Cryptocurrency regulation: The role of the Financial Action Task Force

Cryptocurrency regulation is taking shape around the world, but what exactly is the role of the Financial Action Task Force when it comes to crypto?

Uncertainty is the enemy of all business. And unfortunately for many blockchain companies, they’ve been tightrope-walking across a gaping void when it comes to cryptocurrency regulation. But what’s the role of the Financial Action Task Force (FATF) when it comes to this murky area?

The Financial Action Task Force (FATF)

The FATF is an international organisation based in Paris. It was established in 1989 by the G7 with a lofty goal: to set the standard for financial institutions when it comes to combatting money laundering.

As we’ve seen from the repeated cases of violation in this sector from entities such as Deutsche Bank, the regulations aren’t always heeded. However, FATF guidelines against money laundering are still the recognised international standard.

What about the FATF and cryptocurrency regulation?

So what does the FATF have to do with cryptocurrency regulation? Well, just like financial services, the entity is currently preparing an international framework for AML policies. They will apply to cryptocurrency exchanges, custodians, and wallet providers.

In 2015 (a long time ago when it comes to cryptocurrency), the FATF introduced guidance on how to approach digital currencies, and they called on participating countries worldwide to take coordinated action.

However, the guidance was woolly at best, and their recommendations currently fall far short of setting a universal standard.

Without clear regulations from corresponding entities in their operating jurisdictions, many crypto companies began implementing their own versions of KYC/AML. Many of these require little more than a national ID and a verified email.

In October 2018, the FATF determined that their recommendations needed revising. Businesses and governments alike were clamouring for clarity on how to implement what they were requesting, rather than creating their own artisanal version. The new guidelines will take effect by Q3 2019.

What do the new rules mean?

According to the revisions by the FATF, each jurisdiction (it’s currently comprised of 37 countries) must ensure that virtual asset service providers such as custodians, wallet providers, exchanges, and any financial services provider for ICOs (which are few and far between) are all subject to AML and CFT (counter financing terrorism) regulations.

For cryptocurrency regulation, this means that companies will need stricter processes in place when onboarding customers. They must register with the corresponding national body and allow themselves to be monitored while reporting any suspicious transactions.

It should be noted that the goals of the FATF, according to the entity itself, are not to crush innovation in the space. According to their October statement:

“As part of a staged approach, the FATF will prepare updated guidance on a risk-based approach to regulating virtual asset service providers, including their supervision and monitoring; and guidance for operational and law enforcement authorities on identifying and investigating illicit activity involving virtual assets.”

The need for regulatory clarity

Many people in the space argue that cryptocurrency regulation will only serve to hamper or curtail innovation. However, most legitimate blockchain companies crave regulatory clarity in order to grow their businesses.

When a chief executive officer is unsure whether their technology, product, or operational activity will become illegal from one day to the next, it’s pretty hard to plan their next move – or win investors over.

The FATF’s president Marshall Billingslea acknowledged in October that current AML standards for cryptocurrencies were:

“Creating significant vulnerabilities for both national and international financial systems.”

What about the Financial Action Task Force (FATF) in the UK?

Last month, the FATF put pressure on the United Kingdom to step up its cryptocurrency monitoring. According to a report from December 7th, the UK needed stricter measures in place to prevent money laundering and combat terrorist financing (CFT). In fact, the organisation stated that the country required a “significant overhaul.”

The FATF stated that many sectors of the UK economy failed to understand the risks of a lack of cryptocurrency regulation or clear AML/CTF standards. They also demonstrated a lack of knowledge about how to effectively mitigate these risks.

“Virtual currency exchange providers are not yet covered by AML/CFT requirements… This is an emerging risk and there is not yet evidence to suggest that broad scale ML/TF is occurring in the UK through this relatively small sector.”

The FATF urged the United Kingdom to take further steps against cryptocurrency exchange providers.

The takeaway

Throughout the world, cryptocurrency regulation is stepping up a gear. From countries developing new legislation such as Malta to the FATF creating international standards for AML/CTF, regulatory clarity is beginning to take shape.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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