What tomorrow will show us: FATF-2019 innovations in Virtual assets regulation

Luda Kukuetu

A September evening was approaching. Having coped with the current development bugs and solved most of the urgent issues, including which Bitcoin wallet to choose, the Trustee Wallet team traditionally decided to get some knowledge.

This time, we've got a target - new president of the FATF with his latest inspiring lecture on September 10, 2019, on saving the Universe through the use of innovative tools.

At the beginning of his speech, Mr. Xiangmin Liu spoke about the rapid development of technology, the expansion of access to digital financial services, which has important implications for economic growth and development.

As we overcome the yawning, we have moved on. 

"Virtual assets and blockchain technology can contribute to cheaper and faster wire transfers, and a number of participants are investing in this technology. We have seen the emergence of new unregulated spaces, such as virtual assets. FATF recognizes the significant benefits that innovations such as blockchain can bring to the financial system and the economy as a whole - they can make certain financial services cheaper and faster, as well as more accessible to the public - the FATF President said.

We cheered up, ordered popcorn and decided to buy some bitcoin. At that time, Mr. President passed to threats.

"The digital age and new technologies also mean new threats. Virtual assets create serious risks of money laundering and financing of terrorism, which criminals and terrorists can use and which they already exploit. We have seen cases of money laundering and terrorist financing involving virtual assets, as well as attempts to use virtual assets to evade United Nations sanctions.

"The anonymity provided by virtual assets is used by serious criminals. They have been used to pay rewards to members of organized criminal groups...".

"The volume and speed of operations is itself a problem. We talked about detecting suspicious activity, such as finding a needle in a haystack; well, the haystack is getting bigger and bigger and moving constantly. This will complicate our work if we can't make better use of the technology to make it work for us.

"Our challenge is to ensure that the risks identified are consistent with the proper controls in place," complained Xiangmin Liu.

We've heard that before, tell us about the cryptocurrency exchange or how to buy Bitcoin from a bank card - but the President ignored us, and continued. 

In June 2019, FATF issued «Guidance for a risk-based approach» - Virtual assets and Virtual asset Service Providers.  This Guidance regulates virtual asset transactions and states that Virtual asset Service Providers are now subject to FATF requirements.

The main principle of the Guidance is that Virtual asset Service Providers are subject to FATF regulation, licensing, registration and control requirements. These Service Providers must take preventive measures, including KYC procedures, maintain records, and identify and report suspicious activities to competent authorities. They should also be subject to a range of sanctions in the case of non-compliance.

Relevant national authorities will now need to develop institutional, legal, regulatory and supervisory frameworks to ensure full compliance with FATF requirements at the national level.

In the case of digital assets, this will be a major challenge, as virtual asset providers are still not regulated in most jurisdictions and a culture of compliance in the sector is still evolving or non-existent.

The FATF President then spoke about his new initiative to create the Supervisors' Forum, which will bring together financial and professional supervisors from around the world to discuss the use of new technologies, but we have not listened to it.

We started flipping through Guidance for the definition of a "Virtual asset Service Provider" and that's what we found there.

“Virtual asset service provider” as any natural or legal person who is not covered elsewhere under the Recommendations and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

· Exchange between virtual assets and fiat currencies;

· Exchange between one or more forms of virtual assets;

· Transfer of virtual assets; and

· Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets;

· Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

 What awaits developers of non-hosted crypto wallets Trustee Wallet? - We continued to scroll Guidance with trembling hands.

In order to qualify a subject as a "Virtual asset Service Provider," the provision of virtual currency exchange and transmission services is key. This includes, in particular, custodial cryptocurrency providers, such as those that hold assets and/or control wallets and/or personal keys of other individuals or entities.

It must be emphasized key points of the "Guidance for a risk-based approach" - Virtual assets and Virtual asset Service Providers, launched by FATF in June 2019:

· Glossary includes new definitions - "Virtual assets" and "Virtual asset Service Provider".

· the FATF standard specifies the key activities with virtual assets that covered by FATF standards;

· Virtual asset Service Providers are classified as financial institutions in terms of AML and CFT compliance;

· Virtual Asset Service Providers are subject to licensing and registration. It should be noted that each country's national legislation should adopt licensing terms, as well as sanctions for conducting such activities without a license;

· underlines that the FATF standards apply to transactions between virtual assets and fiat assets, as well as to virtual asset exchanges;

· providers of such services should apply KYC procedures while ensuring that documents and information obtained in the course of such procedures are stored and updated.  However, blockchain technology is not sufficient for this purpose;

· the determination of whether a person covered by definition of a Virtual asset Service provider must include a functional analysis of the service/platform;

· National legislation should implement appropriate sanctions for non-compliance with AML and CFT requirements of such providers. All of the above requirements should be implemented by countries that apply the FATF standards within one year.



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