The Financial Action Task Force (FATF) — the world’s money laundering and terrorist financing watchdog — has released the outcome of its weeklong plenary session and said that more than half of 128 reporting jurisdictions have yet to implement its guidance on virtual assets and virtual asset service providers (VASPs).
But the revised guidance itself is being updated, with the plenary agreeing to delay the deadline for the finalization of the FATF’s revised guidance to October.
‘Gaps in implementation’ of FATF standards
According to FATF’s 12-month review, only 58 out of 128 jurisdictions reported that they implemented the revised FATF standards that were finalized in 2019, with 52 jurisdictions regulating VASPs and six banning VASPs. The majority of jurisdictions have yet to implement the requirements, including the “travel rule.” The report of FATF’s review will be published on July 5.
The FATF guidance places anti-money laundering and counter-financing of terrorism (AML/CFT) obligations on virtual assets and virtual asset service providers — similar to the requirements typically required by banks and financial institutions. The 2019 guidance also extended FATF’s Recommendation 16 — commonly known as the “travel rule” that requires financial institutions to pass on certain customer and transaction information to the next financial institution for certain funds transfers — to VASPs.
“These gaps in implementation also mean that we do not yet have global safeguards to prevent the misuse of VASPs for money laundering or terrorist financing,” FATF said. “The lack of regulation or implementation of regulation in jurisdictions can enable continued misuse of virtual assets through jurisdictional arbitrage.”
FATF has urged “the need for all jurisdictions to implement the revised FATF Standards, as quickly as possible,” and its report identifies potential FATF actions to prevent the misuse of virtual assets for criminal activities, such as through crypto ransomware.
“It is a stark reminder to jurisdictions that full implementation of the revised FATF standards is not an option, it is a requirement,” Claire Wilson, partner at Holland & Marie, a compliance consultancy, told Forkast.News. “Jurisdictions are well aware that the FATF is keen to ensure that loopholes relating to digital assets are closed as soon as possible.”
“Only a few jurisdictions are managing to keep their head above water. Others are not, and are struggling to implement the revised standards,” Wilson added. “These jurisdictions are, however, trying to put in place measures wherever possible. For example, in June the SEC of Thailand issued new regulations on the handling of NFTs and meme coins.”
Deadline for FATF’s revised draft guidance extended to October
In March, FATF released its draft guidance on a “risk-based approach to virtual assets and virtual asset service providers” for public feedback. The proposed revisions raised concerns in the crypto industry particularly around the definition of a VASP, regulating decentralized finance (DeFi) and unhosted wallets.
Industry experts told Forkast.News that the deadline extension is an indication that FATF is taking the time to carefully consider the feedback received from the crypto industry, given the significant impact of the proposed guidance on the industry.
“The FATF received a large number of responses and appears keen to review all feedback to ensure that the guidance is appropriate and mitigates unintended consequence risk,” Malcolm Wright, chair of the advisory council of Global Digital Finance, an industry group, told Forkast.News. “We should not infer anything beyond the FATF applying an appropriate level of review and governance, bearing in mind when the consultation closed and when a final draft would be necessary for review for the June plenary it would have been an extremely ambitious timeline.”
Chia Hock Lai, co-chairman of the Blockchain Association Singapore, said it was very likely that the FATF needed “more time to digest the feedback given that some of proposed guidelines are not trivial such as the definition of DeFi.”
“The impact on the crypto industry should be slightly positive as this shows that FATF is taking the crypto industry feedback seriously and not rushing into any premature guidance,” Chia said.
See related article: As DeFi swells past US$140 billion, FATF stokes worries over KYC/AML
Will Asia lead ‘travel rule’ compliance?
FATF’s “travel rule” has posed special challenges because VASPs do not yet have widely accepted industry standards like SWIFT. But FATF’s recent plenary update notes that “the private sector have made progress in developing technological solutions to enable the implementation of the ‘travel rule.”
Countries that have implemented the travel rule include the United States, Switzerland and Singapore.
Earlier this month, Notabene, a New York-headquartered software company that helps crypto businesses comply with the FATF travel rule, announced that it had partnered with Elliptic, London-based blockchain AML analytics provider, to launch a service to enable VASPs to automate transactions with trusted counterparties while detecting any suspicious activity that should be reported according to regulatory requirements.
“When it comes to compliance with the Travel Rule, VASPs are now in a rush to implement scalable solutions and come live,” said Alice Nawfal, Notabene’s chief operating officer, in a statement. “We expect the next six to twelve months will be a pivotal time for the crypto industry as VASPs overcome outstanding challenges and determine how to collaborate with each other effectively.”
In April, three crypto companies in Singapore completed testing of automated Travel Rule transfers using Notabene. In May, Hong Kong-based cryptocurrency exchange Crypto.com said that it would use CipherTrace’s Traveler solution to comply with FATF’s travel rule.
“A group of the largest U.S. cryptocurrency exchanges, part of the U.S Travel Rule Working Group (USTRWG), had also tested their version of ‘travel rule’ implementation a few days ago. However, Asia seems to be faster in implementing the ’travel rule’ compliance as evidenced by the alliance driven by Singapore-based VerifyVASP since Aug 2020,” said Chia, adding that VerifyVASP was a member of the Blockchain Association Singapore.
“Singapore is one of the early jurisdictions implementing the FATF standards under its Payments Services Act, and as a key blockchain hub in Asia, I expect Asia will lead when coming to the travel rule compliance,” Chia added.
Are more regulation coming?
As the FATF urges countries to step up their implementation of the revised FATF standards, some enforcement agencies around the world have begun placing crypto companies under greater scrutiny.
The Ontario Securities Commission (OSC) — the agency that oversees securities legislation in Canada’s most populous province — is seeking to bring enforcement action against crypto exchanges Poloniex, KuCoin and Bybit. Binance, the world’s largest cryptocurrency exchange by trading volumes, announced on June 26 that it is no longer serving Ontario-based users and has asked them to close out their active positions by Dec. 31. Japan’s Financial Services Agency has also warned Binance and Bybit for operating in the country without registration.
And over the weekend, the U.K.’s Financial Conduct Authority issued a consumer warning that Binance Markets Limited — part of Binance Group — was not permitted to undertake any regulated activity in the UK. Binance, however, tweeted that “BML is a separate legal entity and does not offer any products or services via the Binance.com website” and “The FCA UK notice has no direct impact on the services provided on Binance.com.”
Chia, of the Blockchain Association of Singapore, said: “There is definitely an increased urgency to regulate the fast growing industry, which is a positive sign and good for the healthy development of this nascent industry, as it means increased regulatory clarity and investor/consumer protection, which are key drivers for adoption of cryptoassets.”
Global Digital Finance’s Wright, too, sees “significant movement by regulators around the world in the crypto space” and advocates a “regulatory-first approach.”
“Given the size, scale and great potential of the crypto sector, we will inevitably see a fully regulated future,” Wright said. “Crypto companies are well-advised to get their house in order or expect further enforcement action.”
