The Financial Action Task Force (FATF) published a Draft Guidance for a Risk-based Approach to Virtual Assets and VASPs on 19 March 2021. Some highlights are as follows:
- As we previously warned, many smart contracts will require identity as many entities are considered VASPs: Decentralised EXchanges, escrow services, brokerage services, order-book exchange services, advanced trading services, decentralised application’s owners and some Non-Fugible Tokens that can facilitate money laundering and terrorism financing.
- As we prognosticated before (“On the Coming Crackdown on Cryptocurrencies without Identity”), P2P transactions to/from non-obliged entities (e.g. unhosted wallets) should be considered high risks: VASPs and countries must consider the extent of the measures to mitigate risks (e.g., FinCEN’s proposed rulemaking for crypto-transfers between self-hosted wallets and exchanges).
- Before a transaction takes place, originator and beneficiaries must be known (i.e., post-facto submission is not allowed): this requirement justifies the need for identity as implemented on our blockchain.
More recently, FATF has published a “Second 12-month Review of the Revised FATF Standards on Virtual Assets and Virtual Asset Service Providers”. Some highlights are as follows:
- Only 58 jurisdictions reported that they had introduced the necessary legislation to implement the revised FATF standards, 25 more than the previous 33 jurisdictions from the previous year: only 35 of the 58 have their regime operational. In fact, there are 32 jurisdictions that declared themselves undecided and another 12 that had not yet commenced the legislative/regulatory process. This lack of adoption clearly aggravates the “sunrise” problem and promotes jurisdictional arbitrage.
- In general, FATF recommendations are “frozen” and there is no need to amend them, except for a technical amendment to R.15/INR.15 to reflect changes to Recommendation 1 regarding proliferation financing to virtual assets and VASPs. Only 10 jurisdictions reported that they had implemented travel rule requirements for VASPs and that these requirements were being enforced.
- The two previous problems reinforce each other: the lack of national implementation of the regulation reduces incentives for technical progress, and the lack of technical progress is used to justify lack of national implementation. The technical root of this conundrum is the difficulty of coordinating standards and implementing identity on blockchains that were originally conceived to be purely pseudo-anonymous: this issue can only be solved using a blockchain conceived with identity from the ground up (i.e., our blockchain).
- There isn’t sufficient evidence to conclude that pure P2P transfers are more prone to ML/TF risks because there is lot of variation in the collected data, thus the P2P sector is kept under review.
- FATF will release an updated Guidance on Virtual Assets and VASPs by November 2021.
The European Union will revise Regulation 2015/874/EU to make it possible to trace transfers of crypto-assets, harmonising the application of FATF’s travel rule over all Europe.