FATF Virtual Assets Guidelines for Cryptosphere Review
With the growing concern of virtual assets/cryptocurrencies being used as a medium for the financing of illegal activities, the Financial Action Task Force (FATF) issues revised guidance from time to time to combat money laundering and terrorist financing involving virtual assets (VAs) and virtual asset service providers (VASPs).
In the report titled, "Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers", the FATF recommendations have two purposes:
- To assist member countries to formulate the regulatory and supervisory responses to VA activities and VASPs
- To help private entities seeking to engage in VA activities in understanding their compliance obligation under the FATF framework.
Let's have a detailed view of the subject and obligations of VASPs and the recommendations made recently in their release. But let's know that recommendations are not very encouraging and will surely make exchanging VAs like Bitcoin more difficult.
The Definition of VAs and VASPs in FATF
The FATF defines VAs as a "digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities, and other financial assets that are already covered elsewhere in the FATF Recommendations."
While VASP is defined as any natural or legal person who is not covered elsewhere under the 'Recommendations' and as a business conducts one or more of the following activities:
- Exchange between virtual assets and fiat currencies
- Exchange between one or more forms of virtual assets
- Transfer of virtual assets
- Safekeeping and/or administration of virtual assets or instruments
enabling control over virtual assets
- Participation in and provision of financial services related to an issuer’s
offer and/or sale of a virtual asset
Obligations Applicable to VASPs
The FATF requires its 37 member countries and two member regional organizations to take every step to mitigate the risks of money laundering and terrorist financing through VAs. This guidance explains how these obligations must be fulfilled and demand additional steps from VASPs.
VA Transfer/Travel Rules
One of the major obligations applicable to VASPs is regarding the VA travel rules. If the VA transfer amount exceeds the US/EUR 1000 limit, in such a case, the VASPs must conduct customer due diligence, verifying the customer's identity. Additionally, the VASPs must obtain, store, and transmit originator and beneficiary data immediately and securely when conducting the VA transfers.
The guidance also states that countries can go an extra length and may include mandatory due diligence for every customer, irrespective of the VA transfer threshold. The information needs to be collected from users include the following:
- Originator's name (Sender)
- Originator's account number ( Wallet address)
- Originator's physical address proof, proof of identity (KYC documents)
- Receiver name
- Receiver account number (wallet address)
It further clarifies that the member countries should treat all VA transfers as a cross-border wire transfer rather than a domestic wire transfer, which avoids stringent checks.
VASP Licensing and Registration Requirement
In Recommendation 14, FATF directs member countries to register and license any money or value transfer service (MVTS) provider including the VASPs to register with a competent authority. The FATF provides options to countries, either ban VA activities at a national level or get VASPs registered and licensed before conducting VA activities.
Apart from the licensing and registration requirement, the FATF requires its member countries to ensure VASP meets all the appropriate criteria set by the competent authority. And, the countries should have supervisory powers to conduct an inspection, press for the production of information, and impose sanctions in case of non-compliance.
The Guidance also calls for disciplinary and penal action against entities and cooperate with the international community to freeze assets of entities (VASP) involved in unlawful activities in foreign countries.
The regulatory requirement is that spot and margin exchanges like Binance, Gemini, Coinbase, etc comply with multiple regulations but this will be difficult, given the nature of the VA operations. And, putting the same regulations that of traditional financial institutions will severely undermine the nature of blockchain-based transfers that allows users to interact directly with each other.
Also, putting the burden of collection and sharing of information every time a user makes a transaction is bound to increase the complexities as VASPs hardly have any way of identifying the recipients. And, there are regulatory costs too, which will reduce the cost-effectiveness of VA activities and VASPs.
And, more alarming, it will put VA activities to a regulated space, which grossly undermines the purpose of the virtual assets.
On the other hand, there are no concert guidelines for people trying to mine Bitcoin. The recommendation report says Bitcoin mining is not an activity subject to authorization either, because miners do not issue or place any Bitcoin themselves. The same applies to the purchase or sale of mined or acquired Bitcoin, which does not require authorization either. This is the scenario of Germany.
The FATF guidance on VA activities is not binding on member states but may face blacklisting or a remediation period if they fail to act, somewhat makes states to either regulate the VA activities or completely ban it.
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