According to a study published by the Financial Action Task Force, often known as FATF, its delegates have reached a consensus on an action plan “to encourage prompt worldwide implementation” of global standards on cryptocurrencies.
According to a publication that was released on February 24 by the Financial Action Task Force (FATF), the plenary for the financial watchdog, which is comprised of delegates from more than 200 jurisdictions, recently met in Paris and reached a consensus on a roadmap that is intended to strengthen the “implementation of FATF Standards on virtual assets and virtual asset service providers.” The task force has said that it would provide a report on how FATF members have progressed in implementing the crypto standards in 2024. This study will include topics such as the regulation and monitoring of VASPs.
According to the findings of the research, “the absence of regulation of virtual assets in many nations presents possibilities that are used by criminals and terrorist financiers.” “Since the FATF strengthened its Recommendation 15 in October 2018 to address virtual assets and virtual asset service providers, many countries have failed to implement these revised requirements,” the Financial Action Task Force (FATF) writes. “This includes the ‘travel rule,’ which requires obtaining, holding, and transmitting originator and beneficiary information relating to virtual asset transactions.”
The “Travel Rule” established by the FATF contains a section that recommends virtual asset service providers (VASPs), financial institutions, and regulated organizations in member states gather information on the originators and beneficiaries of certain digital currency transactions. The financial watchdog said that as of April 2022, several nations were not in accordance with its requirements for combating the financing of terrorism and anti-money laundering.
The nations of Japan, South Korea, and Singapore have been among those that have shown the most willingness to put policies in place that are in line with the Travel Rule. According to reports, a number of countries, including Iran and North Korea, have been added to the “grey list” maintained by the FATF in order to monitor potentially illicit financial activities.
The Travel Rule, which now governs service providers in the digital currency ecosystem, is arguably not a source of concern as a new report from Notabene shows many firms in the space are in compliance already.
Per the report, which surveyed 56 businesses across North America, Asia Pacific, Europe, Africa, and the Middle East, as many as 70% of businesses are either practising the rule or planning to complete their compliance in Q1/Q2 2022.
The Travel Rule demands businesses involved in cash or money transfers to report funds transactions of $1,000 and above to authorities, a move that is expected to curb money laundering and terrorist financing. With the emergence of Bitcoin (BTC) and altcoins, the Financial Action Task Force (FATF), an international watchdog responsible for developing the rule, has publishedguidelines and revisions to fit the evolution in the nascent digital currency ecosystem.
Per the Notabene report, about one-third of firms (31%) completely or partially adhere to the regulation. The report also revealed that 92% of respondents have internal compliance and legal departments, and 78% of these businesses consider these teams able to guarantee the company acts in accordance with external rules and internal controls.
In all, crypto-assets service providers are shown to be in broad compliance with many who have no technical expertise to implement the rules exploring other protocols that can be adopted.
Many critics have often dwelled on how cryptocurrency exchanges and other service providers have backed illegal use of Bitcoin and other coins with pseudo-anonymous provisions. However, platforms like Coinbase Global Inc, Binance, and Huobi have notably implementedtransaction monitoring tools, a move that suggests players in the digital assets ecosystem are not anti-regulation.
From Notabene’s report, the broad compliance of players in the space to the Travel Rule can help them become active partners in shaping the future of the crypto payment industry.
Major South Korean crypto exchanges including Upbit, Bithumb and Korbit will follow Coinone’s lead in banning transfers to non-verified wallets, industry analysts say.
Yesterday Coinone announced that it would reject deposits from unverified private wallets starting Jan. 24 to reduce the risk of money laundering. All Korean exchanges, including Upbit, Bithumb, Korbit and 20 others, are expected to implement similar or identical measures as Coinone by or before March 25. The Korean government set the deadline for exchanges to track coin transactions on and off their platforms accurately.
Korean blockchain industry analyst Jun Hyuk Ahn told Cointelegraph, “Korean exchanges are creating their own Travel Rule solutions in order to meet the requirements to operate post-March.”
“All the Korean exchanges are going to have to use some travel rule system by March because that’s when the government has set a deadline for them. Coinone just did it first.”
The rule for exchanges will also help the far eastern nation come into compliance with the Financial Action Task Force (FATF) “travel rule.”
According to anti-money laundering (AML) Compliance service Sygna, the travel rule stipulates that national governments must “ensure domestic exchanges share real-identity information with transmittal counterparties or face increased AML/CFT monitoring.”
These compliance stipulations for exchanges are part of a long series of regulatory restrictions for crypto exchanges which started with the real-name bank account requirement for all users. Before that rule was implemented in 2018, crypto exchange accounts could be linked to a bank account owned by multiple individuals.
By Sep. 2021, exchanges were required to have Internet Security Management System (ISMS) verification and a single domestic bank partner which would issue real-name accounts. All exchanges that could not meet the requirements were forced to remove KRW pairs from trading or suspend services altogether.
Related:Binance Turkey fined 8M lira for non-compliance against money laundering
The country has grappled with global FATF compliance issues related to nonfungible tokens (NFT) as well. Financial regulators flip-flopped on their policy direction regarding NFTs until the latest statement from the Financial Services Commission stated on Nov. 24 that it would explore its options to regulate and tax NFTs.
Globally, South Korea’s exchanges are the outliers in complying with the rule. As of now, there are no other major crypto spot exchanges that require users to verify their private wallets.
Cyprus is moving to regulate the cryptocurrency industry, with the country’s finance ministry releasing a national risk assessment on crypto.
Published on Dec. 13, the official documentation provides a risk assessment for the Republic of Cyprus regarding money laundering risks related to virtual asset activities and virtual asset service providers (VASPs).
The Ministry of Finance of Cyprus stressed that there is a “limited direct understanding or experience” regarding money laundering risks of crypto in the country.
However, authorities like Cyprus Securities and Exchange Commission (CySEC) and local enforcement authorities have demonstrated a “sophisticated level of understanding of the sector,” the statement notes. The authorities should further explore the market and receive “in-depth training on these issues” to enhance their skills, the ministry stated.
The ministry also recommended local financial companies “adopt written policies and procedures to comply” with the wire transfer rule for virtual currencies. In the meantime, authorities should start to maintain and share data that is specific to virtual currencies and VASPs, the ministry said, adding:
“Although activity levels now are believed to be negligible, this will enable an evidence-based baseline as activities increase, promoting earlier detection of risks or changes to risk levels.”
The authority noted that Cyprus should actively collaborate with other jurisdictions experienced in the crypto industry in order to learn from these relationships and identify the best practices.
“Such international cooperation could be an important channel for Cyprus to strengthen and accelerate its capacity building for the VA/VASP sector,” the ministry wrote.
Related:Israel reportedly adopts new AML rules for crypto
One of the world’s most uncertain countries in terms of cryptocurrency regulation, Cyprus has been moving to adopt crypto-related regulations this year. In September, CySEC reportedly disclosed new details of crypto regulation policies, planning to increase cryptocurrencies by integrating European Union’s Anti Money-Laundering rules into the Cypriot laws.
The Cypriot crypto ecosystem is associated with significant uncertainty as some major financial institutions including the Bank of Cyprus were allegedly blocking Bitcoin (BTC)-related transactions this year, according to reports on social media.
The Financial Action Task Force (FATF) released its long-awaited guidance on virtual assets, laying out standards that have the potential to reshape the crypto industry in the United States and around the world. The guidance addresses one of the most important challenges for the crypto industry: To convince regulators, legislators and the public that it does not facilitate money laundering.
The guidance is particularly concerned with the parts of the crypto industry that have recently brought about significant regulatory uncertainty including decentralized finance (DeFi), stablecoins and nonfungible tokens (NFTs). The guidance largely follows the emerging approach of U.S. regulators toward DeFi and stablecoins. In a positive note for the industry, the FATF is seemingly less aggressive toward NFTs and arguably calls for a presumption that NFTs are not virtual assets. The guidance, however, opens the door for members to regulate NFTs if they are used for “investment purposes.” We expect this guidance to add fuel to the NFT rally that has been underway for the majority of 2021.
Related:The FATF draft guidance targets DeFi with compliance
Expanding the definition of virtual asset service providers
The FATF is an intergovernmental organization whose mandate is to develop policies to combat money laundering and terrorist financing. While the FATF cannot create binding laws or policies, its guidance exerts a significant influence on counter-terrorist financing and anti-money laundering (AML) laws among its members. The U.S. Department of the Treasury is one of the government agencies that generally follows and implements regulations based on the FATF’s guidance.
The FATF’s much-anticipated guidance takes an “expansive approach” in broadening the definition of virtual asset service providers (VASPs). This new definition includes exchanges between virtual assets and fiat currencies; exchanges between multiple forms of virtual assets; the transfer of digital assets; the safekeeping and administration of virtual assets; and participating in and providing financial services relating to the offer and sale of a virtual asset.
Once an entity is labeled as a VASP, it must comply with the applicable requirements of the jurisdiction in which it does business, which generally includes implementing Anti-Money Laundering (AML) and counter-terrorism programs, be licensed or registered with its local government and be subject to supervision or monitoring by that government.
Separately, the FATF defines virtual assets (VAs) broadly:
“A digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.” But excludes “digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.”
Taken together, the FATF’s definition of VAs and VASPs seemingly extends AML, counter-terrorism, registration and monitoring requirements to most players in the crypto industry.
Impact on DeFi
The FATF’s guidance regarding DeFi protocols is less than clear. The FATF starts by stating:
“DeFi application (i.e., the software program) is not a VASP under the FATF standards, as the Standards do not apply to underlying software or technology…”
The guidance does not stop there. Instead, the FATF then explains that DeFi protocol creators, owners, operators or others who maintain control or sufficient influence over the DeFi protocol “may fall under the FATF definition of a VASP where they are providing or actively facilitating VASP services.” The guidance goes on to explain that owners/operators of DeFi projects that qualify as VASPs are distinguished “by their relationship to the activities undertaken.” These owners/operators may exert sufficient control or influence over assets or the project’s protocol. This influence can also exist by maintaining “an ongoing business relationship between themselves and users” even when it is “exercised through a smart contract or in some cases voting protocols.”
In line with this language, the FATF recommends that regulators not simply accept claims of “decentralization and instead conduct their own diligence.” The FATF goes so far as to suggest that if a DeFi platform has no entity running it, a jurisdiction could order that a VASP be put in place as the obliged entity. In this respect, the FATF has done little to move the needle on the regulatory status of most players in DeFi.
Related:DeFi: Who, what and how to regulate in a borderless, code-governed world?
Impact on stablecoins
The new guidance reaffirms the organization’s previous position that stablecoins — cryptocurrencies whose value is pegged to a store of value such as the U.S. dollar — are subject to the FATF’s standards as VASPs.
The guidance addresses the risk of “mass adoption” and examines specific design features that affect AML risk. In particular, the guidance points to “central governance bodies of stablecoins” that “will in general, be covered by the FATF standards” as a VASP. Drawing on its approach to DeFi generally, the FATF argues that claims of decentralized governance are not enough to escape regulatory scrutiny. For example, even when the governance body of stablecoins is decentralized, the FATF encourages its members to “identify obliged entities and … mitigate the relevant risks … regardless of institutional design and names.”
The guidance calls on VASPs to identify and understand stablecoins’ AML risk before launch and on an ongoing basis, and to manage and mitigate risk before implementing stablecoin products. Finally, the FATF suggests that stablecoin providers should seek to be licensed in the jurisdiction where they primarily conduct their business.
Relayed:Regulators are coming for stablecoins, but what should they start with?
Impact on NFTs
Along with DeFi and stablecoins, NFTs have exploded in popularity and are now a major pillar of the contemporary crypto ecosystem. In contrast to the expansive approach toward other aspects of the crypto industry, the FATF advises that NFTs are “generally not considered to be [virtual assets] under the FATF definition.” This arguably creates a presumption that NFTs are not VAs and their issuers are not VASPs.
However, similar to its approach toward DeFi, the FATF emphasizes that regulators should “consider the nature of the NFT and its function in practice and not what terminology or marketing terms are used.” In particular, the FATF argues that NFTs that “are used for payment or investment purposes” may be virtual assets.
While the guidance does not define “investment purposes,” the FATF probably intends to encompass those who buy NFTs with the intent to sell them at a later time for a profit. While many buyers purchase NFTs because of their connection with the artist or work, a large swath of the industry purchases them because of their potential to increase in value. Thus, while the FATF’s approach toward NFTs is seemingly not as expansive as its guidance for DeFi or stablecoins, FATF countries may rely on the “investment purposes” language to impose stricter regulation.
Related:Nonfungible tokens from a legal perspective
What the FATF guidance means for the crypto industry
The FATF guidance closely tracks the aggressive stance from U.S. regulators concerning DeFi, stablecoins and other major parts of the crypto ecosystem. As a result, both centralized and decentralized projects will find themselves increasingly pressured to comply with the same AML requirements as traditional financial institutions.
Moving forward, DeFi projects, as we are already seeing, will burrow deeper into DeFi and experiment with new governance structures such as decentralized autonomous organizations (DAOs) that approach “true decentralization.” Even this approach is not without risk because the FATF’s expansive definition of VASPs creates issues with key signers of smart contracts or holders of private keys. This is particularly important for DAOs because signers could be classed as being VASPs.
Given the expansive way that the FATF interprets who “controls or influences” projects, crypto entrepreneurs will have a tough fight ahead of them not only in the United States but also around the world.
This article was co-authored byJorge PesokandJohn Bugnacki.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Jorge Pesok serves as general counsel and chief compliance officer for Tacen Inc., a leading software development company that builds open-source, blockchain-based software. Before joining Tacen, Jorge developed extensive legal experience advising technology companies, cryptocurrency exchanges and financial institutions before the SEC, CFTC, and DOJ.
John Bugnacki serves as policy lead and law clerk for Tacen Inc. John is an expert on governance, security and development. His research and work have focused on the vital intersection between history, political science, economics and other fields in producing effective analysis, dialogue and engagement.
A prominent global anti-money laundering (AML) agency called the Financial Action Task Force (FATF) is updating its guidance for the virtual asset sector.
In a document published Thursday, FATF detailed further regulation clarifications on six key crypto topics. These subjects include the definition of virtual assets (VA) and virtual asset service providers (VASPs), stablecoin guidance, peer-to-peer (P2P) risk mitigation, VASP registration and licensing, guidance on the “travel rule,” and information sharing amongst VASPs.
The guidance aims to further define what makes a VASP. In addition, the Updated Guidance for a Risk-Based Approach for Virtual Assets and Virtual Asset Service Providers includes,
“Updated guidance on how stablecoins, non-fungible tokens (NFTs), decentralized finance (DeFi) and decentralized or distributed applications (DApp) and multisignature arrangements relate to the FATF Standards.”
The guidance outlines how countries should implement the “travel rule” in crypto assets. The travel rule recommends that governments force exchanges, banks, over-the-counter (OTC) desks, and hosted wallets to share identifying information about people involved in crypto transactions worth more than $10,000.
According to FATF president Marcus Pleyer, the new guidance updates previous policies and strategies.
“[It] builds on our guidance that we issued in 2019 to explain how the FATF recommendations apply to virtual assets and their service providers, and in particular the guidance clarifies the definitions of virtual assets and VASPs.
It explains how the FATF standards apply to stablecoins, and it addresses the risk for peer-to-peer transactions and illustrates tools to identify and mitigate these risks.”
The original guidelines were released in 2019.
You can read the full updated guidance report here.
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Decentralized finance, or DeFi, continues driving more interest from regulators, becoming a part of major international rules designed for virtual asset service providers, or VASPs.
On Oct. 28, the Financial Action Task Force, or FATF, issued a new update for its 2019 guidance for a risk-based approach for virtual assets and VASPs, paying particular attention to the DeFi industry.
The new guidance addresses issues identified in the FATF’s 12-month review of the revised FATF standards on virtual assets and VASPs requiring further clarification, also reflecting input from a public consultation in March and April 2021.
The authority has provided significant additional guidance regarding the DeFi industry despite DeFi applications not being a VASP under the FATF standards, as the standards “do not apply to underlying software or technology.” However, the updated guidance states that DeFi developers and maintainers can actually be considered as VASPs:
“Creators, owners and operators or some other persons who maintain control or sufficient influence in the DeFi arrangements, even if those arrangements seem decentralized, may fall under the FATF definition of a VASP where they are providing or actively facilitating VASP services.”
According to Pelle Brændgaard, CEO of crypto compliance startup Notabene, the new guidance is looking to determine VASPs in the DeFi ecosystem based on revenue of its participants. “If a business is extracting transaction fees or direct revenue from a protocol that they control, they likely will be classified as a VASP. More fully decentralized protocols could be covered under certain cases as well, but not all cases,” Brændgaard told Cointelegraph.
Apart from providing significant additional guidance on DeFi, the new FATF guidance also address nonfungible tokens, stating that NFTs are excluded from the FATF definition of virtual assets, but “would be covered by the FATF standards as that type of financial asset.”
“Given that the VA space is rapidly evolving, the functional approach is particularly relevant in the context of NFTs and other similar digital assets. Countries should therefore consider the application of the FATF standards to NFTs on a case-by-case basis,” the document reads.
Related:Crypto exchange Bitfinex testing new AML compliance tool
The update also calls for increased urgency for global regulators to implement the Travel Rule, an Anti-Money Laundering and Counter Financing of Terrorism regulation for financial institutions introduced by the FATF in 2019. “Countries may wish to take a staged approach to enforcement of travel rule requirements “but should continue to ensure that VASPs have alternative measures in place” to mitigate money laundering risks associated with crypto transfers in the interim, the document notes.
“With this updated Guidance, FATF is increasing the urgency yet also acknowledging the real-world issues VASPs and Travel Rule service providers like us have pointed out to them over the last year. They are now recommending that regulators be flexible during the initial rollout,” Brændgaard said.
Cryptocurrency exchanges Bitfinex is preparing to test out a new Anti-Money Laundering (AML) tool on its platform.
The firm announced Wednesday that it will be testing a new solution designed for complying with the “Travel Rule,” an AML/Counter Financing of Terrorism regulation for financial institutions introduced by the Financial Action Task Force (FATF) in 2019.
Bitfinex partnered with compliance startup Notabene to implement its software-as-a-service solution to identify virtual asset accounts, track cross-border transactions and comply with other broad obligations of Virtual Asset Service Providers (VASPs). The integration will supposedly allow the firm to ensure privacy while collecting and managing Travel Rule-related data.
According to the announcement, the solution allows Bitfinex to share, send and receive counterparty information alongside blockchain transactions to any counterparties using the same infrastructure. Bitfinex’s sister company Tether, which operates the world’s largest stablecoin Tether (USDT), has also begun using Notabene’s solution.
Paolo Ardoino, chief technology officer at Bitfinex and Tether, said that Bitfinex has “always taken a leading role in meeting new global regulatory requirements.”
Notabene CEO Pelle Braendgaard told Cointelegraph that the firm launched its travel rule solution in August 2020. The service is currently processing transactions between at least 50 different exchanges, including Paxful, Luno, BitSo, OnChain Custodian and others.
Notabene has been running tests across many jurisdictions, including a pilot with the Financial Services Regulatory Authority of Abu Dhabi Global Market in early October.
“With this updated Guidance, FATF is increasing the urgency yet also acknowledging the real-world issues VASPs and Travel Rule service providers like us have pointed out to them over the last year. They are now recommending that regulators be flexible during the initial rollout,” Braendgaard said.
Related:Bank of Spain issues registration guidelines for crypto services
Braendgaard added that Travel Rule compliance is growing rapidly every quarter, and the firm expects major VASPs to comply by the first or the second quarter of 2022.
Since releasing the crypto Travel Rule more than two years ago, the FATF has continued working on the framework to improve it and fit the growing cryptocurrency industry. In February, the authority issued a review document to adapt its Travel Rule guidance for stablecoins and crypto peer-to-peer transactions.
Tether Operations Limited, the firm operating Tether (USDT), announced on Tuesday that it will use Notabene, an end-to-end solution for cryptocurrency Travel Rule compliance.
Tether will begin testing Notabene’s cross-border transaction monitoring system for virtual asset service providers (VASP) to combat financial crimes such as money laundering.
Notabene is a new technology for monitoring cryptocurrency transactions in real-time, making the blockchain more transparent and allowing regulators to keep better track of cash flow.
The Know Your Customer infrastructure stack at the firm is built to span jurisdictions with little or no regulation of financial services.
In order to assist cryptocurrency exchanges, digital wallet providers, and financial institutions with the new FATF Travel Rule requirement, #Tether will begin testing the Notabene platform.⬇️https://t.co/9gUpq15As6
— Tether (@Tether_to) October 26, 2021
Notabene claims to offer a low-risk environment to test sophisticated crypto use cases. Tether will use Notabene’s technology to determine whether it can securely transmit identifying data for clients in other VASPs. In particular, as it pertains to transactions conducted by VASPs, Notabene’s solution will help Tether protect its consumers.
The Financial Action Task Force, a worldwide group that sets Anti-Money Laundering standards, has determined that VASPs should adhere to the same rules as regulated financial institutions. The “Travel Rule” advises VASPs to exchange specific client information between counterparties for transactions worth more than a certain amount.
These procedures are meant to assist nations and service providers in preventing money laundering, terrorist financing and complying with sanctions laws. Commenting on the new development, Tether chief compliance officer Leonardo Real stressed the importance of working with other VASPs, stating:
“As pioneers of blockchain technology and leaders in transparency, we are dedicated to not only keeping up with new rules but helping shape them. Because the Travel Rule traditionally applies to financial institutions, we see this as an opportune moment to foster cooperation across traditional and digital channels in order to create better services for customers globally. We are proud to lead the charge.”
According to a recent report from Cointelegraph, the United States Securities and Exchange Commission will be in charge of U.S. stablecoin regulation and enforcement. In 2021, the stablecoin market has seen tremendous development, and Tether’s market capitalization has soared this year, increasing by 229% since the start of the year to $69.6 billion.