2019 witnessed FATF’s latest foray into regulation of the virtual asset economy, representing a critical step towards standardized international compliance policy making. While lenient in comparison to standards of oversight to which traditional financial institutions are held, the regulations published in June of 2019 will undoubtedly have far-reaching impacts on the crypto-economy.
Many of our clients and associates have expressed their concern regarding the implications of FATF’s regulatory guidelines. We have compiled the most prominent among these concerns below, discussing in detail the practical effects the resultant policies might have, their influence on day-to-day operations, and what might be coming next.
It is not unreasonable to expect these and future controls to follow the principles that underlie those imposed upon existing financial institutions. The extent of these controls and the rapidity with which states implement them will be driven by the perceived aggregate risk of virtual asset transactions.
A Brief Background
The Financial Action Task Force (FATF), is an intergovernmental, standard-setting organization founded in 1989 in order to develop policies pursuant to anti-money laundering and combating the financing of terrorism (AML/CFT).
Frequently Asked Questions
1. What are the key recommendations that crypto business should know about?
There are two primary FATF recommendations that are most likely to require direct action by crypto businesses:
VASP Licensing: Businesses which interact with the virtual asset economy are to be classified as Virtual Asset Service Providers (VASPs), and must obtain the associated licenses from appropriate regulating bodies in order to operate. Those who fail to meet regulatory standard are subject to penalties, sanction, and revocation of license.
The Travel Rule: All transactions on VASP platforms of 1000 USD/EUR or greater must be documented. VASPs must obtain and hold required and accurate originator and beneficiary information on transfers and submit it immediately and securely on request. Recipient platforms have a responsibility to ensure that fund transfers include adequate documentation of aforementioned information.
In addition to these, the FATF recommendations apply various standards of record-keeping and customer due diligence (CDD).
2. How much time do I have before FATF regulations take effect in my country?
While FATF’s recommendations are usually heeded by its member nations, they are still recommendations. Though some nations have already implemented FATF-inspired policy, the emergence of COVID-19 has, understandably, disrupted the rollout of state policy in many jurisdictions.
While a hard deadline for compliance may not be immediately forthcoming, ‘luck favors the prepared’ and getting out ahead of regulations through good practices will pay dividends in the future. We can reasonably expect that pressure will pick up as we approach FATF’s next plenary session in late 2020, however businesses must be aware of circumstances in their individual countries. A solid, well-integrated compliance program may, realistically, take months to implement.
3. My country already has regulation similar to FATF’s recommendations, will I be affected?
The nature of FATF’s recommendations renders them open to interpretation by state policymakers. While it is expected that associate policies embody the spirit of the recommendations, they will not necessarily follow them to the letter.
Countries that already implement strict regulation of the virtual asset economy will likely maintain those standards, while adapting certain elements of their infrastructure to more closely resemble those recommended by FATF.
4. What are the privacy implications of FATF’s recommendations?
Pseudonymity is perhaps one of the most identifiable features of the virtual asset economy, however it has concurrently been among its most controversial. There is no doubt that new standards of record-keeping like the Travel Rule necessitate greater transparency and invite regulatory scrutiny. This does not, however, require an undue invasion of privacy on the part of VASPs.
In the majority of cases, the KYC information collected by most VASPs is sufficient to fulfill regulatory requirements as currently stated.
If we are to take traditional finance as an example, the transparency of transactions builds trust into a system, so pseudonymity will likely be relegated to fringes as the virtual asset economy grows.
5. There is another FATF meeting coming up in 2020. What comes next?
The fact of the matter is that FATF’s current recommendations pertaining to cryptocurrency represent a scaled-down implementation of those already applied to traditional financial institutions. As the virtual asset economy continues to grow and mature, we expect VASPs to become subject to the same standards to which traditional financial institutions are held, including:
-A 5-year minimum maintenance of transactional records sufficient to reconstruct individual transactions and made available to domestic authorities
-Bearing responsibility for reporting, through suspicious transaction reports, any and all suspected criminal proceeds, money-laundering, or financing of terrorism to appropriate authorities
-An obligation to report all suspicious transactions or attempted transactions regardless of amount. The reporting requirement should be a direct, mandatory obligation, and any indirect or implicit obligation to report suspicious transactions is not acceptable
6. What can I do to ensure that my business meets regulatory standards?
Businesses should, first and foremost, be aware of their nation’s policies with regards to the virtual asset economy. Implementation of FATF recommendations is an ongoing process, and stands to accelerate in the latter half of 2020.
Look to existing regulatory frameworks for guiding principles likely to be incorporated into future virtual asset related policy making. Ultimately, the goal of FATF and like-minded standards organizations is to assure the integrity of transactions in this emerging tech space.
Tools like AnChain.AI’s Blockchain Ecosystem Intelligence can help to streamline the process of meeting regulatory standard, enabling users to seamlessly integrate transaction monitoring, case management, and both internal and external investigation into their existing infrastructure.