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Elliptic was privileged to host a fireside chat on April 14 with Sandra Garcia and Takahide Habuchi, co-chairs Financial Action Task Force (FATF) Virtual Assets Contact Group (VACG).
VACG has been at the center of some of the most important and contentious issues facing the crypto industry today – including the Travel Rule – and since June 2019 is FATF’s contact point for industry engagement.
In March, FATF and VACG launched a public debate on a draft update to its guidance on virtual assets. The revisions to the guidelines take on a number of complex issues facing the crypto space, including:
- Regulation of decentralized exchanges (DEX).
- Risks of peer-to-peer transactions i self hosted wallets.
- How to successfully comply with the Travel Rules.
- VASP due diligence.
- How is it the public sector can take advantage of blockchain analytics.
We discussed these and other topics in our webinar. Read our three key takeaways from our discussion with the VACG co-chair or watch the replay of the conversation here.
Lesson 1: AML compliance must be top of mind for any business launching in the crypto space – not an afterthought or optional add-on
A key topic of discussion was that the FATF guidelines aim to ensure that participants in cryptoasset markets launch products and services with embedded AML/CFT principles.
Whether it’s decentralized finance (DeFi), stablecoins or other innovations, compliance must be front and center, according to VACG co-chairs. Any participant conducting Virtual Asset Service Provider (VASP) activities should be held accountable for failure to ensure that AML/CFT is applied around a particular product, service or platform. According to Sandra Garcia:
“What we don’t want to see is that financial service providers fall outside the scope of these requirements because they unbundle certain elements of their services and spread them out.” . . There will be very few arrangements that will be formed or operate without a virtual asset service provider at some stage if countries apply the definition correctly. . . There has to be someone responsible.”
This echoes the message that Kenneth Blanco, the former director of the US Financial Crimes Enforcement Network (FinCEN) delivered in Elliptical webinar in November 2020: when it comes to AML compliance, crypto companies should seek permission, not forgiveness.
This of course simplifies the picture. While it’s easy to suggest that the innovators behind DeFi platforms and markets should put compliance front and center – in practice, things get a lot more complicated.
As others in the crypto industry have notedtrying to apply SPN/BPFT rules designed for banks in the DeFi world is fraught with difficulties and can result in guidelines that are hopelessly vague and impractical to implement. Whether countries can even apply regulation to DeFi markets in a meaningful way remains an open question.
But that doesn’t mean the FATF won’t try to clarify how this might be done. “The FATF has a long history of not giving up just because something is difficult,” says Sandra.
Regardless of the practical challenges of implementation, the message is clear: the global standard setter expects the innovators behind almost all crypto products and services to think about AML/CFT compliance from day one.
Lesson 2: Traceability is a key factor when considering the riskiness of cryptoassets
The FATF guidance spends a lot of time discussing the implications of proprietary wallets and P2P transactions – and notes that the cross-border nature of cryptocurrencies can lead to increased risks.
However, the guidelines also emphasize that the traceability of cryptoassets can act to mitigate the risk of financial crime. As the instructions state, “Blockchain Analytics is . . . widely used by VASPs and some FIs to monitor their own risk exposure.”
Indeed, they refer to the updated FATF guidelines blockchain analytics five times – an indication that there is a possibility of monitoring crypto transactions a core component of AML/CFT compliance. also points to “technological features that increase anonymity – such as mixers, pans or [privacy coins]” as factors that can increase the risk profile of crypto transactions and services.
In our conversation, the VACG co-chairs pointed to traceability as a risk factor that should be taken into account. “We focus on the role of technology features that increase anonymity, such as mixers and glasses as something that is challenging for us,” said Sandra.
According to Takahide, virtual assets “with public blockchains could be more visible than cash, providing opportunities for analytics to identify suspicious transactions.”
This traceability is something we feel at Elliptic significantly reduced the spread of illegal activities in crypto.
Lesson 3: The Travel Rule will remain a top priority
If anyone thinks that all this talk of DeFi, self-hosted wallets and P2P transactions might sway the FATF from considering the ever-controversial travel rule – think again.
The updated guide offers suggestions on how both the public and private sectors can address the key challenges presented by the Travel Rule – such as how to know if transactions fall within its scope.
U report he published last yearVACG noted that compliance with the Travel Rule is patchy at best: many countries have yet to implement it, and the private sector is slowly adopting a range of solutions that are not yet fully interoperable. This does not bode well for the introduction of requirements that require cross-border coordination to succeed.
But in VACG’s opinion, the fact that Compliance with travel rules remains a challenge it’s no reason to shy away from it.
“Because we are aware [the challenges of implementation]” said Sandra, “in these instructions we really tried to expand on the different ways that a native VASP can rely on several data sources” to comply. “We’ve been really encouraged by some of the technology solutions we’ve seen to support travel compliance.”
Submit your response to the consultation to share your views
The FATF Consultations ends April 20. Elliptic has submitted our response. Have you submitted yours?
The FATF guidelines will shape the future of crypto regulation for years to come, so make sure your voice is heard.
Contact us today to arrange a demo and find out how we can help your business address FATF’s virtual assets guidelines.
Crypto Compliance Regulation
