Regulatory Insights
Global Risks of Inadequate Regulation: The Cross-Border Impact of Unregulated Virtual Asset Service Providers
Given the fast-moving and technologically dynamic nature of the virtual asset sector, ongoing monitoring and collaboration between the public and private sectors is essential. Recognizing this, the FATF has increasingly focused on the rapidly expanding sector of virtual assets (VAs) and virtual asset service providers (VASPs).
Virtual assets are inherently international and borderless, so the failure to regulate VASPs in one jurisdiction can have significant global consequences. This is especially concerning in light of the emerging trends within this sector.
To adopt this Report, which contains essential information for the organization and functioning of the relevant market, it is important to emphasize that he critical need for countries to fully implement the FATF’s requirements on virtual assets and VASPs. The Report highlights significant gaps in the current global framework, underscoring the vulnerabilities that criminals and terrorists are exploiting due to these shortcomings. Addressing these gaps is crucial for ensuring a secure and regulated market environment.
In this respect, is important to mentioned that in October 2018, the Financial Action Task Force (FATF) made significant amendments to its Recommendations to explicitly include financial activities involving virtual assets. Specifically, Recommendation 15 was revised to ensure that VASPs are regulated for anti-money laundering and countering the financing of terrorism (AML/CFT) purposes. The revised Recommendation mandates that VASPs must be licensed or registered and subject to effective systems for monitoring and supervision.
Additionally, the FATF added two new terms to its Glossary: “virtual asset” (VA) and “virtual asset service provider” (VASP). Virtual assets, as defined by the FATF, are digital representations of value that can be digitally traded or transferred and used for payment or investment purposes. This category encompasses cryptocurrencies like Bitcoin, along with other digital assets such as security tokens and stablecoins. VASPs are entities that facilitate the exchange, transfer, or safekeeping of these virtual assets, including cryptocurrency exchanges, wallet providers, and other intermediaries operating within the virtual asset ecosystem.
In June 2019, the FATF adopted an Interpretive Note to Recommendation 15 to provide further clarity on how its requirements should be applied to VAs and VASPs. This Note specifically addresses the application of the risk-based approach to virtual asset activities and operations, the supervision or monitoring of VASPs for AML/CFT purposes, and the requirements for licensing or registration. It also outlines preventive measures, including customer due diligence, recordkeeping, and suspicious transaction reporting, as well as sanctions, enforcement measures, and the importance of international cooperation.
In response to the growing integration of digital currencies and blockchain technologies into the global financial system, the FATF has issued comprehensive guidance on how countries and financial institutions should approach VAs and VASPs using a risk-based approach. This article explores the key aspects of that guidance, providing a detailed examination of the FATF’s recommendations and their implications for the regulation and management of virtual assets.
- Clarification of Definitions: the guidance provides an expanded definition of what constitutes a virtual asset (VA) and a virtual asset service provider (VASP). This ensures that a broad range of digital assets and service providers fall under FATF’s regulatory framework, aiming to prevent any relevant financial assets from being excluded from necessary AML/CFT measures.
- Application to Stablecoins: the FATF outlines how its standards apply to stablecoins, emphasizing that entities involved in stablecoin arrangements could qualify as VASPs under the FATF framework. The guidance stresses the need for countries to assess and mitigate the AML/CFT risks associated with stablecoins, particularly as they have the potential for mass adoption.
- Peer-to-Peer (P2P) Transactions: the guidance addresses the challenges posed by P2P transactions that do not involve a VASP or other obliged entity, which are not explicitly covered by AML/CFT obligations. The FATF urges countries to understand and monitor the risks associated with P2P transactions, particularly as they could be used to circumvent AML/CFT controls.
- Licensing and Registration of VASPs: the updated guidance clarifies the requirements for the licensing and registration of VASPs, specifying that countries should ensure VASPs are registered or licensed in jurisdictions where they operate and should take action against entities operating without the required authorizations.
- The ‘Travel Rule’: the guidance provides further details on the implementation of the ‘travel rule,’ which mandates that VASPs obtain, hold, and transmit required information about the originator and beneficiary of virtual asset transfers. This is crucial for maintaining transparency and traceability in virtual asset transactions.
- International Cooperation and Information Sharing: emphasizing the cross-border nature of virtual assets, the FATF encourages enhanced international cooperation and information sharing among VASP supervisors to ensure a cohesive global response to the risks posed by virtual assets.
- Implications for National Authorities and the Private Sector: the updated FATF guidance is designed to help countries develop effective regulatory frameworks that can address the specific risks associated with virtual assets. It also provides the private sector, particularly VASPs, with clearer expectations for compliance with AML/CFT obligations. The guidance emphasizes a risk-based approach, allowing for flexibility in how different jurisdictions implement these standards while ensuring that the overall goals of financial integrity and security are met.
According with the FATF/OECD data in 2023 the country situation regarding this topic was the following[1]:
[1] https://www.fatf-gafi.org/content/fatf-gafi/en/publications/Virtualassets/VACG-Snapshot-Jurisdictions.html
Source:
https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Guidance-rba-virtual-assets-2021.html
