FATF Updates Guidance on Virtual Crypto Assets

Financial Action Task Force (FATF) issues its annual targeted update on the implementation of its standards on Risk-Based Approach to Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs).

On June 27th 2023, the FATF published its report on country compliance with Recommendation 15 — including the Travel Rule — and updates on emerging risks and market developments. Global implementation and compliance remain relatively poor and behind most other financial sectors.

Almost all the FATF recommendations are directly relevant to address the money laundering and terrorism financing (ML/TF) risks associated with VAs and VASPs (see Biggest Crypto & Blockchain Unicorns).

FATF recommendations apply to VASPs in the same manner as FIs, with two specific qualifications:

• The occasional transaction threshold, above which VASPs are required to conduct customer due diligence (CDD), is USD/EUR1,000 (rather than USD/EUR15,000);
• The wire transfer rules set out in Recommendation 16 apply to VASPs and VAs transfers in a modified form (so-called “travel rule”).

FATF’s report finds that jurisdictions continue to struggle with fundamental requirements such as undertaking a risk assessment, enacting legislation to regulate VASPs, and conducting a supervisory inspection (see What is Blockchain?).

In addition, jurisdictions have made insufficient progress on implementing the Travel Rule, which is a key AML/CFT measure. Of the 151 jurisdictions that responded to FATF’s 2023 Survey, more than half still have not taken any steps towards implementing the Travel Rule (see New Crypto DeFi Crime Trends).

This is a serious concern as the risks posed by VAs and VASPs continue to increase and that the lack of regulation creates significant loopholes for criminals to exploit. This demonstrates an urgent need for jurisdictions to accelerate implementation and enforcement of R.15/INR.15 to mitigate criminal and terrorist misuse of VA and VASPs (see about Investing in the Metaverse).

FATF’s report acknowledges collaboration among the private sector members to improve industry compliance with R.15/INR.15 including the Travel Rule and highlights that all players need to have appropriate risk identification and mitigation measures and continue to work towards fully compliant Travel Rule compliance tools.

The FATF calls on all countries to rapidly implement the FATF’s Standards on VAs and VASPs, including the FATF’s Travel Rule (see Virtual Worlds in the Metaverse. How Blockchain Helps E-commers?).

The FATF will therefore continue to monitor the illicit financing risks and developments in this sector.

In February 2023, the FATF adopted a roadmap to improve implementation of R.15. In line with this roadmap and to address the findings of this report, the FATF will:

• Continue to conduct outreach and provide assistance to low-capacity jurisdictions
• Identify and publish steps FATF member jurisdictions and other jurisdictions with materially important VASP activities have taken towards implementing R.15/INR.15
• Facilitate sharing of finding, experiences, and challenges including relating to DeFi, unhosted wallets, and P2P and monitor market trends in this area for material developments that may necessitate further FATF work
• Continue to engage with member countries and the private sector on progress and challenges
• Conduct a further review on progress and remaining challenges for implementation by June 2024

What’s new in the updated Guidance?

This updated Guidance is focused on six key areas to:

1. Clarify the definitions of VA and VASP to spell out that these definitions are expansive and there should not be a case where a relevant financial asset is not covered by the FATF standards (either as a VA or as another financial asset);
2. Provide guidance on how the FATF standards apply to stablecoins and clarify that a range of entities involved in stablecoin arrangements could qualify as VASPs under the FATF Standards;
3. Provide additional guidance on the risks and tools available to countries to address the ML/TF risks for peer-to-peer (P2P) transactions, which are transactions that do not involve any obliged entities;
4. Provide updated guidance on the licensing and registration of VASPs;
5. Provide additional guidance on the implementation of the travel rule;
6. Include principles of information sharing and cooperation amongst VASP supervisors.

It is up to the sector to develop the technology to meet the FATF’s requirements, particularly when it comes to the so-called ‘travel rule’, which requires securely collecting and transmitting originator and beneficiary information (see Venture Capital Investment in Web 3.0, Blockchain & Crypto Startups).

To help governments and the industry, the FATF has developed guidance on how to take a risk-based approach in this area. The guidance, which had significant input from the sector itself, explains how to understand the risks, how to license and register the sector, and how to know who their customers are, store this information securely and detect and report suspicious transactions.

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