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Analysis: Proposed FATF Guidance for Virtual Assets and VASPs

CipherTrace | JJ | March 19, 2021

AML money laundering - Analysis: Proposed FATF Guidance for Virtual Assets and VASPsOn March 19, 2021, global anti-money laundering watchdog the Financial Action Task Force (FATF) released a public consultation for its updated Draft Guidance on a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. Key changes in the draft guidance include:

  • DEXs and crypto escrow services are considered Virtual Asset Service Providers (VASPs)
  • Stablecoins are virtual asset (VAs) and FATF Standards apply to them
  • Only NFTs that can facilitate money laundering (ML) and terrorism financing (TF) are VAs
  • VASPs should assess and mitigate proliferation financing (PF) risks
  • Best practices for counterparty VASP due diligence
  • Options for mitigating peer-to-peer transaction risks
  • New Travel Rule clarifications and guidance

Proliferation Financing (PF) Risks

  • In addition to money laundering and terrorism financing (ML/TF) risks, VASPs should begin to assess and mitigate proliferation financing (PF) risks.
  • The FATF is currently developing separate guidance to clarify these requirements.

FATF standards apply to “so-called stablecoins”

  • The FATF recommends countries analyze and mitigate the ML/TF risks of before they are launched—especially if the stablecoin is to be used for P2P transactions.
  • Risk mitigation could include “limiting the scope of customers’ ability to transact anonymously and/or by ensuring that AML/CFT obligations of obliged entities within the arrangement are fulfilled, e.g. by using software to monitor transactions and detect suspicious activity.”

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Risk mitigation options for peer-to-peer transactions

  • Transactions to/from non-obliged entities (e.g. unhosted wallets) and transactions where at an earlier stage P2P transactions have occurred should be considered higher-risk.
  • The FATF recommends some of the following as possible P2P risk mitigation tactics in high-risk jurisdictions:
    • implementation of the VA equivalent of CTRs
    • denying licensing of VASPs if they allow transactions to/from non-obliged entities (i.e., private/unhosted wallets)
    • enhanced recordkeeping requirements and enhanced due diligence (EDD) requirements
    • ongoing enhanced supervision of VASPs
    • issuing public guidance and advisories to raise awareness of risks posed by P2P transactions

Specific guidance on the implementation of the “travel rule”

  • VASPs that have not implemented the “Travel Rule” should be considered higher-risk.
  • A VASP needs to undertake counterparty VASP due diligence before they transmit the required information.
  • Regardless of the lack of regulation in the beneficiary jurisdiction (sunrise issue), originating VASPs can require travel rule compliance from beneficiaries by contract or business practice. In general, those business decisions are made by each individual VASP based on their risk-based analysis.
  • Originators and beneficiary VASPs should screen transactions to confirm that the counterparty is not a sanctioned name.
  • The submission of originator and beneficiary information in batches is acceptable, as long as submission occurs immediately and securely as per the FATF Standards. Post facto submission of the required information should not be permitted (i.e., submission must occur before or when the VA transfer is conducted)
  • Where there is not an originator or beneficiary institution (transactions to and from unhosted wallets), the VASP must still collect the required information with respect to their customer. Countries should also consider requiring VASPs to treat such VA transfers as higher risk transactions that require enhanced scrutiny and limitations.

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NCFA Jan 2018 resize - Analysis: Proposed FATF Guidance for Virtual Assets and VASPs The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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