14 August 2020
While The Industry Develops Travel Rule Solutions, Jurisdictions In a Hurry to
Implement Regulation Regimes for Virtual Asset Service Providers
On June 24, 2020, the meeting of the Financial Action Task Force took place, even though virtually, which was the third and final Plenary meeting under the presidency of Xiangmin Liu, the president of the People’s Republic of China, in order to examine progress with novel anti-money laundering solutions guidance for virtual asset service providers (VASPs) and virtual assets. The meeting, the details of which were released in FATF’s one-year Review of the Revised FATF Standards on Virtual Assets and Virtual Asset Service Providers, concluded with a hopeful outlook for VASPs and the broader cryptocurrency community.
The meeting addressed three strategic points: implementation and enforcement of the revised Standards in the public sector, development and adoption of a Travel Rule compliance mechanism in the private sector, and new money laundering risks and emerging market trends.
The public and private sector’s response being good enough to impress them, FATF has acknowledged the effort undertaken to implement FATF guidance with regard to virtual assets and VASPs on a global scale. VASPs genuine efforts over the past year to develop a tech solution that will be in compliance with the Travel Rule was commended by FATF, but only affirmed again the importance of swift development of a solid compliance mechanism.
FATF made a decision not to revise recommendations which were made earlier, and are related to virtual assets or VASPs, but has confirmed that continued direction will be needed in the future. Reassessing progress towards a working Travel Rule solution and more guidance is scheduled for June 2021 at the next one-year review meeting under Marcus Pleyer, the upcoming German President.
Market Trends and Money Laundering Typologies: A Privacy Coin Quandary As assessed before, the criminal activity incidence rate with virtual assets is low. A wide variety of crimes were reported mostly involving a singular virtual asset, with fraud such as investment scams, blackmail, and extortion and narcotics-related crime being most common.
The risk ranges are defined by two major issues: the first and most important being the tools to anonymize transactions, as well as unregulated jurisdictions under which some VASPs are operating in. FATF has noted that DNS registers were used to redact, supress and basically hide the true owners of domain names, tumblers, mixers, and privacy coins. The concerns are held with continued money laundering and terrorism financing opportunities. Anonymity paired with instantaneous, cross-border nature of virtual assets might have given professional money laundering networks new toys to play with, and very useful ones at that, using virtual assets to further stratify illicit funds and hide their origin. They were especially concerned about “VASPs failing to implement adequate controls to mitigate risks involved with anonymity-enhanced virtual assets.”
In jurisdictions where regulatory regimes for virtual assets and VASPs are well established, an up-tick in regulatory offenses such as record-keeping and reporting violations, as well as unlicensed financial services was noticed. Again, as FATF is relying upon self-implementation and self-enforcement of the Standards on a voluntary basis, the prescribed one-year period was not enough time to examine any novelties in trends which appeared alongside new regulatory frameworks.
Public Sector: Government Implementation of Crypto AML/CFT Regulations The public sector shows clear direction towards adopting and implementing FATF’s revised Standards, even through voluntary self-assessment. Out of the 54 responding FATF and FATF-Style Regional Body (FSRM) member jurisdictions, 32 jurisdictions reported implementing AML/CFT regulations for Virtual Asset Service Providers, 13 jurisdictions reported having regulations in development, and 5 jurisdictions decided to prohibit VASPs presently or potentially in the near future.
It is further noted that of 32 jurisdictions that have established AML/CTF regimes for virtual asset service providers, 30 are in establishment of licensing or registration regimes, 18 of which have advised that their regulations extend to VASPs overseas that offer products or services to customers in their jurisdictions. In jurisdictions where licensing and registration procedures for VASPs commenced, most have reported under ten registered VASPs, meanwhile very few jurisdictions reported over 100 VASPs. 20 jurisdictions alone reported over 1000 registered or licensed VASPs.
45 Jurisdictions Have Already Developed AML/CFT Regulations for VASPs
The decentralization of exchanges and regulatory responsibility has raised additional concerns, some of which suggested the determination of the extent of AML/CFT requirements for VASPs within their respective jurisdictions is needed.
31 of the 32 jurisdictions with established regulatory frameworks have implemented supervisory regimes, in the form of specialized organizations, tax authorities, or central banks. 15 jurisdictions noted that supervisory regimes within those jurisdictions are conducting on- and off-site inspections, 8 jurisdictions even already imposing penalties for AML/CFT violations.