In June 2019, the Financial Action Task Force (FATF) presented its revised set of standards for digital asset service providers. The document states anti-money laundering and terrorism (AML / CFT) requirements for regulated VASPs, VASP is the term that mainly refers to cryptocurrency trading platforms, These standards must eventually be implemented in your daily operations. The guidelines are framed as recommendations, and the FATF leaves in the hands of the governments of the participating nations developing its own regulations in accordance with the suggested principles.
The watchdog has also established a 12-month review period to monitor the progress of the public and private sectors in implementing the standards. Following the expiration of the review period in June 2020, the FATF developed a report which sums up the value of a year of legislative and compliance work. Here’s how both the FATF and industry participants assess the current state of international standardization against money laundering in regards to digital assets.
The organism perspective
The report indicates that 35 of the 54 countries surveyed have implemented standards on digital assets within their national legislation, while another 19 have not yet. The FATF admits that implementation was not always smooth for both the public and private sectors. However, the group maintains that it has not identified any major issues that could justify a change to the requirements.
The organization said that would keep a close eye on digital assets and announced another 12-month review of the standards implementation.
A particularly enlightening discussion on the FATF decision-making took place last week on the Dedicated Online Financial Integrity Network (DOLFIN) platform. He webinar had four former heads of the US delegation to the FATF, whose holdings offered an informed perspective on how the organization approaches risk management for virtual assets and stablecoins.
Jennifer Fowler, currently director in the office of Brunswick Group in Washington DC, who served as Vice President of the FATF between 2017 and 2018, said that continuous risk assessment is at the core of the control group’s approach to digital assets.
A troubling trend that Fowler mentioned is that lately the organization has noticed an increase in the number of professional money launderers who turn to cryptocurrencies, especially in the context of the coronavirus pandemic. Fowler mentioned that another potential threat that the FATF is watching closely These are peer-to-peer transactions, the growth of which may make the group’s traditional approach to regulating intermediaries (such as VASPs) somewhat obsolete.
Chip Poncy, currently executive of the compliance team K2 End, led by the United States delegation in the Financial Action Task Force from 2010 to 2013, He spoke about the paradigm of open versus closed circuits in assessing the risks posed by new financial instruments. An open loop system is one that is connected to the traditional financial system, while a closed loop system is self-sufficient.
New financial instruments that create open-loop systems can be regulated at the points that link them to the fiduciary realm (for example, VASPs), while closed-loop agreements have limited interest to the policy community. However, when a closed loop system expands to a considerable size, it can create its own hazards. Thus, Poncy observed, that the GAFI is monitoring the scale of adoption of digital assets.
Without taking your foot off the gas
For VASP representatives and industry insiders, the FATF report had some surprises. Elsa Madrolle, international general manager of cryptocurrency wallet and security startup CoolBitX, told Cointelegraph that the continuation of the 12-month review process was widely expected until June 2021, as the FATF generally stayed in close contact with the industry throughout the year, conducting regular updates to the contact group.
Naturally, service providers welcomed the one-year extension of the review. Under the initial deadline, it has been virtually impossible for market participants to ensure compliance with one of the core components of the standard package, known as the Travel Rule. They hold thatFor transactions exceeding USD 1,000, exchanges must pass on the details about the identity of both the originator and the beneficiary of the funds.
Sumit Gupta, CEO of Indian Cryptocurrency Exchange CoinDCX, stated to Cointelegraph:
“The FATF has committed to conducting a second review in June 2021, indicating that it is reaffirming its stance towards sustainable regulation of the cryptocurrency industry at a pace appropriate to the development of the global cryptocurrency market. We do not see this as an extension of the deadline for VASPs to take their foot off the gas, but rather as a buffer period for the industry to move towards full implementation of the Travel Rule next year. “
Others, however, They noted the downsides of the FATF approach. One of the main apples of contention has been that the watchdog’s recommendations are not particularly conducive to the creation of a coherent cross-border regulatory environment. Besides that, the standards may be incompatible with some of the existing regulatory frameworks.
Terry Culver, CEO of Digital Finance Group, commented to Cointelegraph:
“One difficulty is that implementation will face significant challenges from the other conflicting regulations for AML and data protection. For example, FinCen’s travel rule distinguishes US regulation from other jurisdictions. Another example is that the EU determined that mass transfer of personal data to the United States is not allowed under the GDPR. “
Nathan Catania, partner of global digital asset policy and regulatory advisor to, XReg Consulting, He also opined:
“It is clear that there is no unified approach to AML / CFT regulation of VA and VASP, the approaches taken from one jurisdiction to another can vary drastically. This makes it very difficult for crypto companies to navigate what I have called a global regulatory minefield. VASPs will need to be very careful about the customers they target, as they may fall into the scope of regulatory regimes elsewhere. “
To illustrate his point, Catania presented an example of a hypothetical VASP registered in Gibraltar and aimed at Australian clients, who would have to comply with the AML regulations of both jurisdictions.
Too wide or too narrow scope?
Dr. Omri Ross, Blockchain Chief Scientist at Digital Asset Trading Platform, eToro, disagreed with one of the principles of the FATF guidance, which states that digital assets they must be held to the same level of scrutiny as any other asset class. He commented:
“While I sympathize with the reasoning behind these recommendations, my concern is that the application of general standards for supervision and monitoring could stifle technological innovation. However, if these technologies were encouraged, they could in fact introduce much greater transparency into international money flows ”.
By contrast, Manuel Rensink, strategy director of the fintech firm Securrency, highlighted the limited scope of the FATF Travel Rule. Rensink told Cointelegraph:
“An expansion of the Travel Rule should also extend to: transactions in asset-backed digital assets, including digital securities and all stablecoins; P2P transactions as well as automated smart contract transactions based on attributes such as size and volume of the transaction; DEXs, smart contract operators and protocol operators (DeFi) should also be considered VASPs. “
The race for compliance with the Travel Rules
One thing all the experts in the cryptocurrency industry seem to agree on is that currently cryptocurrency exchanges are not technically prepared to comply with the Travel Rule. Culver of Digital Finance Group commented on this matter: “The regulator is ahead of the crypto sector in this area, a nice change of pace.”
At the same time, Blockchain technology clearly holds great promise as a foundation for innovative compliance tools, and pioneering work is already underway in that department. Cointelegraph has already reported on efforts like BitGo’s cryptocurrency wallet API and the partnership between CoolBitX and Elliptic specifically addressing the Travel Rule challenge.
Omri ross of eToro commented:
“Early findings from academic studies, law enforcement and business research indicate that the level of complexity and sophistication that can be achieved using blockchain technologies for KYT is far superior to existing solutions currently used in the financial sector.” .
Manuel Rensink of Securrency, spoke in the same vein, adding that Artificial intelligence (AI) and machine learning reporting tools can be applied to blockchain transactions to enable regulators to much more effectively monitor all transactions within their respective jurisdictions.
This formidable potential will likely translate into a diverse set of solutions at the end of the day. As pointed out Elsa Madrolle from CoolBitX, “It appears that the market believes that there will not be a global ‘one size fits all’ solution that can satisfy the regulations of all jurisdictions while working for all VASPs.” In this situation, the question of interoperability occupies the leading role.
A breakthrough on this front came in early May, when an industry-wide working group on interVASP Messaging Standards (JWG) released a solution designed to allow the systems of various service providers to communicate with each other. As more digital asset service providers join this initiative, It seems perfectly achievable to see the major crypto exchanges comply with the Travel Rule by June 2021.