Virtual Assets

Virtual assets (crypto assets) refer to any digital representation of value that can be digitally traded, transferred or used for payment. It does not include digital representation of fiat currencies.

Virtual assets have many potential benefits and dangers. They have the scope to make payments easier, faster and cheaper, and provide alternative methods for those without access to regular financial products. However, they are largely unregulated, and also have the potential to become worthless and are vulnerable to cyberattacks and scams.

Without proper regulation, virtual assets also risk becoming a safe haven for the financial transactions of criminals and terrorists. The FATF has been closely monitoring developments in the cryptosphere and has issued global, binding standards to prevent the misuse of virtual assets for money laundering and terrorist financing. In recent years, some countries have started to regulate the sector, while others have prohibited virtual assets altogether. However, the majority of countries are yet to implement effective regulations. These gaps in the global regulatory system have created significant loopholes that can be exploited by criminals, terrorists and rogue regimes.

Taking effective action

Countries need to fully and effectively implement the FATF’s Standards for virtual assets as a priority. At the same time, virtual asset providers need to carry out the same preventive measures as financial institutions, such as customer due diligence (CDD), record keeping and suspicious transaction reporting (STR). This will ensure transparency of virtual asset transactions and keep funds with links to crime and terrorism out of the cryptosphere.

Today, many virtual asset service providers are perceived as ‘risky business’ and denied access to bank accounts and other regular financial services. While there have been technical challenges to implementing the FATF’s requirements in the sector, they will ultimately increase trust in blockchain technology

The effective global implementation of these standards by all countries will ensure virtual asset technologies and businesses can continue to grow and innovate in a responsible way, and it will create a level playing field. It will prevent criminals or terrorists seeking out and exploiting jurisdictions with weak or no supervision.

How do the FATF Standards apply to virtual assets ?

Countries

need to:

Understand the money laundering and terrorist financing risks the sector faces
Licence or register virtual asset service providers
Supervise the sector, in the same way it supervises other financial institutions

Virtual Assets service providers

need to:

Implement the same preventive measures as financial institutions, including customer due diligence, record keeping and reporting of suspicious transactions
Obtain, hold and security transmit originator and beneficiary information when making transfers

Building partnerships

Regulating virtual assets service providers is challenging for all. National authorities need to develop skills to understand the technology involved, while service providers have to understand and apply financial rules that apply to the sector.

It is up to the sector to develop the technology to meet the FATF’s requirements, particularly when it comes to the so-called ‘travel rule’, which requires securely collecting and transmitting originator and beneficiary information.

To help governments and the industry, the FATF has developed guidance on how to take a risk-based approach in this area. The guidance, which had significant input from the sector itself, explains how to understand the risks, how to license and register the sector, and how to know who their customers are, store this information securely and detect and report suspicious transactions.

The FATF has engaged intensively with the virtual asset service provider sector to build a partnership between them and governments, to better understand the issues and risks involved, including by hosting annual fintech/regtech forums since 2017.

Through its Contact Group, the FATF continues to engage with the industry to further explain the FATF’s requirements and to monitor developments to ensure the industry is meeting the various challenges.

Virtual Assets: Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers

27 Jun 2023

This report provides an update on implementation of the FATF's anti-money laundering and counter terrorist financing standards on virtual assets and virtual assets service providers. This is the fourth update since the FATF extended its Standards to this sector. The report finds that global implementation of these strengthened measures remains relatively poor. The lack of regulation creates significant loopholes for criminals to exploit. Closing the gaps in global regulation of virtual assets is an urgent priority. The FATF calls on all countries to apply the AML/CFT rules to virtual assets service providers, without further delay.