October 24, 2018 | Policy Brief

FATF Moves to Apply Regulatory Standards to Cryptocurrencies

October 24, 2018 | Policy Brief

FATF Moves to Apply Regulatory Standards to Cryptocurrencies

The Financial Action Task Force (FATF) on Friday announced that its international standards for illicit finance regulations now apply to virtual assets. The update means that countries will need to set requirements for businesses trading or facilitating the exchange of virtual assets to follow FATF rules pertaining to anti-money laundering and combating the financing of terrorism (AML/CFT).

The move by FATF, an intergovernmental body that sets global standards on AML/CFT, constitutes a formalization of non-binding guidance it issued in 2015 to help jurisdictions understand the illicit financing risks arising from virtual currencies like Bitcoin. In the three years since then, numerous finance ministers, particularly in the Group of 20 major economies, have sought explicit standards from FATF in order to address the growth of cryptocurrencies around the globe.

FATF also added the terms “virtual asset” and “virtual asset service providers” to the glossary of its FATF Recommendations publication. The organization defines a virtual asset as “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.” Nations will likely incorporate this terminology into their local legislation. FATF periodically evaluates the performance of members pursuant to these recommendations.

FATF does not use the term “virtual currencies” in its update at all, probably in order to distinguish between government-issued currencies and digital financial assets that are not backed by any central bank. The word choice also indicates that virtual assets do not have all the key characteristics of money, such as being a widely accepted medium of exchange.

FATF’s announcement is likely to be the most significant in the short term for smaller nations and territories that have become popular destinations for cryptocurrency startups seeking permissive regulatory environments. For example, many entrepreneurs have recently incorporated in places like Bermuda, Gibraltar, and Malta due to their smoother approval process for cryptocurrency service businesses and their openness to initial coin offerings. In order to stay in good standing with FATF, such jurisdictions will need to demonstrate that they have rigorous AML/CFT regulations in place to ensure that they are managing the risks within their growing virtual asset sector.

While FATF’s announcement signals that countries will need to regulate virtual asset service providers, it does not specify how. FATF’s current president, Marshall Billingslea, who also is the U.S. assistant secretary for terrorist financing, said that FATF will announce instructions on how to implement standards for virtual asset businesses by June 2019.

FATF’s update to its recommendations is a much-needed initial step in addressing the gaps that allow criminals located in well-regulated jurisdictions to launder illicit funds at cryptocurrency exchanges in poorly regulated jurisdictions. While the United States and Canada issued clear regulatory guidance on virtual currencies in 2013 and 2014, respectively, financial authorities in other regions have lagged. Countries will no longer have any excuse for not developing and enforcing AML/CFT rules for virtual asset services.

Despite last week’s announcement, there is a related risk that FATF appears unready to address: the future possibility that central banks will develop digital currencies and approve them as legal tender. In fact, many governments are exploring prospects for “central bank digital currencies” in the coming years. As FATF’s recommendations currently stand, such digital currencies would appear to fall under the same regulatory rules for conventional fiat currencies. However, the concrete appearance of a government digital currency would likely raise unforeseen questions and challenges. FATF and financial regulators around the world will have to keep an eye on this potential development, even if it remains distant for now.


Blockchain and Digital Currencies Cyber Sanctions and Illicit Finance