Money laundering has always been one of regulators’ biggest concerns that has held back the evolvement of the crypto industry. To alleviate these concerns, there needs to be a greater collaborative regulatory effort among jurisdictions across the globe. Recently at a meeting held by the Financial Action Task Force (FATF), over 200 jurisdictions agreed in principle that establishing and following standards to combat financial crime is of utmost priority. But adopting FATF standards globally remains a challenge.
Developing global regulations around digital assets is a relatively new trend. More active regulation of virtual asset service providers (VASPs) began in 2021, with half of the jurisdictions implementing the revised FATF standards. The majority of that half regulated VASPs while six of them prohibited their operation. This past year saw a number of jurisdictions — including the Philippines, the United Arab Emirates and Gibraltar — under increased monitoring for having persistent “strategic deficiencies” in their regulatory regimes to combat money laundering and anti-terrorism financing effectively. The reasons for their inability to meet FATF standards vary, but it’s fair to say that for the crypto ecosystem to grow for the long term, stronger anti-money laundering laws and enforcement must be adopted globally.
Overview of the FATF standards
As digital assets gain popularity, criminals and malicious actors are finding new ways to perform money laundering and terrorism financing. That’s why it is more important than ever for governments to find ways to regulate VASPs. At the recent FATF meeting, it was observed that many jurisdictions do not follow existing guidance, including the well-known “travel rule” that would require crypto companies to screen, collect and pass on information regarding the originator and beneficiary for transactions above a certain threshold. According to a FATF survey last year, only 11 out of 98 jurisdictions are enforcing the travel rule.
FATF is a prominent global watchdog organization with 39 members. Its membership includes 37 countries as well as regional bodies like the European Commission and the Gulf Cooperation Council. FATF sets legal, regulatory and operational standards for combating money laundering and counter-financing of terrorism (AML/CFT). The organization serves multiple objectives, with one general goal of protecting the international financial system.
Its recent meeting has had a significant influence on the crypto industry for several reasons. What we saw in 2022 was a wake-up call for many exchanges and VASPs around the globe, with over US$3 billion stolen due to hacks. Now the global community is pushing to fight ransomware attacks on crypto platforms. Jurisdictions with little or no AML/CFT controls in place become vulnerable for businesses in this industry.
Another ever-growing area that the FATF has named as one of “increasing concern” is non-fungible tokens (NFT) and decentralized finance (DeFi), due to their potential for letting funds escape the regulatory environment. A stricter and clearer regulatory regime pertaining to DeFi and NFTs may help these industries gain more credibility and attract more clients from the traditional big corporate world.
Benefits and drawbacks for the crypto industry
Implementing and complying with the standards established by FATF can provide immense benefits to the global crypto community. First of all, it would improve the crypto industry’s reputation, which would in turn promote the adoption of digital assets to the masses. Having gone through the visionary and early adoption stages of the new technology life cycle, crypto is now entering the early majority stage, and the industry needs to help eliminate all possible security concerns. It is also critical to increase the industry’s legitimacy. Digital asset products can get better recognition from the traditional finance market when crypto platforms achieve full compliance with international AML/CFT standards. When governments, the financial establishment and ordinary people stop seeing crypto as a means for illegal activities, adoption will reach a new milestone.
When compliance standards are promoted and adopted across the industry, it also reduces uncertainty and broadens market access. In order for businesses to efficiently operate globally, they need to trust that the industry has consistently implemented and abides by international regulations. Many countries require businesses to comply with international regulations before they can even register an entity in their jurisdictions. Likewise, complying with the FATF standards will offer crypto companies opportunities in new markets.
Increased regulation and compliance will come at a cost. When regulations limit the scope for acceptable business practices and activities, it could also reduce revenues and the potential for growth in some areas. To be FATF-compliant, companies will have to invest in hiring compliance experts and new technology that enables platforms to collect and share customer information in a regulations-compliant manner — which increases transaction costs that get passed to the customers. Adopting global regulatory standards can also raise privacy issues and lead some crypto customers to switch from law-abiding platforms to non-compliant platforms.
Some companies may simply refuse to go along if subject to more regulations. But others that invest more resources that allow their product and services to stay at the top of the game and be regulations-compliant will likely be the ones that can grow globally and thrive for the long term.
Meeting users’ expectations while fulfilling the requirements of new regulatory standards remains the crypto industry’s primary challenge.
Conclusion
It remains to be seen how the implementation of these regulations will affect the crypto industry in the long run, and the FATF Plenary has revealed that many jurisdictions still need to make a stronger effort in their crypto regulatory regimes. The potential benefits of complying with global regulatory standards for crypto will likely ultimately outweigh the costs — but crypto companies as well as the many countries that still fall short of international standards need to be persuaded that it would be in their best interest to do so.