Financial Crime World

FATF Releases Revised Standards on Virtual Assets and Providers

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The Financial Action Task Force (FATF) has published its revised standards on virtual assets and virtual asset service providers, highlighting ongoing trends in money laundering and terrorist financing risks associated with cryptocurrencies.

Regulatory Arbitrage: A Significant Concern

Regulatory arbitrage is a significant concern due to uneven global implementation of the revised standards. Many jurisdictions have weakly compliant or non-compliant regulations, creating opportunities for misuse by virtual asset service providers (VASPs) and crypto-exchange service providers (CESPs).

Methods Used to Increase Anonymity

  • Tumblers and Mixers: methods that obscure the connection with the originator by mixing transactions with those of others.
  • Anonymity Enhanced Coins (AECs) and Privacy Coins: cryptocurrencies that embed anonymous technology in their blockchain platform.
  • Privacy Wallets: wallets that do not have an intermediary, allowing individuals to manage their private keys and complete transactions themselves.
  • Chain Hopping: replacing one cryptocurrency with another, making it difficult to trace the transaction history.
  • Dusting: transferring small amounts of funds to random wallets to hide ownership.
  • Use of Decentralized Applications (DApps) and Decentralized Exchanges (DEX).

CoinJoin: A Growing Trend

The report also highlighted the growing trend of CoinJoin, a method of hiding the relationship between originator and beneficiary addresses by pooling coins and comingling multiple transactions into one.

Global Implementation of FATF Standards

As of April 2021, only 58 out of 128 jurisdictions that responded to a survey reported having taken necessary legislative measures. However, only 29 jurisdictions have conducted on- or off-site inspections, and 18 have administrative sanctions in place.

Need for Strong Regulatory Frameworks

The report emphasized the need for strong regulatory frameworks to prevent illicit activities.

Risks Associated with Peer-to-Peer (P2P) Transactions

The report warned of the risks associated with peer-to-peer transactions, which are becoming increasingly popular. The report found that P2P transactions are at a reasonably large scale, but the proportion of illicit transactions is higher compared to transactions via CESPs.

Stablecoins and Future Risks

Potential Risks

The report cautioned that if globally adopted stablecoins and other cryptocurrencies become widely used in the future, the current approach of reducing risk at on- and off-ramps to the traditional fiat economy may not be sufficient. Close monitoring will be necessary to address these potential risks.

Importance of Continuous Monitoring

The Japanese Financial Services Agency (FSA) has long provided red flag indicators related to these cases and receives reports from CESPs on identified instances. The FSA emphasized the importance of continuous monitoring by providers to detect such cases.

Conclusion

The revised FATF standards highlight the need for robust regulatory frameworks to address money laundering and terrorist financing risks associated with virtual assets and VASPs/CEPSs. Global implementation of these standards is crucial to prevent misuse and ensure a secure financial system.