14 July 2020 Peiying Chua Heikes Financial Regulation

Singapore - FATF conducts review of revised standards on virtual assets and virtual asset service providers

14 July 2020

In June 2019, the Financial Action Task Force (FATF) amended its global Standards to include AML/CFT requirements on virtual assets and virtual asset service providers (VASPs). Last month, the FATF issued a report reviewing the implementation of these Standards by the public and private sector. Overall, progress has been made, particularly around the development of technological solutions to enable the implementation of the travel rule by VASPs.

ML/TF risks and the virtual asset market

In its report, the FATF observed key trends around money laundering and terrorism financing (ML/TF) risk in the virtual asset market. There has been an increase in the use of VASPs registered or operating in jurisdictions that lack effective AML/CFT regulation, leading to challenges in tracking transactions.

The FATF also noted that the growth of stablecoins could lead to a substantial increase in the number of anonymous peer-to-peer virtual asset transactions occurring via unhosted wallets. Such transactions, made without the use of a VASP or other AML/CFT regulated entity, are not explicitly within the scope of the revised FATF Standards. The FATF has advised jurisdictions to analyse and address risk in a forward-looking manner to ensure they are prepared for any material ML/TF vulnerabilities.

Issues identified with the revised FATF Standards and Guidance

The report also sets out key issues with the FATF Standards, identified by jurisdictions and representatives from the VASP sector. These include a need for greater clarity around the approach that jurisdictions should take if new assets are developed may fall into both the 'traditional financial asset' and 'virtual asset' categories, such as stablecoins; and the current lack of explicit coverage of peer-to-peer transactions without the use of a VASP or financial institution. The FATF is expected to issue further guidance on these points, but does not believe that these issues will require the revised Standards to be amended.

Going forward

The report concludes with a few key recommendations for the FATF:

  1. The FATF does not currently need to amend its revised Standards on virtual assets and VASPs, but should conduct a second 12-month review of implementation by June 2021.
  2. The FATF should release updated Guidance for the public and private sectors.
  3. The FATF should continue to promote the understanding of the public and national authorities of the ML/TF risks and potential misuse of virtual assets.
  4. The Virtual Asset Contact Group (promoting implementation, identifying issues and engaging with the private sector on the revised Standards) should continue its engagement with the private sector.
  5. The FATF should continue its program of work to enhance international cooperation amongst VASP supervisors.