Swift compliance with the FATF Travel Rule is desirable but challenging to attainOther noteworthy developmentsConclusion
Thursday, 16 April, 2020
The Digital Regulator
Crypto AML: a complex but worthy compliance effort
The Financial Action Task Force (FATF) will review in June 2020 the state of adoption and implementation of the anti-money laundering (AML) standard for virtual assets (VAs) and virtual asset service providers (VASPs) issued in June 2019. This includes the so-called Travel Rule, conceived to extend to VAs and VASPs the quality of transactional compliance achieved in the fiat transactions world with the SWIFT messaging system. The industry is currently dealing with the daunting task of creating the technology needed to enable full compliance. More time is needed to bring it to market and see it adopted. The regulators should be pragmatic during the transition phase and focus on creating a level playing field in order to minimise arbitrage opportunities. The industry will benefit materially from swift and seamless compliance because the Travel Rule establishes a distinction – in terms of compliance quality – between ubiquitously accepted fiat transactions and still largely mistrusted cryptofinance transactions.
Amongst the regulatory developments of the past few weeks, we highlight analyses from international and national regulators concerning retail central bank digital currency (CDBC) and analyses related to stablecoins.
Swift compliance with the FATF Travel Rule is desirable but challenging to attain
In June 2019, the FATF extended to digital and crypto transactions the standards applicable to traditional banking transactions and typically complied with through the SWIFT messaging system. Rapid compliance is key to preventing money laundering activity via VAs and is desirable to enhance trust in the underlying blockchain technology and the cryptofinance applications it supports. These results will be achieved only if an international level playing field is ensured. Timing is of essence, and depends on when the required technology is made available. Initiatives are underway, including in particular in the Crypto Valley in Switzerland. It is however unlikely that operational readiness will be achieved by June 2020, when the FATF will review the state of play.
Moreover, VASPs must be registered or licensed in the FATF member states and subject to the five-year records retention obligation. Lastly, the rule excludes transfers to and from unregulated wallet providers. In a nutshell, the Interpretative Note extends the traditional banking transaction regulations to digital and crypto transactions.
In sum, the FATF Travel Rule, even if criticised by the industry at the time of its pronouncement, is pivotal for the future of cryptofinance because it establishes – in terms of compliance quality – a distinction between ubiquitously accepted fiat transactions and still largely mistrusted cryptofinance transactions. National regulators should proactively assist the process of defining and implementing the required technical solution, and work towards achieving a level playing field internationally with regard to content and timing.
Other noteworthy developments
The Bank for International Settlements (BIS) communicated its views on the design of a retail CBDC. The Bank of England (BoE) followed suit with an analysis of opportunities and challenges of retail CBDC. This may indicate that the timing for the first retail CBCD could be nearer than anticipated.
India has written history by lifting the banking ban on crypto. This opens up a huge crypto market.
IOSCO joined the Financial Stability Board and other international standard setters in examining stablecoins. The BoE expressed concern that the credit supply could dry up if stablecoins began to mushroom.
The FATF took stock of the growth in digital transactions and issued a standard for the use of digital identity systems in the context of customer due diligence.
The maturity, sustainability and development of cryptofinance depends crucially on the broader financial community accepting the credibility of its underlying processes. Compliance with the FATF Travel Rule is a daunting task, yet worth the investment because it will deliver precisely such credibility in the area of cryptofinance transactions.
The flow of news over the past few weeks has shown that top national and international regulators are focusing their analyses on retail CBDC and on providing the correct framework for stablecoins.
1VAs are defined as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes. The definition excludes digital representations of fiat currencies. ↵
2VASPs are defined as any natural or legal person who as a business conducts activities or operations for or on behalf of another natural or legal person including the exchange between VA and fiat currencies, the exchange between one or more forms of VA, the transfer of VAs, the safekeeping and/or administration of VAs or instruments enabling control over VAs, and the participation in and provision of financial services related to an issuer’s offer and/or sale of a VA. ↵
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