FATF Report to the G20 Finance Ministers and Central Bank Governors: Virtual Currencies / Crypto-Assets
On July 18, 2018, FATF, published its report to the July 2018 G20 Finance Ministers and Central Bank Governors’ meeting. The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard.
The report recounted that in March 2018, G20 Finance Ministers and Central Bank Governors (the “G20 Ministers and Governors”) reiterated their call for swift and effective implementation of the FATF Standards worldwide and they reaffirmed their support for the FATF, as the global anti-money laundering and counter terrorist financing standard-setting body, to further strengthen its institutional basis, governance, and capacity. The G20 Ministers and Governors noted that virtual currencies/crypto-assets pose issues with respect to money laundering and terrorist financing and they committed to implement the FATF Standards as they apply to virtual currencies/crypto-assets. The G20 Ministers and Governors called on the FATF to advance global implementation, and asked the FATF to provide an update on this work in July 2018. The FATF will take this work forward under the US presidency from 1 July 2018 to 30 June 2019.
Under the US presidency, FATF will prioritize, among other things, fostering improvements in the regulation and supervision of virtual currencies/crypto-assets. The report to the G20 Ministers and Governors summarized the FATF’s work programme on virtual currencies/crypto-assets. The report stated that FATF has developed a comprehensive approach to respond to the increasing use of virtual currency/crypto-asset activities for money laundering and terrorist financing. This approach is intended to ensure that all countries exercise a sufficient level of oversight on virtual currency/crypto-asset activities taking place within their jurisdiction and to encourage a more consistent approach to the regulation of virtual currencies/crypto-assets across different countries. The report noted that FATF has several areas of work designed to encourage appropriate and consistent safeguards that will contribute to the mitigation of the associated money laundering and terrorist financing risks while avoiding unnecessary barriers to legitimate use.
The report also noted the money laundering and terrorist financing risks of virtual currencies / crypto-assets. Virtual currencies/crypto-assets facilitate easy online access and global reach which make them attractive to move and store funds for money laundering and terrorist financing. The report stated that FATF is actively monitoring the risks associated with virtual currency/crypto-asset payment products and services, including pre-paid cards linked to virtual currencies, Bitcoin ATMs, and ICOs. In June 2018, the FATF updated its stocktake based on new and emerging cases. The report also noted that besides small-scale drug trafficking and fraud, the link between virtual currencies/crypto-assets and other predicate crimes appears to be growing.
The report included a summary of the regulatory environment for virtual currencies/crypto-assets. The FATF has conducted a stocktake to identify the different regulatory approaches among G20 participants as well as in a number of other countries. The range of regulatory responses among the countries surveyed is broad:
- Some countries have prohibited the use of all virtual currencies/crypto-assets, or have prohibited financial institutions from dealing in virtual currencies/crypto-assets;
- Several countries apply anti-money laundering / countering the financing of terrorism regulations to virtual currency/crypto-assets (and the associated exchanges), for example by using existing AML/CFT laws and regulations governing money and value transfer services, banks, or other payment institutions, based on clarifications that these regulations apply to virtual currency/crypto-asset exchangers;
- Some countries do not specifically regulate virtual currencies/crypto-assets or exchanges dealing in them, but have broad-based requirements to report suspicious transactions, including those transactions related to virtual currencies/crypto-assets, and some go beyond regulated entities (i.e., applying suspicious activity reporting requirements to virtual currency/crypto-asset exchangers);
- Many countries are in the process of establishing law or regulations.
The report noted that the global regulatory environment for virtual currencies/crypto-assets is changing rapidly. This may make it challenging to ensure a consistent global approach, which could increase risks. Given the highly mobile nature of virtual currencies/crypto-assets, there is a risk of regulatory arbitrage or flight to unregulated safe havens. The report included a chart summarizing the regulatory measures currently in effect in G20 participants.
The report also included a summary of global standards and guidance. In June 2018, the FATF began to review its guidance and Standards to determine if changes are necessary to clarify their application to virtual currencies/crypto-assets and promote a more consistent approach, taking into account the results of FATF’s stocktake exercise of the different national regulatory approaches. The FATF Standards do not refer explicitly to virtual currencies/crypto-assets or the associated service providers and intermediaries. This leaves some uncertainty about the scope of the anti-money laundering and countering financing terrorism obligations.
The report announced that FATF will hold an intersessional meeting in September on how the FATF Standards apply to virtual currencies/crypto–assets. Further, in October 2018, FATF will consider detailed proposals to clarify the application of its Standards to activities involving virtual currencies/crypto-assets. FATF will consider whether it needs to update its 40 Recommendations to reflect the technical aspects of virtual currencies/crypto-assets. There is an immediate need to clarify how the FATF definitions and Recommendations concerning customer due diligence, money or value transfer services, wire transfers, supervision, and enforcement apply to virtual currency/crypto-asset providers and related businesses. In addition, FATF will review its 2015 Risk-based Approach Guidance on Virtual Currencies to continue assisting the public and private sectors in implementing risk-mitigation measures.
With respect to improving operational capacity, the report stated that many national law enforcement authorities could significantly improve their understanding of how to effectively conduct investigations of cases involving virtual currencies/crypto-assets, and how to disrupt criminals. The FATF will work further with investigative authorities on identifying relevant tools to support criminal investigations involving virtual currency/crypto-asset payment products and services as well as identifying technological or other limitations which hinder effective investigations when these payment products and services are involved.
This document is for general guidance only. It does not contain definitive advice.
Ron is a partner at Cummings Fisher and heads the derivatives and documentation practice. Drawing on his work in private practice with buy-side clients and in house at investment banks, he has broad experience in providing legal advice in relation to derivatives and structured finance transactions, prime brokerage and asset custody arrangements.
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