The intergovernmental body, Financial Action Task Force (FATF), has been combating global money laundering since 1989. Beginning in 2018, FATF made efforts to level the playing field in the cryptocurrency and virtual asset service provider (VASP) spaces.
The FATF standards will look to apply similar safeguards to virtual assets (VAs) as have existed in the financial sector. By treating VASPs as financial institutions, the FATF expects VASPs to use preventive measures on fraudulent trades, money laundering, or transactions financing criminals/terrorists.
Why Crypto Demands an Intergovernmental Approach
Unlike a national currency, like the US Dollar, cryptocurrencies are a global exchange currency. As long as the parties in an exchange agree on which currency to use, they can trade a virtual asset like cryptocurrency for a good or service while avoiding the ups and downs of the value of traditional fiat currency.
The FATF establishes the guidelines—it’s up to their jurisdictions to decide when and how to enforce them. Due to the global nature of crypto exchanges, as soon as one of the jurisdictions within a VASP network begins implementing the guidelines, the VASP must meet the guidelines for transactions done with that jurisdiction. It is then in the VASPs’ best interest to make the FAFT guidelines a part of their universal business approach.
In a video about preventing the misuse of virtual assets, the FATF describes itself as “leading global action to stop the financial flows that fuel crime and terrorism.” Watchdogs have cited this global usage would also make crypto the go-to currency of criminals. Any unregulated virtual currency would make it easier for criminals to avoid justice. Their regulatory recommendation efforts are likely to be accepted by the 39 members of FATF and nearly 200 additional jurisdictions that have FATF-Style Regional Bodies. This near-global anti-money laundering effort will also affect the everyday virtual asset owner/trader and VASPs.
The Benefits of Regulation
Virtual asset exchange is a dynamic and rapidly-growing sector. Regulating this market will:
- Increase trust from financial institutions
- Protect consumers
- Prohibit terrorism, money laundering, and other criminal activity
- Level the playing field between countries and VASPs
- Create a fairer marketplace
Treating VASPs as financial institutions should yield net benefits. As this market grows, traditional investors will look to add virtual assets to their portfolios. A moderately-regulated marketplace will reduce the risk of participating in this dynamic space.
Regulatory practices aim to prevent fraudulent behavior. Financial scams are as old as time. The Financial Crimes Enforcement Network (FinCEN) of the United States has documented such scams. In the summer of 2020, scammers took to Twitter to solicit payment for a guaranteed doubling of the convertible digital currency used in the exchange. You can read more about that hustle here.
FAFT’s mission is to stop money laundering schemes across the globe. Money laundering aids in the efforts of terrorism, trafficking, environmental crime, and fraud. In the neverending balancing act between security and liberty, these guidelines increase the transparency of virtual asset transfers to root out the bad actors on these platforms.
The global market for virtual assets includes a revolving door of startups and established institutions and mainstays in the industry. The regulatory guidelines put out by FATF will help to ensure an equitable playing field for VASPs and consumers. These regulations should act like the rules of a sport like football/soccer. Without the agreed-to guidelines, teams and organizations can leverage disparate advantages unavailable to their competitors.
The market is responding to this new phase in virtual assets trading by creating consulting firms and tools for consmers and VASPs to ensure FATF guidelines compliance. For a free evaluation, you can use a tool like AMLBot. AML, of course, stands for anti-money laundering. Preventing money laundering and the crime that spawns from it is the primary goal of the FATF.
The end goal of these regulatory efforts is to create a fairer marketplace for virtual assets. Previously invested consumers of VAs should see increased security in their investments. New or prospective consumers should feel relieved that FATF and its associated organizations are stopping bad actors who utilize the anonymity of virtual assets and currencies for illegal means.
Some regulations will remain local or national, but individuals who trade internationally and VASPs with international clients will likely begin to adopt the FATF guidelines.
What is Crypto Travel?
One of the most talked about guidelines has been the so-called “travel rule.” This regulation requires a strict vetting process for any virtual asset transfer over a specified amount. The vetting process involves communication between the VASP of each party in the transfer.
The VASP of the party sending the virtual assets is responsible for the following:
- Verifying the sender’s information
- Collecting the receiver’s information from their VASP
- Performing a screening of the receiver
- Investigating the trustworthiness of the receiver’s VASP
- Communicating and transferring data to the receiver’s VASP
The VASP of the party receiving the virtual assets is responsible for the following:
- Affirming the receiver’s information
- Confirming that the receiver is a client of the VASP
- Verifying the reception of the sender’s data
- Performing a screening of the sender
- Investigating the trustworthiness of the sender’s VASP
- Accepting or rejecting the transfer on behalf of their client
If your jurisdiction is currently, or will soon be, enforcing FATF’s guidelines, including the travel rule, you should seek additional information from regulators or risk losing your operating license.
The Cost of Regulation
Any increase in regulation will lead to an increase in resources required to operate for VASPs—which could likely lead to increased consumer prices. The increased cost of doing business could lead to companies merging to reduce growing overhead.
It will be necessary for VASPs to have open lines of communication with their local regulators to stay abreast of which regulations are being adhered to and enforced. These relationships are vital for the virtual assets community. Ongoing education is necessary for regulators, and VASPs and VA investors should have their voices heard about what regulations will lead to a healthier marketplace.
Regulations aren’t going away for Virtual Asset Service Providers and the virtual assets global industry. The companies and investors who adapt to ongoing regulatory practices will position themselves for continued growth.
By treating this modern marketplace more like traditional financial institutions, consumers can expect increased security for their investments. Thought leaders hope to see continued innovation in this space, not in spite of the FATF recommendations but because of them.