In 2019, the Financial Action Task Force (“FATF”) adopted a Guidance for Risk-Based Approach to Virtual Assets (“VAs”) and Virtual Asset Service Providers (“VASPs”). The purpose behind the Guidance was to help national authorities to comprehend and develop regulatory and supervisory responses to VAs activities or operations and VASPs, and to help private sector entities seeking to engage in VAs activities in comprehending their obligations with respect to anti-money laundering and countering the financing of terrorism (“AML/CFT”) and how they can successfully comply with these requirements.
The FATF updated its 2019 Guidance in October of this year. A brief outline of the main updates that were made to this Guidance is going to be provided.
Mainly, the 2021 Guidance focuses on:
I. providing clarification on the definitions of VAs and VASPs;
ii. providing guidance on how the FATF Standards apply to stablecoins;
iii. giving additional guidance on the risks and tools available to countries to address the money laundering and terrorism financing (“ML/TF”) risks for peer-to-peer transactions;
iv. updating the guidance on the licensing and registration of VASPs;
v. providing additional guidance for the public and private sectors on the implementation of the travel rule; and
vi. establishing principles of information-sharing and co-operation amongst VASPs Supervisors.
‘Part One’ of the 2021 Guidance clarifies that central bank-issued digital currencies are not considered to be VAs for the purpose of the FATF since these are seen as a digital representation of the fiat currencies. Nevertheless, the revised section explicitly provides that the FATF Standards are still applicable to central bank digital currencies similar to any other form of fiat currency that is issued by a central bank. Through the 2021 Guidance, the FATF clarifies that all types of VASPs, irrespective of their business model, should be treated in the same manner from a regulatory and supervisory point of view.
Moreover, ‘Part Two’ of the updated Guidance seeks to provide further direction on how the FATF Standards apply to stablecoins. VASPs, other obliged entities, and countries are to make sure to identify and evaluate ML/TF risks emanating from stablecoins before their launch, in an ongoing and forward-looking manner. Suitable measures must be adopted with an aim to control and lessen any risks before launch. The updated section invites VASPs and countries to recognise the risks emanating from peer-to-peer transactions and exhibits the risks and instruments available to countries to address ML/TF risks for these transactions. A non-exhaustive list of elements relating to VAs and VASPs is provided to help VASPs and countries in identifying, evaluating, and establishing ways on how to reduce the risks related to VAs activities and the provision of VASPs services or products. Furthermore, the updated section makes it clear that the FATF does not regulate natural or legal persons that offer ancillary products or services to a VAs network if they do not provide or actively facilitate, as a business, any covered VAs operations or activities on behalf of their customers.
‘Part Three’ of the updated Guidance seeks to provide additional guidance on the risks and the tools available to countries to address the ML/FT risks for peer-to-peer transactions. This section highlights that those countries prohibiting VASPs or VAs activities are obliged to periodically assess the ML/TF risks related to VASPs and VAs. Amongst the updates made to part three of the Guidance, the updated Guidance ameliorates the description on licensing and registration, provides further considerations relating to the licensing and registration process, and refines the section dealing with the travel rule. Further clarifications are provided regarding the approach to be adopted towards counterparty VASPs due diligence, the information to be collected on transactions with unhosted wallets, how VASPs and countries must tackle the sunrise issue, and provides further clarifications on how the FATF handles sanctions screening, the travel rule, and batch transfers.
Furthermore, the FATF updated ‘Part Four’ of the Guidance dealing with the application of FATF Standards to VASPs and other obliged entities that engage in, or provide, covered VAs activities. The updated section includes references to VAs transfers to/from unhosted wallets, counterparty VASPs identification and due diligence, correspondent banking and other similar relationships, key red-flag indicators for VAs, and technological solutions allowing VASPs to comply with the travel rule in an efficient and efficacious manner.
‘Part Five’ of the Guidance was updated to include recent case-studies of risk-based approach to VASPs and VAs.
A section introduced in the 2021 Guidance is ‘Part Six’ which establishes non-binding principles of information-sharing and co-operation amongst VASPs Supervisors to enhance cooperation between counterparts and exchange of relevant information.
This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact Dr. Katya Tua and Dr. Anthea Sammut.