From being a happening virtual currency touted as the future of money to being considered highest in risk exposure, the cryptocurrency landscape has witnessed a fast-paced transformation over the years. Although it is less likely that it will replace government or fiat money as early adopters had claimed, it is certain that cryptocurrency here to stay. Acknowledging this, and the high exposure to financial crimes, money laundering and terrorism financing, FATF has published several guidelines over the past year.
With most countries yet to regulate crypto businesses, it fell upon the global regulatory watchdog FATF to fast-track guidelines. In its Recommendations of October 2018, the FATF first assigned a “virtual” connotation to cryptocurrency by terming it as a ‘virtual asset”, and stressed the need for regulating virtual asset service providers (VASPs). The scope of the definition includes both virtual-to-virtual and virtual-to-fiat transactions or financial activities.
The FATF Plenary that periodically evaluates risk assessments of various sectors and countries further published a Draft Interpretive Note to FATF Recommendation 15 on February 2019, which addressed the mitigation of risks arising from cryptocurrency businesses. These guidelines have subsequently been adopted into its final Guidance for a ‘Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers’ in June this year.
What does the June Guidance on Virtual Assets and VASPs put forth?
In the Guidance for crypto businesses, FATF lays down the road map to enhance financial transparency and minimise the risk exposure of virtual asset businesses. While the earlier February guidelines were mere recommendations, the June Guidance becomes binding upon all its member states. Under these new guidelines, cryptocurrency service providers are now considered on par with traditional financial institutions concerning regulatory compliance requirements.
The Guidance aims at helping national regulators understand and develop regulatory measures, and amend national laws where applicable, to address the ML/TF risks. It makes countries responsible for licensing and monitoring the operations of VASPs and imposes accountability to enforce penalties for non-compliance of AML/CFT and record keeping obligations. In a remarkable departure from any observations made in other Plenaries, it was observed in June that the crypto sector “will not be permitted to rely on a self-regulatory body for supervision or monitoring.” The pressure now comes upon Regulators to enforce compliance in the cryptocurrency sector.
The Guidance also seeks to help the entities engaged in “virtual asset” activities to better understand their compliance obligations and ensure appropriate AML/CTF programmes.
The FATF considers the “threat of criminal and terrorist misuse of virtual assets” a “serious and urgent” issue. Countries are given 12 months to adopt the measures guidelines, and the FATF sets a review for June 2020.
What does this imply?
FATF’s recommendations advocate the adoption of a strong AML/CTF compliance programme. At the same time, countries that do not meet the FATF standards may be placed on a blacklist.
The recent FATF Guidance aims at enhancing financial transparency to enforce a level playing field for VASPs, by the laws in the jurisdiction.
U.S. to strictly enforce AML rules in the crypto sphere
The growing acceptance that virtual currencies are a part of the financial system has compelled regulatory bodies from around the world to minor crypto firms and exchanges. Coming on the heels of the FATF Guidance, several countries have begun revisiting their policies.
Last month, FinCEN declared that it would strictly enforce the recommendations of the FATF, and require cryptocurrency firms engaged in money service businesses such as digital asset exchanges and wallet service providers to share customer information about their customers. This comes in the wake of a rise in crimes and money laundering networks with crypto at the centre. A recent report mentioned that cryptocurrency thefts, scams, and fraud might have exceeded more than $4.3 billion this year.
According to the FinCEN entities transacting digital assets are subject to the Bank Secrecy Act (BSA), whether the digital asset is a stable coin, centralised, or decentralised cryptocurrency.
On the other side, crypto regulators are pulling the rug on exchanges that are failing to comply, to foster a safe and reliable system to their clients. As the FATF rules come into effect, it is expected that together with national Regulators, crypto trading platforms may impose their own set of rules, to instil customer and Regulator confidence.