The Financial Action Task Force (FATF) is an intergovernmental body established to promote effective implementation of legal, regulatory and operational measures to combat money laundering, terrorist financing (AML/CFT) and other related threats. Due to the different financial systems and regulatory framework each country has around the globe, the FATF helps set standards on AML/CFT so that legislators in each country have a basis upon which to regulate such matters.
The FATF Recommendations Updated Guidance For a Risk-Based Approach Virtual Assets and Virtual Asset Service Providers has successfully defined what is a virtual asset and what is expected from virtual asset service provider (VASP) which has made its way into internal legislation worldwide. Countries that are investing time into incorporating Blockchain Technology to their legislation are following FATF recommendations to successfully and safely manage this matter.
AML/CFT is the regulatory framework that sets a standard in world legislation of control and prevention of money laundering and finance of terrorism through monetary transactions. Legislators around the globe emit laws complying with AML/CFT to regulate the diligence behind the prevention of such actions in their jurisdiction, therefore, ensuring that financial and non financial entities that are at risk of facilitating such activities take all the precautions to mitigate the problem. Furthermore, based on AML/CFT regulation, entities are instructed to not only prevent but identify and report suspicion on criminals intending to use the financial system to launder money and/or finance terrorism.
What is a Crypto asset: FATF Definition.
Virtual assets (crypto assets) refer to any digital representation of value that can be digitally traded, transferred or used for payment. It does not include digital representation of fiat currencies or securities.
For a crypto currency to be considered a security it has to meet all four requirements of the Howey Test: (i) Investment of funds or other forms of consideration such as property or services; (ii) The investment must be part of a common enterprise where investors pool their resources to achieve a common goal and share in the profits; (iii) An expectation of profit is necessary for an investment to qualify as a security, which can come from an increase in value or a share of the profits; And (iv) the profits should primarily come from the efforts of others, meaning that investors are relying on someone else to make the investment profitable, rather than their own personal efforts. Finally, if there is an Initial Coin Offering (ICO) for the crypto currency in question this strictly identifies the crypto currency as a security.
Application of the Recommendations in the Context of VAs and VASPs:
The FATF have issued a number of Application of the Recommendations in the Context of VAs and VASPs so internal control and supervision institutions can prevent AML/CFT in Peer to Peer (P2P) transactions; Exchanges where there is no intermediary in the transaction of crypto currencies between two parties. The following measures are intended to mitigate the risk of AML/CFT in P2P transactions:
- Conducting outreach to the private sector, including VASPs and representatives from the P2P sector (e.g. consulting on AML/CFT requirements concerning P2P transactions);
- Training of supervisory, financial intelligence unit (FIU) and law enforcement personnel;
- Encouraging the development of methodologies and tools, such as blockchain analytics, to collect and assess P2P market metrics and risk mitigation solutions, risk methodologies to identify suspicious behaviour, and determine whether wallets are hosted or unhosted, including by engaging with programmers/developers in this space;
- Obliging VASPs to facilitate transactions only to/from VASPs and other obliged entities;
- Placing additional AML/CFT requirements on VASPs that allow transactions to/from non-obliged entities (e.g., enhanced recordkeeping requirements, EDD requirements);
- Guidance highlighting the importance of VASPs applying a RBA to dealing with customers that engage in, or facilitate, P2P transactions, supported by risk assessment, indicators or typologies publications where appropriate;
- Issuing public guidance and advisories and conducting information campaigns to raise awareness of risks posed by P2P transactions (e.g., accounting for specific risks posed by P2P transactions through the assessment of specific users, patterns of observed conduct, local and regional risks, and information from regulators and law enforcement).
The “Travel Rule”:
This rule first introduced by the FATF for traditional finance was then amplified to crypto/virtual assets stating that there is a minimum of information that control and supervision entities have to gather from the sender and recipient of each transaction. Due to the decentralized nature of Blockchain technology this requirement has been a tremendous hassle to successfully adopt in many jurisdictions worldwide.
The information requirements that are expected to be compiled are as follows: (i) The name of the originator; (ii) the originator account number where such an account is used to process the transaction; (iii) the originator’s address, or national identity number, or customer identification number, or date and place of birth; (iv) the name of the beneficiary; and (v) the beneficiary account number where such an account is used to process the transaction. The FATF urges legislators to adopt and regulate based on this requirement to minimize exposure to AML/CFT.
While the adoption of blockchain technology is crucial for the innovation and progress of any country’s financial and technological sectors, it must also be balanced with measures to prevent money laundering and terrorist financing. The recommendations put forth by the FATF aim to achieve this balance, by promoting the implementation of best practices for the use of crypto assets, and ensuring that the potential risks associated with this new technology are properly mitigated. As the cryptocurrency industry continues to evolve, it will be important for all regulators and financial institutions to work together to promote responsible innovation and ensure that the benefits of this new technology are fully realized while safeguarding the integrity of the financial systems.
https://www.fatf-gafi.org/content/dam/fatf/documents/recommendations/Updated-Guidance-VA-VASP.pdf
