Following a targeted report on VASPs and digital assets, the FATF [Financial Action Task Force], a global coordinator of financial standards and illicit activity, has filed a report on decentralized finance, or DeFi.
FATF standards are followed, and at times adhered to, by approximately 200 countries.
The targeted report on DeFi highlights the ‘regulatory challenges” and implementation of FATF standards in managing participants in the DeFi sector. FATF urges action in response to claims of emerging risk in the DeFi sector. This includes recommendations to counter potential abuse, noting that “DeFi activity is currently highly concentrated, with North America and Europe accounting for approximately 60% of global transactions, whereas the Middle East and Africa together are estimated to contribute to less than 10%.”
The FATF notes that DeFi has grown significantly but remains largely unregulated, potentially creating opportunities for criminals to exploit. The report pushes countries to take action without banning DeFi operations.
Lee Schneider, GC at Ava Labs, posted on X his misgivings on the FATF report, explaining he is disappointed with the document. Schneider says they have long asked for clear definitions on DeFi, but they have been chagrined that none have been forthcoming.
“Two big problems: FATF never adequately defines “control or sufficient influence.” More importantly, FATF never explains why certain forms of control should be treated as providing financial services,” says Schneider. “We’ve long asked for a clear definition of decentralization. Here is the one we proposed: No single point of failure; No single source of truth; No single authority with the ability or legal responsibility to alter transactions, balances, or ownership.”
He explains that, instead of defining FATF, proposes a test with little explanation of how sufficient control is determined. This may lead to jurisdictions that over-regulate to err on the side of caution. Ava Labs’ solution is proposed as follows which they believe is superior to the FATF outline:
Ask whether a person can:
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- execute or alter orders or transactions;
- affect settlement finality;
- change customer balances or ledger state; or
- freeze, redirect, or seize assets.
