FATF Reveals How to Deal with Virtual Assets in Financial Crimes

FATF Reveals How to Deal with Virtual Assets in Financial Crimes

Without proper regulation, virtual assets also risk becoming a safe haven for the financial transactions of criminals and terrorists.

The Financial Action Task Force (FATF) informs that virtual assets (or crypto assets) refer to any digital representation of value that can be digitally traded, transferred or used for payment. It does not include digital representation of fiat currencies. Fiat currency is declared legal tender by a government but has no fixed value and it is not backed by any tangible asset, such as gold or silver.

According to the International Capital Market Association (ICMA), crypto assets are private assets that depend primarily on cryptography and distributed ledger or similar technology as part of their perceived or inherent value. These are also referred to as cryptocurrencies, which include Bitcoin, Ether, Tether, Algorand and Stellar, amongst others.

In the financial world, FATF says, virtual assets have many potential benefits and dangers. They have the scope to make payments easier, faster and cheaper, and provide alternative methods for those without access to regular financial products. However, they are largely unregulated, and also have the potential to become worthless and are vulnerable to cyberattacks and scams.

Without proper regulation, virtual assets also risk becoming a safe haven for the financial transactions of criminals and terrorists. The FATF says it has been closely monitoring developments in the cryptosphere and has issued global, binding standards to prevent the misuse of virtual assets for money laundering and terrorist financing.

In recent years, some countries have started to regulate the sector, while others have prohibited virtual assets altogether. However, the majority of countries are yet to implement effective regulations. These gaps in the global regulatory system have created significant loopholes that can be exploited by criminals, terrorists and rogue regimes.

Countries need to fully and effectively implement the FATF’s Standards for virtual assets as a priority. At the same time, virtual asset providers need to carry out the same preventive measures as financial institutions, such as customer due diligence (CDD), record keeping and suspicious transaction reporting (STR). This will ensure transparency of virtual asset transactions and keep funds with links to crime and terrorism out of the cryptosphere.

Today, according to FATF, many virtual asset service providers are perceived as ‘risky business’ and denied access to bank accounts and other regular financial services. While there have been technical challenges to implementing the FATF’s requirements in the sector, they will ultimately increase trust in blockchain technology.

The effective global implementation of these standards by all countries will ensure virtual asset technologies and businesses can continue to grow and innovate in a responsible way, and it will  create a level playing field.  It will prevent criminals or terrorists seeking out and exploiting jurisdictions with weak or no supervision. 

FATF says that countries need to understand the money laundering and terrorist financing risks the sector faces and licence or register virtual asset service providers. They should also supervise the sector in the same way they supervise other financial institutions.

Also, virtual assets service providers should implement the same preventive measures as financial institutions, including customer due diligence, record keeping and reporting of suspicious transactions. They should also obtain, hold and security transmit originator and beneficiary information when making transfers.

Regulating virtual assets service providers is challenging for all. National authorities need to develop skills to understand the technology involved, while service providers have to understand and apply financial rules that apply to the sector.

It is up to the sector to develop the technology to meet the FATF’s requirements, particularly when it comes to the so-called ‘travel rule’, which requires securely collecting and transmitting originator and beneficiary information.

To help governments and the industry, the FATF has developed guidance on how to take a risk-based approach in this area. The guidance, which had significant input from the sector itself, explains how to understand the risks, how to license and register the sector, and how to know who their customers are, store this information securely and detect and report suspicious transactions.

The FATF has engaged intensively with the virtual asset service provider sector to build a partnership between them and governments, to better understand the issues and risks involved, including by hosting annual fintech/regtech forums since 2017.

Through its Contact Group, the FATF continues to engage with the industry to further explain the FATF’s requirements and to monitor developments to ensure the industry is meeting the various challenges.