick in as they may have an unintended consequence of killing innovation before it is sufficiently developed.
According to a note from the organizers, the V20 event will convene G20 representatives, national blockchain associations, the world’s leading VASPs, and legislators from multiple jurisdictions to discuss implications and explore possible technical solutions to achieve the desired outcomes of a new set of recommendations proposed by the FATF guidelines.
In a solid endorsement, ex-FATF President and former secretary Australian Department of the Attorney General, Roger Wilkins, will deliver a keynote speech at the V20 Summit.
Wilkins expressed his opinion that the FATF rules may have the opposite effect of their intention as they may simply compel bad actors to move away from controlled platforms.
“As a former regulator, I recognise how important it is to identify a balanced solution that implements the recommendations of the FATF while also building the opportunity for business,” stated Wilkins.
Japanese Congressman Naokazu Takemoto, another person expected to participate in the V20, said that clear regulation to prevent financial crime and mitigate corruption was key. He said that Japan has led by example and they are happy to share what they have learned with the international community.
Japan is a nation where the crypto industry has a good degree of self-regulation – in contrast to what FATF demands.
Longtime blockchain advocate Taiwanese Congressman Jason Hsu has called on other legislative leaders to back the V20 mission.
Organizers share that the V20 is hosted by a good group of national associations including the Singapore Cryptocurrency and Blockchain Industry Association (ACCESS), the Australian Digital Commerce Association (ADCA), the British Blockchain and Frontier Technologies Association (BBFTA), the Korean Blockchain Association (KBCA), the Hong Kong Blockchain Association (HKBA), the FinTech Association of Hong Kong (FTAHK), and in cooperation with Global Digital Finance (GDF).
This is a regulatory development to watch that impacts the global digital asset industry.