Revised FATF Standards for Virtual Assets 12 Month Review
Jurisdictions vie to implement regulatory systems for virtual asset service providers as the industry develops solutions to travel rules
On June 24, 2020, the Financial Action Task Force met, albeit virtually, for the third and final plenary session under President Xiangmin Liu of the People’s Republic of China to review progress in implementing new anti-money laundering guidelines for virtual and virtual assets Service Providers (VASPs). Details of the meeting published in FATFs 12-month review of the revised FATF standards on virtual assets and virtual asset service providers offered a hopeful outlook for VASPs and the larger ones A cryptocurrency (or cryptocurrency) is a digital asset that … more Community.
The scope of the review highlights three main areas of assessment: emerging market trends and money laundering risks, implementation and enforcement of the revised standards by the public sector, and the development and implementation of a travel compliance mechanism by the private sector.
Impressed by the response from the public and private sectors, the FATF recognized the steps that were being taken to implement the FATF guidelines on virtual assets and VASPs worldwide. Recognition of the VASPs for their extensive efforts over the past year to develop a technology solution that supports travel rules compliance but reaffirms the importance of rapidly developing a compliance mechanism.
The FATF has decided not to revise previous recommendations regarding virtual assets or VASPs, but has documented the need for further alignment in the future. A reassessment of the progress towards a travel rule solution and further guidelines are planned for June 2021 during the next 12-month review under the new Federal President Marcus Pleyer.
Market trends and money laundering typologies: A. Privacy Coins Quandary
According to previous estimates, the volume of criminal activity involving virtual assets is low. It was mainly a type of virtual asset and a wide variety of criminal offenses were reported, with drug-related crime and fraud such as investment fraud, extortion and extortion being the most common
The risk landscape is defined by two major weaknesses: VASPs that operate in unregulated legal systems and tools for anonymizing transactions. The FATF notes that the use of DNS registers to suppress or blacken the true owners of domain names, tumblers, mixers, and privacy coins raises ongoing money laundering and terrorist financing concerns. The anonymity coupled with the immediate and cross-border nature of virtual assets has piqued the interest of professional money laundering networks that use virtual assets to layer illicit funds and disguise their origins. In particular, they raised concerns that “VASPs are not implementing adequate controls to mitigate the risks associated with virtual assets with enhanced anonymity”.
Jurisdictions with established virtual asset regulatory systems and VASPs have seen an increase in regulatory offenses such as unlicensed financial services and violations of recording and reporting violations. However, as the FATF relies on the voluntary implementation and enforcement of its standards, the allotted 12 month period was too short to assess new trends driven by new regulatory frameworks.
Public Sector: Government implementation of crypto AML / CFT regulations
Determined by voluntary self-assessment, the public sector shows a clear direction in adopting and implementing the revised standards of the FATF. Of the 54 responding jurisdictions of the FATF and the FATF-Style Regional Body (FSRM), 32 jurisdictions stated that they have existing AML / CFT regulations for virtual asset service providers, 13 jurisdictions reported regulations in development and 5 jurisdictions indicated the ban or possible proximity to future ban on VASPs.
The report also finds that out of 32 countries with AML / CTF regulations in place for virtual asset providers, 30 have either licensing or registration regulations in place, with 18 jurisdictions indicating that their regulations extend to VASPs based overseas and offer products or services to customers in their countries. Within jurisdictions that have initiated licensing and registration processes for VASPs, most reported fewer than ten registered VASPs, while a small minority of jurisdictions reported over 100 VASPs. Over 1,000 registered or licensed VASPs have been reported from 20 jurisdictions alone.
Concerns related to decentralized exchanges and regulatory responsibility have required further guidance in determining the scope of the AML / CFT requirements for VASPs in their respective jurisdictions.
In 31 of the 32 jurisdictions, supervisory systems with established regulatory frameworks in the form of central banks, tax authorities or specialized organizations have been introduced. Fifteen jurisdictions reported that their respective oversight systems have started conducting on-site and off-site inspections, with eight jurisdictions already reportedly imposing penalties for AML / CFT violations.
Travel rule review
Adoption and enforcement of the Travel Rule in all FATF jurisdictions has been limited as the jurisdictions cite a lack of scalable technology solutions that encompass all of the compliance requirements for VASPs. While the FATF advocates a technology neutral stance, the political body recognized evidence of several emerging solutions – and drew attention to an attempt by the industry initiative to establish messaging systems within the. to standardize What is a Virtual Asset Service Provider (VASP)? A virtual A … more Community.
Despite optimism, the FATF recognizes the main obstacles to implementation such as the identification of counterparty VASPs, broader compliance for private and non-hosted wallets transacting with VASP customers, batch processing of data, interoperability challenges and the sunrise problem. FATF’s Virtual Asset Contact Group – a working group dedicated to monitoring and engaging the virtual asset sector – offers few immediate solutions and reiterated its commitment to partnering with the industry to identify and promote solutions to current and future obstacles while both VASPs as well as travel regulators are advancing towards rule implementation. The FATF urges the community to promote diversity and redouble their efforts to engage reluctant VASPs and identify remaining issues, and expects significant progress toward a deployable Travel Rule solution over the next 12 months.
In the race to find a mechanism to comply with travel rules, working with industry is vital – with open source initiatives emerging as pioneers that aim for integration and ease of use over VASP protocols while ensuring security and privacy.
One of the promising solutions is the Travel Rule Information Sharing Alliance (TRISA), which has already implemented the interVASP IVMS101 messaging standard and works with PayID, OpenVASP, Shyft and BIP75.
Continuous open dialogue and collaboration between VASPs and regulatory oversight will be vital as both the private and public sectors break new ground to create a more secure, secure and accessible digital payments system around the world.
Future Risk Mitigation Strategies for Virtual Assets and Virtual Asset Service Providers
The report highlighted user and transaction volume concerns related to stablecoins and the lack of private and public sector AML / CFT infrastructure to handle an influx of such activity.
Additionally, upset by the lack of AML controls for activities outside of VASPs-to-VASP transfers, the FATF suggested risk mitigation strategies such as:
- Transaction or volume limits for peer-to-peer transactions
- require transactions to use an intermediary VASP or financial institution,
- or the most serious – the prohibition or refusal of the use of In its Interpretative Letter No. 1172, the Office of the Comptr … more Transfers.
During the next 12 month review period, the ongoing assessment will continue to understand the changing risk landscape and provide further guidance on limiting the money laundering and terrorist financing opportunities that non-hosted wallets offer. The FATF encourages the industry to be proactive in introducing new products, services and technologies to ensure continued commitment to AML / CFT obligations and to prepare for future regulatory restrictions.
The next steps of the FATF for compliance with crypto-AML / CFT under the German presidency
This meeting was the third and final under the presidency of Xiangmin Liu from China. The organization will next be headed by the German Marcus Pleyer. Germany promises to press for a more rigorous fight against money laundering and has set five priorities for its presidency:
- Digital transformation of AML / CFT
- Financing ethnically or racially motivated terrorism
- Money laundering and migrant smuggling
- Environmental crime
- Illicit arms trade
Under the German presidency, the FATF will continue to build on the virtual asset standards that have already been introduced. Part of the German plan for the digital transformation of AML / CFT provides for the launch of an initiative to monitor the risks of virtual assets. Unlike the previous presidency, it will last two years, not just one. This initiative includes two studies on the opportunities and challenges for VASPs / VAs to implement AML / CFT more efficiently and an inventory of the current VASP / VA data pool and analysis for AML / CFT.
The full FATF report is available here: http://www.fatf-gafi.org/publications/fatfrecommendations/documents/12-month-review-virtual-assets-vasps.html