The Financial Action Task Force’s Updated Guidance for Virtual Assets and Virtual Asset Service Providers paves the way for law enforcement officials and government agencies to regulate the blockchain and digital asset industries.
The update builds on the previous two pieces of guidance released by the Financial Action Task Force (FATF) and was created to provide clarity in six key areas:
- It defines the words ‘Virtual Asset’ and ‘Virtual Asset Service Provider’ and explains why each is under the jurisdiction of FATF standards.
- It provides guidance on how FATF standards apply to stablecoins.
- It outlines the money laundering and terrorist financing risks associated with peer-to-peer transactions and the tools available to help countries combat these risks.
- It provides guidance regarding the licenses and registration that virtual asset service providers (VASPs) should obtain.
- It provides guidance around travel-rule compliance, and
- It emphasizes VASP due diligence and government cooperation when it comes to information sharing.
The guidance explicitly addresses decentralized finance (DeFi) apps and services. The FATF believes that even though many DeFi companies cannot be categorized as VASPs by FATF standards, the creators, owners, operators, and people who control or have significant influence over DeFi companies may fall under the FATF definition of a VASP when they are providing or actively facilitating VASP services, and therefore, they would need to comply with existing laws and regulations.
The document addresses stablecoins and the risks they present concerning money laundering and terrorist financing. The guidance even encourages countries to mitigate the risks associated with stablecoins before a company launches its coin.
The FATF is also encouraging virtual asset service providers to not only conduct due diligence on its users but also on the virtual asset service providers it interacts with.
The Updated Guidance for a risk-based approach: Virtual assets and Virtual Asset Service providers suggests that both centralized and decentralized digital asset companies need to be licensed, registered, supervised, and compliant to lawfully operate.
The digital currency market is worth roughly $2.5 trillion, according to recent estimates. As it continues to grow in size, government agencies around the world are looking to protect the investors, consumers, and residents of their country from the downside risks and illegal activities that take place in these emerging markets.
“We expect that the countries will implement this as soon as possible,” said FATF President Dr. Marcus Pleyer.
Over 200 jurisdictions around the world have committed to the FATF recommendations, meaning they often rely on and subsequently enforce FATF-created frameworks. The latest guidance around Virtual Assets and VASPs paves the way for countries around the world to effectively enforce and regulate companies that work with digital assets, and it clarifies what qualities a company needs to have to make it fall under the jurisdiction of the FATF frameworks.
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