The Financial Action Task Force (FATF) first released guidance on crypto currencies and assets in 2019, which was updated in October 2021.
In their report, entitled “Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers”, hereafter “UG”, the FATF proposed expanding the definitions of Virtual Asset Service Providers (VASP) while devoting more focus to decentralized marketplaces and projects.
We must keep in mind that peer-to-peer transactions (P2P) are not covered in the UG, because transfers of virtual assets refer only to transactions conducted by intermediaries, moving virtual assets between addresses and or accounts. Sections 90 and 105 of the UG do however recommend clarification of the actual risks associated with P2P transfers.
Sections 68 and 93 of the UG reveal that many projects which are indeed controlled by a centralized entity, deceptively declare themselves as Decentralized Finance projects (DeFi), and that therefore it falls upon the jurisdictional regulators to apply the pertinent VASP definitions to such projects.
Section 66 of the UG also describes that many trading platforms promote themselves as decentralized, whereas their developers or management have access to source codes and can block users.
Precise guidance on decentralized trading platforms and applications is however not provided. Local regulators are tasked with interpreting the meaning of DeFi. Deciding whether a platform or project is either a financial intermediary or a VASP must be done in accordance with local regulations.
Compliance with anti-laundering and counter-terrorism legislation is covered by recommendation 16, the so-called “Travel Rule”. Only very few jurisdictions who belong to the FATF are deemed fully prepared in a regulatory sense, among them Singapore and Switzerland. Ready made, easily implemented solutions have been produced by the industry to assist individual participants to comply with these rules.
In 2022, the FATF will likely strengthen requirements and compliance deadlines concerning the Travel Rule. It is possible that a list of compliant protocols and solutions will be released to assist individuals. However as of now there is no unified format, and existent solutions apply only to regions. With time, these solutions will have to consolidate, resulting in an equivalent to SWIFT for crypto-transactions.
The upcoming year will show increased focus on so-called decentralized platforms, including sharpened onboarding procedures and controls on transactions, in an effort to prevent money laundering and financing terrorism.