Financial Action Task Force Proposes Recommendations that Impact the Global Blockchain Ecosystem

Financial Action Task Force Proposes Recommendations that
Impact the Global Blockchain Ecosystem

The Financial Action Task Force is taking significant steps that could impact our industry. Here’s what you need to know.

The FATF Sets Global Anti-Money Laundering Standards.

The FATF is a multi-governmental organization that sets standards and promotes global implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the financial system.  The FATF thus develops anti-money laundering policies to bring about national legislative and regulatory reforms in its member countries.

The organization maintains a series of Recommendations that are recognized as the global anti-money laundering and counter-terrorist financing standards.

The FATF monitors the progress of its members in implementing necessary measures and publicly identifies countries that fail to meet its standards. This can have significant implications for financial institutions operating in or with those countries.

The FATF’s AML Standards Were Expanded to include Virtual Assets and Virtual Asset Service Providers.

Last fall, the FATF’s Recommendations were amended to include a set of definitions for what it calls “virtual assets” and “virtual asset service providers” (VASPs).  In February, the FATF adopted an “Interpretive Note” to explain the application of the Recommendations to virtual assets and VASPs.  In the process, it asked for public comment on how to apply existing Recommendations regarding wire transfers to VASPs.

In setting these definitions of virtual assets and virtual service providers, the FATF expanded the universe of things subject to money laundering and terrorist financing beyond typical payments and money transfers to include:

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. (emphasis added).

Virtual Asset Service Providers include:

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 or operations for or on behalf of another natural or legal person:

  1. exchange between virtual assets and fiat currencies;
  2. exchange between one or more forms of virtual assets;
  3. transfer of virtual assets;*
  4. safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
  5. participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

* In this context of virtual assets, transfer means to conduct a transaction on behalf of another natural or legal person that moves a virtual asset from one virtual asset address or account to another.

The Chamber’s Response.

Earlier this month, the Chamber submitted a letter to the FATF expressing concerns in relation to the FATF’s proposed paragraph 7(b) of its Interpretive Note to Recommendation 15 which advocates two key principles:

 

1. The Definition of Virtual Asset Is Broad, Going Beyond Typical Payments or Medium of Exchange, and Must Be Limited to Payments or Medium of Exchange When Applying AML Standards to Virtual Asset Service Providers.

The FATF AML Standards are designed for financial institutions to develop an added protective layer between ordinary commerce and financial systems.  As the FATF noted in its 2015 Guidance for a Risk-Based Approach to Virtual Currencies, it focuses on the “gateways” to the regulated financial system, such as convertible virtual currency exchangers.  The broad definitions of virtual asset and virtual asset service provider in this context makes it unclear who is captured within the requirements.

It is more common to see descriptions of regulated financial activity involving a virtual asset limited to its function as a medium of exchange (such as in the FATF’s 2015 Guidance for a Risk-Based Approach to Virtual Currencies and FinCEN’s 2013 Guidance – Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies), and more particularly in the wire transfer context.  The FATF’s own definition of a wire transfer requires that the transaction be carried out through a financial institution.

Note that the FATF’s 2015 Guidance focused on Virtual Currency Payments Products and Services (VCPPS).  In just 3 years, the FATF has changed its terminology, as well as the scope, indicating that this is a quickly evolving area requiring close study to avoid another such shift.

 

2. It Is Inappropriate to include the Broad Scope of Virtual Assets within a Wire Transfer Framework.

Considering virtual assets within a wire transfer context misunderstands the way in which virtual currency transfers work.  Transfers of virtual currency may not always involve regulated financial institutions at both ends, which is contrary to the very definition of wire transfers used by the FATF.

This interpretation would also cut off independent users from accessing regulated exchanges unless they, too, established their account at a VASP.  The requirement to obtain incoming originator information or outgoing beneficiary information would effectively block out any potential participant that does not hold its account at a VASP.  This could have a devastating effect on encouraging growth among this community within a regulated environment, potentially pushing it out.

Building a Coalition to Ensure Effective AML Compliance.

The proposed paragraph 7(b) of its Interpretive Note to Recommendation 15 will be finalized in June 2019.

The Chamber supports effective regulatory action to mitigate the risks presented by emerging technologies, including virtual currencies, but believes that more work needs to be done before a final interpretation and definitions can be issued to effect meaningful compliance.

As part of our efforts to promote sound anti-money laundering and counter terrorist financing (CTF) compliance regimes, the Chamber’s Chief Policy Officer, Amy Davine Kim, along with several Chamber members, will be attending the FATF’s public consultative meetings May 6-7, 2019 in Vienna, Austria.

While each business has its own specific perspectives on the details of these issues, the industry is unified in these broad principles.  We are coordinating a group of industry members to help present these important factors to the FATF. Let us know if you’ll be in Vienna.