A powerful intergovernmental organization devoted to combating money
laundering and terrorism financing has finalized its recommendations on
regulating cryptocurrencies for its 37 member countries.
As expected, the Financial Action Task Force (FATF) standards released Friday include a controversial
requirement that “virtual asset service providers” (VASPs), including
crypto exchanges, pass information about their customers to one another
when transferring funds between firms.
The final recommendation makes official the contentious part of FATF’s February proposal, saying countries should make sure that when crypto businesses send money, they:
“… obtain and hold required and accurate originator
[sender] information and required beneficiary [receipient] information
and submit the information to beneficiary institutions … if any.
Further, countries should ensure that beneficiary institutions … obtain
and hold required (not necessarily accurate) originator information and
required and accurate beneficiary information …”
Under the new guidance, the required information for each transfer includes:
- (i) originator’s name (i.e., the sending customer);
- (ii) originator’s account number where such an account is used to process the transaction (e.g., the VA wallet);
- (iii) originator’s physical (geographical) address, or national
identity number, or customer identification number (i.e., not a
transaction number) that uniquely identifies the originator to the
ordering institution, or date and place of birth;- (iv) beneficiary’s name; and
- (v) beneficiary account number where such an account is used to process the transaction (e.g., the VA wallet).
Calling the “threat of criminal and terrorist misuse of virtual assets” a “serious and urgent” issue, FATF said in a public statement that it will give countries 12 months to adopt the guidelines, with a review set for June 2020.
The so-called travel rule is a longstanding requirement for
international banks when sending each other money on customers’ behalf.
But blockchain industry advocates argued it would be onerous if not impossible to put into practice with crypto, harmful to user privacy, and counter-productive to law enforcement goals.
Enforcement recommendations
The guidelines also suggest that individuals using crypto wallets to
transmit value could be designated VASPs, and thus subject to licensing
requirements – at least if they do so as a business.
“In cases where the VASP is a natural person,
it should be required to be licensed or registered in the jurisdiction
where its place of business is located—the determination of which may
include several factors for consideration by countries,” the document
says.
Individuals are not VASPs if they use crypto to buy goods or services
or if they make “a one-off exchange or transfer,” FATF said.
FATF is also giving countries the option of requiring foreign VASPs
that provide products or services within their jurisdiction to register
with the appropriate authorities.
“Competent authorities should take the necessary legal or regulatory
measures to prevent criminals or their associates from holding, or being
the beneficial owner of, a significant or controlling interest, or
holding a management function in, a VASP,” the guidance states
elsewhere.
“Such measures should include requiring VASPs to seek authorities’
prior approval for substantive changes in shareholders, business
operations, and structures,” it adds.
For enforcement purposes, FATF recommends that countries consider
using open-source information and web-scraping tools to identify
unregistered or unlicensed operations advertising their services.
Authorities should also consider public feedback, information from
reporting institutions and “non-publically available information,” such
as intelligence or law enforcement reports.
The guidance even addresses services designed to obfuscate the origin
of crypto transfers, saying nations should make sure that providers can
either manage or mitigate the risks of transfers that use mixers,
tumblers or similar tools. “If the VASP cannot manage and mitigate the
risks posed by engaging in such activities, then the VASP should not be
permitted to engage in such activities,” the document reads.
VASPs should also be able to freeze or prohibit transactions with sanctioned individuals, FATF said.
Short-term impact?
Data analytics company Chainalysis, among others, has warned that instead of more transparency, the now-official rule would spur services to shut down or drop off the radar.
But despite hearing such concerns at a private-sector consultation meeting in Vienna last month, which drew 300 attendees, the FATF, led by the United States, pressed ahead.
“By adopting the standards and guidelines agreed to this week, the
FATF will make sure that virtual asset service providers do not operate
in the dark shadows,” U.S. Treasury Secretary Steven Mnuchin said in remarks to the FATF plenary session held Friday in Orlando, Florida.
This will help the fintech sector “stay one step ahead of rogue regimes and sympathizers of illicit causes,” he said, adding:
“We will not allow cryptocurrency to become the
equivalent of secret numbered accounts [and] we will allow for proper
use, but we will not tolerate the continued use for illicit activities.”
To be clear: FATF’s recommendations for anti-money-laundering
policies are not binding; member countries adopt them by passing
legislation or writing regulations. However, countries that fall
egregiously out of compliance with FATF standards get put on a
blacklist, making them radioactive to foreign investment.
The crypto guidelines come a week ahead of the annual Group of 20
(G20) summit in Osaka, Japan, on June 28-29. The G20, comprised of 19
countries and the European Union, has been pushing for international harmonization of crypto regulations.
The guidelines also come just before the United States’ one-year
presidency of the FATF ends on June 30. Marshall Billingslea, the U.S.
Treasury official who holds the rotating post, had listed applying FATF
standards to virtual currency among his top priorities.
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