Problems in the Revised FATF Standard

Bethany Walsh

Sep 08, 2021

(1) Definition of virtual assets and VASP

The revised FATF Standard introduces new terms "virtual asset" and "virtual asset service provider". If an emerging asset is classified as a traditional financial asset according to the standard but relies on "virtual asset" at the technical level, it is still unclear how each jurisdiction should classify it. Besides, regions believe that the scope covered by the definition of VASP should be further explained to ensure the general consistency of the definition of VASP, which is very important for the applicable standards of operators and service providers in the jurisdiction.

(2) Peer to peer transactions and private / non-public wallets

At present, without the participation of VASP or financial institutions, the peer-to-peer transactions of virtual assets are not clearly subject to the anti-money laundering obligations under the revised FATF Standard. Since the revised FATF Standard focuses on placing anti-money laundering obligations on intermediaries between individuals and the financial system, there is no clear provision for such virtual asset transactions. However, there is not enough evidence to show that the number and value of anonymous peer-to-peer transactions have changed greatly since June 2019.

At the same time, the introduction of new virtual assets may greatly enhance the risk of money laundering / terrorist financing, especially when virtual assets are widely used for peer-to-peer anonymous transactions. When countries believe that the risk of money laundering / terrorist financing is too high, they can take measures such as unsecured wallet transfer, limit the number of transactions, or force the use of VASP or financial institutions to reduce the risk. But so far there is no consistent international practice.

(3) Stable currency

The revised FATF Standard brings the stable currency into the adjustment range and believes that it may be a virtual asset or a traditional financial asset. FATF believes that if all regions have fully implemented the revised FATF Standard, the current standard is sufficient to reduce the capital flow risk caused by the stable currency. Nevertheless, FATF claims that this field must be strictly regulated, because it’s still common for the residual risk caused by stabilizing currency through peer-to-peer transactions, weak supervision of "anti-money-laundering" and decentralized governance. At the same time, the landing of the stable currency poses a great challenge to the skill and expertise of the regulatory authorities.

(4) Implementation of the Travel Rule

The "Travel Rule" was first proposed by the U.S. financial crime enforcement network (FinCEN) in 1996. In March 2013, the rules were extended to cryptocurrency exchanges。The "Travel Rule" requires cryptocurrency exchanges in all jurisdictions to fulfill the obligation of "KYC (know your customer)", and stipulates that VASP must share the information when the sender and receiver exceed a specific threshold, and properly keep the relevant information for the authorities’ money laundering and terrorist financing review.

There are several different technical solutions for Travel Rule under development, some of which are being released or tested. However, it may take a few years for "Travel Rules" to be widely used. Under the "Travel Rule", the cryptocurrency in the "White List" is subject to more strict control, while the cryptocurrency in the "Grey Market" will be issued and circulated in another way away from the traditional trading ecosystem. Market differentiation will make it difficult to realize effective exchange between cryptocurrencies, and then affect the "interactivity" of tokens.

Overall, most jurisdictions have made significant progress in implementing the revised FATF Standard. More than half of FATF members said that they had incorporated the FATF Standard into domestic law, but the challenges remained. Some jurisdictions have not yet operated the anti-money laundering systems, some have not yet been established. Moreover, this review does not cover the entire FATF global network, so it’s unknown for the progress situation of FSRB members who have not submitted reports.

Cipher Trace, a blockchain company, claims that the virtual asset loss caused by illegal access, theft and fraud between January and May, 2020 reached US $1.36 billion. Among the crimes related to encrypted assets, fraud cases are increasing year by year. Under the regulation of FATF "Travel Tules", encrypted assets enterprises should strengthen the control of their own security system.

After this round of review, FATF will conduct the second review of 12 months before June 2021 to continue to strengthen the supervision of virtual assets and virtual asset service providers, and will consider whether it is necessary to further update the FATF Standard. At the same time, FATF will continue to work with the private sector to promote the understanding of money laundering and terrorist financing risks of virtual assets and virtual asset service providers. FATF should continue to promote awareness among the public and national authorities of the money laundering risks involved in virtual assets transactions. For this, FATF will provide the public with red flag indicator information related to virtual asset transactions in October 2020 and strengthen effective cooperation with VASP regulators.

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