Evaluation: Proposed FATF Steerage for Digital Belongings and VASPs


On March 19, 2021, the worldwide anti-money laundering watchdog, the Monetary Motion Job Power (FATF), printed a public session on its up to date draft coverage on a risk-based method for digital asset and digital asset suppliers. The principle adjustments within the draft directive embody:

  • DEXs and crypto escrow companies are thought-about Digital Asset Service Suppliers (VASPs).
  • Stablecoins are digital property (VAs) and the FATF requirements apply to them
  • Solely NFTs who can facilitate cash laundering (ML) and terrorist financing (TF) are VAs
  • VASPs ought to assess and mitigate Proliferation Funding (PF) dangers
  • Finest Practices for Counterparty VASP Due Diligence
  • Choices to mitigate peer-to-peer transaction threat
  • New explanations and directions for journey guidelines

FATF specifies the definitions of digital property and digital asset service suppliers

  • The FATF doesn’t view central financial institution digital currencies (CBDCs) as digital property and as an alternative applies requirements which might be just like another type of fiat forex issued by a central financial institution.
  • Decentralized exchanges, platforms or apps are thought-about VASPs.

    • A decentralized or distributed utility (DApp) shouldn’t be a VASP in line with the FATF requirements – the requirements don’t apply to any underlying software program or expertise – however corporations related to the DApp, similar to homeowners or operators, may be VASPs in line with the FATF definition.
  • VA escrow companies, together with companies that embody clever contract expertise, brokerage companies, order e-book trade companies, superior buying and selling companies, and custody suppliers, are all VASPs.
  • Some non-fungible tokens (NFTs), which can not initially symbolize VAs, may very well be VAs as a consequence of secondary markets that allow the switch or trade of worth, or facilitate cash laundering, terrorist financing, and proliferation financing.
  • Belongings shouldn’t be thought-about revealed by the FATF Suggestions because of the format by which they’re provided, and no asset must be interpreted as being fully outdoors of the FATF requirements.

Proliferation Financing (PF) Dangers

  • Along with the dangers of cash laundering and terrorist financing (ML / TF), VASP ought to start to evaluate and mitigate the dangers of proliferation financing (PF).
  • The FATF is at present creating separate tips to make clear these necessities.

FATF requirements apply to so-called stablecoins.

  • The FATF recommends that nations analyze and mitigate ML / TF dangers earlier than they’re launched – particularly if the stablecoin is for use for P2P transactions.
  • Danger mitigation may embody: “Limiting the scope of consumers ‘potential to commerce anonymously and / or be certain that the obligated entities’ AML / CFT obligations underneath the settlement are met; By utilizing software program to observe transactions and detect suspicious exercise.

Mitigation choices for peer-to-peer transactions

  • Transactions to / from non-committed corporations (e.g. non-hosted wallets) and transactions which have beforehand been P2P transactions must be thought-about riskier.
  • The FATF recommends a few of the following potential P2P threat mitigation ways in excessive threat nations:
    • Implementation of the VA equal of CTRs
    • Refusing to license VASPs if they permit transactions to / from non-committed corporations (i.e. non-public / non-hosted wallets)
    • Improved Document Retention Necessities and Expanded Due Diligence (EDD) Necessities
    • repeatedly elevated monitoring of the VASPs
    • Publication of public tips and proposals to lift consciousness of the dangers of P2P transactions

Particular tips for the implementation of the “journey rule”

  • VASPs that haven’t applied the “journey rule” must be categorized as extra dangerous.
  • A VASP should conduct a VASP due diligence by the counterparty earlier than submitting the required info.
  • Whatever the lack of regulation within the beneficiary’s jurisdiction (Dawn Situation), originating VASPs might require beneficiaries to adjust to the journey guidelines by means of contract or enterprise observe. Basically, these enterprise choices are made by every particular person VASP based mostly on its risk-based evaluation.
  • Originators and beneficiary VASPs ought to overview transactions to substantiate that the counterparty shouldn’t be a sanctioned title.
  • The transmission of data from the originator and beneficiary in batches is permitted, offered that the transmission is fast and safe in accordance with FATF requirements. Subsequent submission of the required info shouldn’t be allowed (ie submission should happen earlier than or in the course of the VA switch).
  • Within the absence of an originator or beneficiary establishment (transactions to and from non-hosted wallets), the VASP nonetheless wants to gather the mandatory info relating to its consumer. International locations also needs to think about requiring VASPs to deal with such VA transfers as greater threat transactions that require nearer scrutiny and restriction.

VASP Counterparty Due Diligence Finest Practices

  • When implementing the journey rule, you will need to perform the due diligence of the VASP counterparty. With a purpose to perform the due diligence of the counterparty promptly and securely, the FATF recommends a three-phase method:
    • Part 1: Decide whether or not the VA switch will probably be with a counterparty VASP or to a VASP unhosted pockets or one other service.
    • Part 2: Establish the counterparty’s VASP.
    • Part 3: Verify whether or not the counterparty VASP is a certified counterparty to ship buyer information to them and to keep up a enterprise relationship with them.
  • Blockchain Analyzes can be utilized to judge the VASP and determine discrepancies.
  • Carry out the VASP due diligence of the counterparty previous to the primary transaction with VASP.
  • The results of the VASP due diligence overview of the counterparty must be reviewed commonly.

Up to date tips on licensing and registration of VASPs

  • The FATF requirements permit jurisdictions flexibility in making use of licensing or registration to VASPs.
  • At the least, VASPs must be licensed or registered within the jurisdictions by which they had been created.
  • Jurisdictions might also require that VASPs providing merchandise and / or companies to clients of their jurisdiction be licensed or registered within the jurisdiction.
  • Nationwide authorities ought to have mechanisms in place to observe the VASP sector and determine any pure or authorized individual finishing up VA actions or operations with out the required license or registration.

Ideas of data trade and cooperation between VASP supervisory authorities

  • The cross-border trade of data between authorities companies and the non-public sector with their worldwide counterparts is essential within the VASP sector because of the cross-border nature and attain of VAs and VASPs in a number of jurisdictions. Beneath its new tips, the FATF has drawn up an inventory of ideas for the trade of data and cooperation between the VASP supervisory authorities. The total checklist contains the identification of regulators and VASPs, in addition to finest practices for info sharing and cooperation between jurisdictions.
  • Every nation should designate not less than one competent authority to supervise VASPs for AML / CFT functions, and the competent authority can’t be a self-regulatory authority.
  • International locations should clearly determine their supervisor (s) of VASPs for AML / CFT functions.
  • When a VASP operates in a number of jurisdictions, a major supervisor may be recognized if the VASP has a good portion of its enterprise in that jurisdiction.

The FATF is soliciting feedback from the non-public sector

Earlier than finalizing the brand new tips, the FATF is asking non-public sector stakeholders to touch upon the next areas by April 20, 2021:

  1. Does the revised information to defining VASP (paragraphs 47-79) present extra readability on which corporations perform VASP actions and are topic to FATF requirements?
  2. What are the best methods to mitigate cash laundering and terrorist financing (ML / TF) dangers related to peer-to-peer transactions (i.e. VA transfers made with out the use or involvement of a VASP or different dedicated firm like VA be) to cut back? Transfers between two non-hosted wallets) (see paragraphs 34-35 and 91-93)?
  3. Does the revised information want additional clarification relating to the journey rule (paragraphs 152-180 and 256-267)?
  4. Does the revised information include clear directions on the best way to apply the FATF requirements to so-called stablecoins and associated corporations (see Bins 1 and four and paragraphs 72-73, 122 and 224)?
  5. Are there another feedback and particular ideas to make the revised tips extra helpful and to advertise the efficient implementation of the FATF requirements?

You could find the draft guideline right here: https://www.fatf-gafi.org/publications/fatfrecommendations/paperwork/public-consultation-guidance-vasp.html


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