The Financial Action Task Force (FATF) has agreed on how it will assess whether countries have taken the necessary steps to implement the crypto-related requirements. “Given the global nature of the virtual asset industry, it is essential that countries implement these requirements swiftly,” the FATF emphasized.
The FATF held a plenary on Oct. 16-18, the first meeting under the Chinese presidency, chaired by Xiangmin Liu of the People’s Republic of China. Over 800 delegates representing 205 jurisdictions and international organizations attended the three-day event. The FATF is an intergovernmental organization founded to develop policies for combating money laundering. It currently comprises 37 member jurisdictions and 2 regional organizations. Stablecoins and other emerging assets are top of the agenda.
The FATF released its standards on crypto assets and related service providers in June, which the G20 leaders, finance ministers, and central bank governors have already declared their commitments to following. Some countries have already started complying.
The next step is for the FATF to assess how countries implement the recommended standards. The organization declared in June that it “will monitor implementation of the new requirements by countries and service providers and conduct a 12-month review in June 2020.” Since June, the FATF has been working on how it will assess the progress of each country, announcing at the plenary:
The FATF has now agreed on how to assess whether countries have taken the necessary steps to implement the new requirements.
The FATF continued, “Given the global nature of the virtual asset industry, it is essential that countries implement these requirements swiftly, in particular understanding the risks and ensuring the effective supervision of the sector,” adding:
From now on, assessments will specifically look at how well countries have implemented these measures.
“Countries that have already undergone their mutual evaluation must report back during their follow-up process on the actions they have taken in this area,” the FATF specified. The organization also “will closely monitor the developments and will continue to actively engage with the private sector to clarify the FATF’s requirements as they work to comply with them,” the announcement reads.
Stablecoins Are Subject to FATF Standards
Stablecoins were also discussed at the plenary. The FATF believes that these types of assets and “their proposed global networks and platforms, could potentially cause a shift in the virtual asset ecosystem and have implications for money laundering and terrorist financing risks,” asserting:
In general terms, both ‘stablecoins’ and their service providers would be subject to the FATF standards either as virtual assets and virtual asset service providers or as traditional financial assets and their service providers.
Further, the FATF is actively monitoring emerging assets including stablecoins and will continue to examine their characteristics and risks.
Regulators worldwide have been discussing stablecoins since Facebook announced its Libra project in June. Some countries have also ramped up their efforts on central bank digital currencies in response to Libra. Last week, the Financial Stability Board informed the G20 finance ministers and central bank governors that stablecoins, with the potential to be globally adopted, could pose financial stability risk. The G7 also recently released a report outlining various risks of stablecoins.
What do you think of the FATF checking how well countries implement its suggested crypto standards? Let us know in the comments section below.
Images courtesy of Shutterstock and the FATF.
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As the G20 leaders’ summit came to a close, the nearby V20 summit concluded with a set of promises for the crypto industry in response to the global crypto standards set by the Financial Action Task Force. A group of national crypto associations aims to engage with government agencies and global policymakers to ensure the industry’s best interests are understood and valued at an international level.
The two-day Virtual Asset Service Providers Summit or V20 in Osaka, Japan, wrapped up Saturday. Policymakers and representatives of major companies in the crypto industry gathered “to develop a clear roadmap toward full compliance with a new set of recommendations from the Financial Action Task Force (FATF) for the global regulation of crypto asset transactions,” the V20 declared. At the same time and in the same city, the G20 leaders’ summit also wrapped up Saturday.
At the conclusion of the summit, the V20 announced that a group of national trade associations representing virtual asset service providers (VASPs) signed a Memorandum of Understanding (MOU) “to establish an association to provide a global unified voice for the virtual asset industry.” Ronald M. Tucker, convenor of the V20 and founder of the Australian Digital Commerce Association (ADCA), commented:
We’ve brought everyone on the journey to create a new body that will assist in establishing a means to engage with government agencies and the FATF to ensure our best interests are understood and valued at an international level.
Tucker explained that the agreement signals a commitment to develop a “cooperative regime to underpin dialogue with government and regulators to promote VASP.” In addition to supporting “industry-wide information exchange and best practice” and an increased “awareness of the industry and its economic value,” it promotes and facilitates “compliance with global industry standards.”
The signatories include the ADCA, Singapore Cryptocurrency and Blockchain Industry Association (ACCESS), Japan Blockchain Association (JBA), Korean Blockchain Association (KBCA), Hong Kong Blockchain Association (HKBA) and Taiwan Parliamentary Coalition for Blockchain & Industry Self-Regulatory Organization. A former FATF president, Roger Wilkins AO, witnessed the signing ceremony.
Representatives from a number of major cryptocurrency exchanges, media outlets, law firms, and other crypto service providers participated in the event. They include Bitfinex, Circle, Coinbase, Huobi, Kraken, Okcoin, Coins.ph, B2c2, Bitcoin.com, Bitcoin Australia, Crypto Garage, Deloitte, Diginex, Norton Rose Fulbright, Sentinel Protocol, Anderson Mori & Tomotsune, and Pwc. Several regulated crypto exchange operators in Japan also participated such as Bitflyer, Bitpoint, Coincheck, Huobi, Rakuten Wallet, and SBI Group.
Implementing Controversial FATF Guidelines
The FATF released its new guidance for the risk-based approach for crypto assets and related service providers on June 21. However, some industry participants, particularly service providers such as crypto exchanges, have raised concerns regarding the implementation of some recommendations.
“What we are hearing from industry is that the new rules may have the opposite effect to which they were intended, effectively forcing crypto transactions off the controlled platforms,” said the former FATF president. Industry participants believe that applying these requirements “could result in potential unintended consequences, including encouraging P2P transfers via non-custodial wallets, which are significantly harder for law enforcement to track or control,” the V20 explained.
Daniel Kelman, Bitcoin.com’s resident legal advisor, spoke at the V20. He shared with news.Bitcoin.com that, in essence, the FATF wants VASPs to be regulated and “only licensed and regulated exchanges could participate in a SWIFT-like network for payments between VASPs.” He remarked, “Of course this makes no sense, since this is not how crypto works. No one uses an exchange to send money, they’ll withdraw to their own wallet and send it anywhere,” stressing the need to address this issue first and foremost. Kelman added:
One quote from a regulator stands out: ‘combating money laundering will always trump innovation and financial inclusion.’ I couldn’t disagree more.
“Most importantly, it was clear FATF did not know much about our industry and were just forcing bank rules cookie-cutter style onto crypto. Case in point was my discussion about using the public ledger to assess risk as opposed to the ‘Travel Rule,’ which is basically impossible for crypto exchanges to implement. I raised the prospect of blockchain analysis to achieve the same result and they were dumbfounded, had never even considered this,” he recalled. “The conference was not really about debating these rules. They were essentially forced on us and they wanted to use this event to try to claim ‘consensus’ that they were fair and valid.”
The FATF Standards Summarized
Following the publication of the FATF guidance, blockchain forensics firm Chainalysis gave its feedback on the recommendations. The firm previously made it clear that there are challenges to implementing the FATF standards, as news.Bitcoin.com reported. The full FATF report can be found in this article.
One of the most controversial proposals is Recommendation 16 which mirrors the Travel Rule in the U.S., the firm explained, adding that it requires VASPs to send originator and beneficiary information to other VASPs or financial institutions involved for transactions over 1,000 EUR/USD. The firm emphasized:
There is a substantial technical obstacle to implement the ‘secure’ and ‘immediate’ transfer of information to other obliged entities.
The FATF requires countries to regulate and monitor crypto activities and register or license crypto service providers. Financial Intelligence Units need to modernize systems and have a regime to freeze and seize accounts when necessary. In addition, financial institutions, including retail and corporate banks, must not de-risk VASPs or customers with crypto activities, but should instead apply the FATF’s risk-based approach and find ways to mitigate risks associated with these activities.
The guidance requires VASPs to have enhanced “due diligence” procedures in place, and include that information in their reporting. Regulators must be able to receive and investigate Suspicious Activity Reports generated from financial institutions and crypto service providers from their compliance efforts.
Moreover, AML compliance needs to be consistent with local privacy laws. “FATF calls upon countries to coordinate and ensure that recommendations are compatible with national data protection and privacy rules,” Chainalysis remarked. Anonymity-enhancing cryptocurrencies were highlighted for higher AML risk, the firm described, elaborating:
Guidance leaves room for truly decentralized exchanges and applications with no natural person connected to them to be excluded.
The importance of international information sharing to mitigate the risk of money laundering is also highlighted in the guidance.
FATF Recommendations Are Not Laws
FATF Secretariat Tom Neylan provided the V20 with an update on the new guidance for VASPs. Emphasizing the importance of regulation, he said that at the current stage they are still looking for an appropriate regulatory framework relating to cryptocurrency which would include not only centralized exchanges but also decentralized exchanges and P2P transactions, Coinpost reported. The publication quoted him as saying, “The regulation on the virtual currency industry is not a ‘monster’ that causes panic,” noting that “If implemented, the virtual currency market will become more open.”
However, lawyer Jake Chervinsky pointed out soon after the FATF released its guidance that the money-laundering watchdog simply “makes recommendations, not laws,” emphasizing that the organization “doesn’t have any regulatory authority of its own.” He detailed:
Member countries can adopt all, some, or none of FATF’s recommendations. There are basically no repercussions for not adopting (or for violating) FATF recommendations.
Speaking at the V20 conference, Takato Fukui, Director General of the Japan Virtual Currency Exchange Association (JVCEA), shared with attendees the best practices for establishing a self-regulatory organization (SRO) for the crypto industry. His association received approval from Japan’s top financial regulator, the Financial Services Agency (FSA), to operate as an SRO in October last year.
The FATF was clear in its new guidance that “only competent authorities can act as VASP supervisory or monitoring bodies, and not self-regulatory bodies.” The FSA explained to news.Bitcoin.com that it is working closely with the JVCEA on self-regulation. “We expect that through self-regulation, clearer and more detailed rules will be provided as to provisions that are not specified under the existing laws/regulations, as well as self-discipline in areas that are not covered by the laws and regulations,” the FSA shared.
Operators of crypto exchanges are expected to follow similar rules to those set by the SRO regardless of whether they are members of the organization. The FSA also clarified that registration of non-SRO members that have not established internal rules equivalent to the SRO’s rules can be refused or canceled.
How Japan Regulates Crypto
Japan has often been referred to as the leader when it comes to crypto regulation, having legalized cryptocurrencies as a means of payment back in April 2017 and requiring crypto exchanges to register with the FSA. The country currently has 19 registered crypto exchanges.
At the summit, Bitflyer CEO and Chairman of the JBA Yuzo Kano was on stage describing his country’s regulatory landscape, Coinpost reported. He explained that, in Japan, the FSA is in charge of multiple areas so it can respond to any issues flexibly and quickly. With the country’s Revised Fund Settlement Act, passed in 2016, the agency succeeded in providing the legal definition for cryptocurrency ahead of most other countries worldwide, Kano detailed. He noted that the industry has been through various twists and turns as it grows such as the Mt. Gox debacle and a couple of major hacks last year. Coincheck, one of the country’s largest crypto exchanges, was hacked in January last year and Zaif, a regulated exchange, was hacked in September.
Kano also noted that the term “virtual currencies” will be changed to “crypto assets” from April 2020 since the revised Act on Fund Settlement and the Financial Instruments and Exchange Act were passed the Plenary Session last month. He added that the crypto industry continues to develop year-after-year.
Some Embrace FATF Standards
Huobi Global, which was represented at the V20, openly embraces the FATF standards. “The crypto industry should embrace industry standards & compliance,” the company announced Friday. “FATF’s guidelines are a chance to develop progressive industry standards, create innovative tech that weeds out abuse while preserving access for legitimate actors, and more.”
Elaine Sun Ye Lin, Huobi’s Head of Compliance, commented: “We see this as the starting point in an ongoing conversation between the cryptocurrency industry and G20 regulators … we believe direct dialog with FATF will help clarify the unique nature of the crypto industry and allow us to find industry-wide solutions to the problems we face.” Huobi Global CEO Livio Weng elaborated:
While it’s true these changes do present a challenge to the industry in terms of immediate implementation, they present real opportunities as well.
He believes that “This is a chance for us to develop industry standards to promote growth and protect user rights, develop technology to identify and weed out the bad while preserving the access for legitimate users, and to develop our ability to respond as a community to the issues that the cryptocurrency and blockchain industries face.”
What do you think of the V20 efforts? Let us know in the comments section below.
Images courtesy of Shutterstock, the FATF, Philippe Le Saux, and the V20.
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The Financial Action Task Force adopted its new rules on crypto assets and published its updated Guidance on Virtual Assets and Virtual Asset Service Providers Friday. Under these new measures, crypto service providers will be required to implement the same requirements as traditional financial institutions.
The Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial system against threats such as money laundering and terrorist financing, wrapped up its Plenary Week Friday in Orlando, Florida.
At the closing of the event, the FATF announced that it had adopted and issued “an Interpretive Note to Recommendation 15 on New Technologies,” which clarifies the amendments to the international standards relating to crypto assets and describes how countries must comply with relevant recommendations.
U.S. Secretary of the Treasury Steven T. Mnuchin delivered the closing speech to the plenary. He said:
The Interpretive Note adopted this week includes virtual asset standards that are binding to all countries … Under these new measures, virtual asset service providers will be required to implement the same AML/CFT requirements as traditional financial institutions.
“The obligations require countries to assess and mitigate their risks associated with virtual asset activities and service providers,” and “implement sanctions and other enforcement measures when service providers fail to comply with their AML/CFT obligations,” the FATF explained. They are also required to “license or register service providers and subject them to supervision or monitoring by competent national authorities,” and “will not be permitted to rely on a self-regulatory body for supervision or monitoring.” The FATF clarified:
Some countries may decide to prohibit virtual asset activities based on their own assessment of the risks and regulatory context, or to support other policy goals.
Guidance on Crypto Assets and Providers
The FATF also published its updated Guidance on Friday for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers “to further assist countries and providers of virtual asset products and services in understanding and complying with their AML/CFT obligations.” This guidance builds upon its 2015 guidance paper.
Mnuchin commented that “By issuing updated guidance, the FATF is enhancing financial transparency and setting expectations,” noting that “This will enforce a level playing field for virtual asset service providers, including cryptocurrency providers, and traditional financial institutions.”
He detailed that crypto service providers will need to “Identify who they are sending funds on behalf of, and who is the recipient of those funds.” They will also need to “Develop processes where they are required to share that information with other providers of virtual assets, and law enforcement.” Further, they need to “Know their customers and conduct proper due diligence to ensure they are not engaging in illicit activity,” as well as “Develop risk-based programs that account for the risks in their particular type of business.” He further remarked:
The FATF standards are only effective if jurisdictions around the world actually take measures to implement them … The United States calls on all nations to join us in ensuring the FATF’s standards are implemented globally.
The industry has voiced some concerns regarding some of the recommendations, as news.Bitcoin.com previously reported.
FATF and G20 – What’s Next
At the recent G20 Finance Minister and Central Bank Governors Meeting in Fukuoka, Japan, the member countries reaffirmed their support for the FATF’s new guidance. Some countries have already started implementing the FATF’s recommendations. The FATF has 38 members, comprising 36 jurisdictions and two regional organizations.
“Today, the FATF has successfully delivered on the G20 call to regulate and supervise virtual asset activities and related service providers for AML/CFT,” the FATF declared, emphasizing:
The threat of criminal and terrorist misuse of virtual assets is serious and urgent, and the FATF expects all countries to take prompt action to implement the FATF Recommendations in the context of virtual asset activities and service providers.
The FATF also announced that it will closely monitor the actions that countries are taking during the next 12 months and establish a Contact Group to engage industry and monitor industry-led efforts to enhance compliance with its standards. “The FATF will monitor implementation of the new requirements by countries and service providers and conduct a 12-month review in June 2020,” the money laundering watchdog reiterated, adding that it is now devising a methodology to assess how countries implement its new requirements for the October Plenary.
What do you think of the FATF guidance on crypto assets and service providers? Let us know in the comments section below.
Images courtesy of the FATF and the Japanese government.
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