On July 5, 2021, the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, released its findings from a yearlong review documenting the progress that its member countries have made towards implementing its guidance on regulation of virtual assets and Virtual Asset Service Providers (VASPs). In its 46-page report, the FATF concludes that the majority of its member countries have yet to incorporate the FATF’s virtual asset standards into their national laws. In fact, of the 128 reporting jurisdictions, only 58 have implemented a version of the standards, and six (6) jurisdictions have prohibited the operation of VASPs outright.
FATF’s guidance is important to the long-term viability of virtual assets because it encourages member countries to regulate VASPS and require the implementation of controls that mitigate the risks of money laundering or funding of terrorism through virtual assets. The FATF’s guidance requires jurisdictions to impose licensing, registration, customer due diligence, recordkeeping, and suspicious transaction reporting for all virtual asset transactions and all VASPs. Some of the key provisions of the guidance are summarized below:
- Risk Assessment: The FATF requires countries to promulgate legislation necessary to implement the guidance. To that end, member jurisdictions must engage in a risk assessment to understand the particular risks posed by virtual assets and VASPs in their countries. The guidance encourages national authorities to undertake a coordinated risk assessment of virtual asset activities, products, and services, as well as the risks associated with the VASP sector in their country. The proposed risk assessment is designed to enable relevant authorities to understand how specific virtual asset products and services function and fit into relevant regulatory frameworks.
- Licensing: Member jurisdictions must require VASPs to meet appropriate licensing and registration criteria as set by relevant national authorities. The guidance states that national regulatory authorities should require VASPs to be licensed or registered at minimum in the jurisdictions where they are created. The licensing standards outlined in the guidance closely mirror AML (anti-money laundering) and KYC (know-your-customer) standards for traditional financial institutions. For example, the guidance provides that VASPs should be able to demonstrate that they have AML programs, including policies and procedures, which are either implemented prior to starting their operation, or which can be implemented once launched.
- Travel Rule: The FATF notes that implementation of the travel rule was particularly slow. The “travel rule” requires companies to identify and share data on all virtual asset transactions over a certain amount. Pursuant to the guidance, member countries should require VASPs to obtain and maintain accurate originator and beneficiary information on all wire transfers using virtual assets. The guidance outlines specific requirements for countries relating to wire transfers for both domestic and cross-border wire transfers, stating that VASPs should monitor wire transfers to detect those that lack the required originator or beneficiary information and screen the transactions to comply with relevant financial sanctions obligations.
- Peer-to-Peer (P2P) Transactions: The FATF notes that illicit transactions are higher for P2P transactions than transactions with VASPs, creating concern for a number of jurisdictions. The FATF advises that it was necessary to continue monitoring the P2P sector and identify risks posed by the P2P sector. The FATF hopes to provide greater clarity on the risk and mitigation efforts for P2P transactions by November.
Most critically, FATF’s guidance is predicated on international cooperation, which is key to achieving the task force’s goals. The FATF makes this clear, stating that “gaps in implementation mean that there is not yet a global regime to prevent the misuse of virtual assets and VASPs for money laundering or terrorist financing.”
Notwithstanding the lackluster implementation rate thus far, the FATF intends to redouble its efforts on implementing its virtual asset standards. In addition to promoting implementation of the existing standards, the FATF intends to publish revised guidance standards on (1) the definition of virtual asset and VASP, (2) stablecoins, (3) P2P transactions, (4) registration of VASPs, and (5) the travel rule by November 2021.
 A VASP is defined as any person or business that 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 asset; (3) Transfer of virtual assets; (4) Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; (5) Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.