Global money laundering watchdog calls for further action to tackle risks around virtual assets and stablecoins
The Financial Action Task Force has released two reports concerning the digital asset industry. Its findings reveal that at least 35 jurisdictions claim to have implemented the latest anti-money laundering standards, but that much work remains in order to achieve effective global coverage. The FATF has promised to deliver more guidance for both the public and private sectors over the coming year.
Two new reports from the Financial Action Task Force
The FATF has released two new reports addressing anti-money laundering / combating the financing of terrorism in the digital asset industry:
- a 12-month review of the revised FATF standards on virtual assets and virtual asset service providers (VASPs)
- a report on so-called stablecoins to the G20 finance ministers and central bank governors
Both reports conclude that the revised FATF standards are currently fit for purpose, but that market developments will need to be monitored closely. They also call on all jurisdictions to step up and fully implement the FATF standards, to the extent they have not already done so.
Review of revised FATF standards
In June 2019, the FATF amended its global AML/CFT standards to clarify how they should be applied to virtual assets and related service providers. G20 leaders endorsed the amendments and affirmed their commitment to implementing them.
12 months on, the FATF review has found that 35 out of 54 reporting jurisdictions have implemented the revised standards, leaving 19 that have not. The total number of non-compliant jurisdictions is likely to be higher as not all members responded. The UK already amended its Money Laundering Regulations to meet the revised FATF standards earlier this year.
The report welcomes the progress that has been made in both the public and private sectors. In particular, it points to the commercial development of technological solutions to comply with the “travel rule”, which it identifies as the “issue of most focus” for VASPs. Under this rule, VASPs must obtain, hold and exchange information about the originators and beneficiaries of virtual asset transfers. The report also highlights the ongoing work of an international industry-wide initiative to set global technical standards for travel rule solutions to use.
The FATF emphasises, however, that there is still much work to be done, noting that “[t]he effectiveness of the revised FATF Standards is contingent on all jurisdictions implementing the revised FATF Standards and the private sector implementing their AML/CFT obligations”.
Report on stablecoins
Stablecoins have been an area of broad regulatory focus over the last year, and authorities have identified money laundering / terrorist-financing concerns as a key risk area. In October 2019, the G20 asked the FATF to analyse these issues further, and this new report sets out the FATF’s findings.
Unsurprisingly, the FATF found that stablecoins present many of the same ML/TF vulnerabilities as virtual assets, including around the potential for anonymity, global reach and layering of illicit funds. It notes that stablecoins may have greater reach than other virtual assets, due to factors such as perceived stability and sponsorship by large firms.
In its view, stablecoins are clearly caught by the revised FATF standards and will either be considered virtual assets or traditional financial assets, depending on their exact structure.
In relation to centralised arrangements, the FATF underlines that their central developers and governance bodies will be subject to AML/CFT obligations, in addition to customer-facing intermediaries, such as exchanges and custodial wallet providers. The report notes that “[t]he central governance bodies of so-called stablecoins are in a unique position to undertake ML/TF risk mitigation, as they determine the functions of the so-called stablecoin, who can access the arrangement and whether AML/CFT preventive measures are built into the arrangement.”
It may be less clear where the AML/CFT obligations fall in relation to decentralised arrangements. Intermediaries are expected to be caught, but there is a risk that some arrangements may not involve any. The report indicates, however, that a central entity that is involved in development of an arrangement prior to launch could be subject to AML/CFT obligations even if it does not act as a central body in the implemented arrangement.
The FATF has called on all jurisdictions to fully implement its revised standards and it plans to review progress again in June 2021.
In the meantime, it will provide updated guidance and other materials to assist both the public and private sectors with implementation. It will also continue work to promote international cooperation between supervisors.