Blockchain security firm CipherTrace has provided an analysis on the proposed Financial Action Task Force (FATF) guidance for digital assets and virtual asset service providers (VASPs).
On March 19, 2021, global anti-money laundering watchdog, the FATF, released a public consultation for its latest Draft Guidance on a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers.
As noted by CipherTrace, some important changes in the draft guidance are as follows:
- DEXs or decentralized/non-custodial crypto exchanges and crypto-asset escrow services are considered Virtual Asset Service Providers (VASPs)
- Stablecoins are virtual asset (VAs) and FATF Standards apply to these financial instruments
- Only non-fungible tokens or NFTs that are able to potentially carry out money laundering (ML) and terrorism financing (TF) activities may be considered VAs
- VASPs need to “assess and mitigate” proliferation financing (PF) risks
- “Best practices” for counterparty VASP due diligence
- Options for “mitigating peer-to-peer transaction risks”
- Updated Travel Rule “clarifications and guidance”
As mentioned in CipherTrace’s blog post, FATF has clarified the definitions of Virtual Assets and Virtual Asset Service Providers.
The FATF doesn’t consider central bank digital currencies (CBDCs) to be a form of virtual assets. The agency “applies standards similar to any other form of fiat currency issued by a central bank,” CipherTrace noted.
The blockchain firm also mentioned that FATF considers decentralized exchanges, platforms, or apps to be VASPs.
As stated in CipherTrace’s blog post:
“A decentralized or distributed application (DApp), is not a VASP under the FATF standards—the Standards do not apply to underlying software or technology—but entities involved with the DApp such as owners or operators may be VASPs under the FATF definition.”
CipherTrace’s blog post added:
“VA escrow services, including services involving smart contract technology, brokerage services, order-book exchange services, advanced trading services, and custody providers are all VASPs.”
The CipherTrace analysis further noted:
“Some non-fungible tokens (NFTs) that may not initially appear to constitute VAs may in fact be VAs due to secondary markets that enable the transfer or exchange of value or facilitate money laundering, terrorist financing, and proliferation financing.”
CipherTrace added that assets “should not be deemed uncovered by the FATF Recommendations because of the format in which they are offered and no asset should be interpreted as falling entirely outside the FATF Standards.”
John Paul Koning, who focuses on monetary economics, financial inclusion, and cryptocurrency, pointed out that if you’re a shareholder of Uniswap (a leading non-custodial Ethereum token or ERC-20 exchange), then you’re likely a VASP.
If you’re a shareholder of Uniswap (or MakerDAO), then you’re likely a VASP. And VASPs (i.e. Virtual Asset Service Providers) are responsible for setting up anti-money laundering controls.
— John Paul Koning (@jp_koning) March 20, 2021
Koning claims that these developments indicate that decentralized finance or DeFi “might be on the cusp of becoming KYC’ed.”
Brendan Blumer, CEO and Block.one, the company behind the development of EOS, a major blockchain platform for developing DLT-powered applications, has argued:
“DeFi is too often an intentional excuse to violate KYC & AML laws, but this will end abruptly. Compliant programmable finance will radically transform our financial system by displacing inefficient fee-taking middle-men and driving more value back to end-users.”
(Note: you may check out FATF’s complete report here.)