FATF: Getting More Serious About Virtual Assets

Last week, the Financial Action Task Force (FATF), the global standard setter for AML/CFT regulation, updated its recommendations to address the rapidly evolving risks associated with virtual assets – which the FATF defines as including cryptocurrencies, initial coin offerings (ICOs) and a wide range of other digital payment and investment technologies.

In a statement accompanying the move, the FATF stated unequivocally that “There is an urgent need for all countries to take coordinated action to prevent the use of virtual assets for crime and terrorism.”

FATF’s call for speed and cooperation is welcome. Many countries around the world have been slow to regulate the virtual property space, or failed to do so at all. This fragmented global regulatory landscape allows criminals to abuse virtual assets and exposes legitimate users and platforms to theft, fraud and other risks.

And with new innovations like ICOs, decentralized exchanges and stablecoins popping up all the time, regulators are struggling to keep up.

The FATF’s recent moves have several important consequences. In the coming weeks, we will offer in-depth analysis outlining how the regulatory picture is shaping up in different regions of the world and what these developments mean for the virtual asset industry. In the meantime, in this post we will look at some lessons that countries should consider in light of the FATF’s latest actions.

No more fences.

Back in June 2015, the FATF issued guidelines encouraging countries to regulate fiat currency exchange services. Almost three and a half years later, many countries have yet to take that basic step.

The new FATF position makes it clear that this posture of inaction is unacceptable. Last week’s update of the recommendations states that countries must have regulation and licensing arrangements around virtual asset service providers.

Countries should expect the FATF to soon begin to assess whether they are doing enough to regulate virtual assets, and those countries that continue to drag their feet could face condemnation.

Regulatory regimes must broaden the scope.

Updates to the FATF recommendations also reflect the evolution of virtual asset products and services that have emerged since it issued its original guidelines in 2015.

Countries will now have to ensure oversight of service providers outside purely fiat-to-virtual asset exchange platforms. The FATF updates indicate that countries should monitor platforms that facilitate exchanges between different virtual assets, as well as monitor ICO issuers, custodian wallets and other related service providers.

The expansion of the scope of subjects subject to the AML/CFT regulation will have important consequences.

For example, some regulatory frameworks, such as the EU’s Fifth Anti-Money Laundering Directive (5AMLD), currently do not cover exchanges between different virtual assets. This creates a significant regulatory gap in those exchanges where criminals can exchange transparent cryptocurrencies like Bitcoin for privacy coins like Monero, as happened in the WannaCry ransomware attack.

Countries yet to regulate virtual assets will therefore need to ensure that any new regulations they create are comprehensive enough, while the EU and other jurisdictions that already have regulations in place may find themselves under pressure to adopt additional measures.

Responses must be effective.

Just writing down regulations on paper will not be enough. Countries will need to ensure that their regulatory frameworks mitigate risks in practice and are supported by strong enforcement.

To this end, the FATF intends to publish detailed guidance by June 2019 that sets out how countries can undertake virtual asset monitoring in practice. It will also provide detailed guidance on how countries can successfully investigate criminal activities involving virtual assets.

In the meantime, it is important that stakeholders do not simply wait for the FATF to issue additional guidance before taking action. With the virtual asset industry advancing at the speed of light, regulators and law enforcement agencies need to start adopting best practices, knowledge and expertise immediately.

Organizations such as Europol have launched important initiatives that can serve as a model for law enforcement training and public-private cooperation in the fight against crime based on virtual assets. Countries that have yet to make similar efforts on these topics need to start, or they could risk falling behind the FATF’s expectations.

Ensuring all these pieces are in place will be far from easy, but they are essential if the virtual property space is to grow and innovate with legitimacy.

For participants in the virtual property space, the stakes are rising.

As more countries adopt the regulations, exchanges and other service providers that currently operate unsupervised will be under scrutiny and will need to be able to demonstrate compliance.

And those platforms already subject to oversight should expect regulators to demand evidence that their anti-money laundering controls remain up-to-date and work in practice, or they could risk facing fines and other penalties.

At Elliptic, we help public and private sector stakeholders address the challenges related to the development of virtual asset regulation. Contact us to learn more about how we can help.