On 28 October 2021, the Financial Action Task Force (FATF), the global standard-setter for anti-money laundering and countering-the-financing-of-terrorism (AML/CFT) efforts, released highly anticipated updates to its guidance for a risk-based approach on virtual assets (VAs) and virtual asset service providers (VASPs) (the Updated Guidance). This update is likely to prompt heightened scrutiny of VAs and their associated risks, sets the tone for the regulation of decentralised finance (DeFi), and lays the groundwork for broader supervision of the VA sector and broader financial industry.
Although not legally binding on FATF member countries, AML/CFT frameworks in these countries are now likely to converge with the Updated Guidance over time.
In due course, VASPs will need to consider updating their AML/CFT policies and procedures, performing AML/CFT enterprise-wide risk assessments, and (in some cases) reassessing the regulatory perimeter to determine whether certain activities (e.g., DeFi offerings) should be viewed as being subject to AML/CFT requirements. Reed Smith is supporting the industry with this alignment process and helping VASPs navigate the updated standards.
1. Overview of changes to FATF guidance for VAs and VASPs
The Updated Guidance supersedes the first version published in June 2019. The revisions provide additional guidance in six key areas:
- the definitions of VA and VASP;
- how the FATF standards apply to stablecoins;
- countering money-laundering and terrorist-financing (ML/TF) risks for peer-to-peer (P2P) transactions;
- licensing and registration of VASPs;
- implementation of the Travel Rule, and
- information-sharing and cooperation among VASP supervisors.
A summary of some of the key changes in the Updated Guidance is set out below.