FATF Virtual Assets Contact Group (VACG): 21’s Takeaways
We continuously update our Travel Rule solution 21 Travel Rule to comply with the latest compliance standards. Here are our takeaways from the FATF VACG meeting.
The Financial Action Task Force's (FATF) Virtual Assets Contact Group recently held a meeting to discuss the challenges and progress made in regulating virtual assets worldwide, and we were there.
The Group emphasised the urgent need for countries to implement the FATF Standards to effectively supervise and regulate the virtual assets sector. During the meeting, the importance of strengthening measures to prevent money laundering, terrorist financing, and proliferation financing in virtual assets was stressed.
The meeting brought together officials from 19 jurisdictions, international organisations, and 80 industry representatives to discuss progress and challenges in implementing the FATF Standards on virtual assets, including the Travel Rule, and emerging risks and threats.
FATF Virtual Assets Contact Group (VACG): 21’s Takeaways
FATF Travel Rule Global Adoption Is Slow
To date, the global Travel Rule adoption rate is slower than the FATF had anticipated. The lack of regulation in many countries creates opportunities for criminals and terrorists to exploit virtual assets.
Additionally, the key obstacles that VASPs are experiencing, such as regulatory compliance issues, tedious and expensive counterparty due diligence and jurisdiction fragmentation, have been identified to be similar as experienced in traditional finance.
Regulated vs Operated
The difficulty of regulating VASPs with their operational unit in a different jurisdiction than they are licenced in was discussed. Consequently, VASPs will be mandated to obtain a licence in the jurisdiction where their operational unit is active. The Market in Crypto Assets (MiCA) is an example of a regulation adopting this stance.
The Travel Rule Is Not Regulators Playing Big Brother
The FATF emphasises the importance of acting in real-time to prevent money from flowing to the wrong sources. Last week the EU released its implementation of the Travel Rule (the Transfer of Funds Regulation - TFR) with this very clause.
The Travel Rule is not simply regulators playing Big Brother; in many regions, political and safety reasons exist for its implementation. For example, Japan has expressed concern about North Korea and its potential involvement in illicit activities. It has been suggested that North Korea may use cryptocurrency's anonymity to its advantage in procuring illegal items. With the implementation of the Travel Rule, global activities like this can be clamped down on.
Read more about the EU’s implementation of the Travel Rule.
Non-fungible Tokens Need to Be Regulated
While NFTs are not considered financial instruments, the FATF reminds us that VASPs offering NFTs must still comply with regulations. NFTs are to be considered art, and like art, NFTs can too be used for money laundering and trafficking.
See the FATF Report Money Laundering and Terrorist Financing in the Art and Antiquities Market for further elaboration.
Stablecoins Need to Be Regulated
Due to the functionality of stablecoins, the FATF considers stable coins as virtual assets and has recommended that they be regulated according to AML/CFT regulations. The EU’s MiCA has taken the lead on stablecoin regulations. Noting the lack of regulations, MiCA redefined the assets and provided a strict framework for the regulation thereof.
Read: Stablecoins Are No More: MiCA’s EMTs and ARTs Explained
VASPs Are to Be Alert
The use of shell VASPs to conduct illicit activities has been discussed as a problem, and it is essential for VASPs to detect whether a shell VASP is using their services. In short, a shell VASP (also known as parasite VASP) uses a regulated VASP’s services to offer VASP services to sanctioned parties.
VASPs must be aware of these activities and implement appropriate measures to screen new customers or smaller VASPs using their services, to safeguard themselves against being complicit.
Software-as-a-Service (SaaS) Solutions
The EU Commission has voiced its concern over cloud storage. They went as far as to caution providers of SaaS Travel Rule solutions stating that data protection contracts must be set up with great care.
Open-source Protocols Are the Way Forward
Low-resource countries have been identified as a priority for the FATF to ensure they can participate in the virtual asset space.
Open-source protocols like the Travel Rule Protocol (TRP) appear to be the way forward for low-resource countries. With free protocols, these countries are not only guaranteed interoperability with other VASPs; they can build local versions of Travel Rule software tailored to their jurisdiction’s requirements.
What Next?
These discussions will contribute to the FATF's Targeted Update on the global implementation of the Standards, which is expected to be finalised in June 2023. The FATF Plenary agreed on a roadmap in February 2023 to enhance the implementation of the Standards on virtual assets, and a report on the steps taken by FATF members and FSRB countries with significant virtual asset activity to regulate and supervise VASPs is expected in the first half of 2024.
Do you have a pressing question about the FATF? We probably have the answer in our FATF Travel Rule Explained Guide.
