Financial Crime World

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Month Review: FATF Standards on Virtual Assets and Service Providers

The Financial Action Task Force (FATF) has released its latest review of the revised standards on virtual assets (VAs) and virtual asset service providers (VASPs), highlighting ongoing trends in money laundering and terrorist financing (ML/TF) risks associated with crypto-assets.

Regulatory Arbitrage: A Major Concern

The review identified uneven global implementation of the revised standards, leading to “regulatory arbitrage” where some jurisdictions have weakly compliant or non-compliant regulations. This has created opportunities for illicit actors to take advantage of these weaknesses.

Misuse of VASPs/CESPs and Anonymity-Enhancing Tools

  • The report highlighted the misuse of VASPs/CESPs that do not comply with regulations, as well as the use of anonymity-enhancing tools such as:
    • Tumblers and mixers
    • Anonymized coins
    • Privacy wallets
    • Chain hopping
    • Dusting
    • Decentralized applications (DApps) and decentralized exchanges (DEX)

P2P Transactions: A Growing Concern

The review looked at peer-to-peer (P2P) transactions, which are increasingly being used to avoid regulations. While there are challenges in understanding the actual scale of P2P transactions, data from seven blockchain analytics companies suggests that they are at a reasonably large scale, with approximately 50% or more of bitcoin transactions being P2P.

Illicit Transactions: A Higher Proportion

  • The report found that the proportion of illicit transactions is higher for P2P transactions than for transactions via regulated intermediaries.
  • However, there has been no significant increase in the proportion of P2P transactions since the finalization of the FATF Standards in 2019.

Stablecoins and Future Risks

The review emphasized the need for close monitoring of stablecoins and other crypto-assets that may become widely adopted in the future. The current approach of reducing risk at on- and off-ramps to the traditional fiat economy may not be sufficient if these assets become widely used.

Recommendations and Next Steps

  • The FATF report concludes by emphasizing the importance of continued vigilance and effective implementation of regulations to mitigate ML/TF risks associated with VAs.
  • It also recommends that providers continue to take measures such as monitoring to detect suspicious transactions.

The Japanese Financial Services Agency (FSA) has long provided red flag indicators for similar cases and has received reports on the number of cases identified by CESPs. The agency emphasizes the importance of continued monitoring and detection of suspicious transactions.

Sources

  • FATF Report on Virtual Assets and Service Providers
  • Study on Privacy and Traceability of Financial Transactions Using Blockchains (2018, FSA)

Keywords

  • FATF Standards
  • Virtual assets
  • VASPs
  • P2P transactions
  • Anonymity-enhancing tools
  • Stablecoins