The Financial Action Task Force Guidance on Digital Assets

Summary:

• Financial Action Task Force (FATF) is an intergovernmental policymaking organization to tackle money laundering.
• The article provides an overview of the FAFT* guidelines for Virtual Assets and Virtual Asset Service Providers (VASP) released in October 2021.
• The FATF believes that stablecoins, like all other VASPs, are subject to its standards of regulatory oversight.
• Under the FATF definition, NFTs aren’t virtual assets while their creators don’t count as VASPs.
• Most DeFi platforms have no required or specified VASPs, making it difficult for FATF to impose jurisdictions on any particular player within the ecosystem.

Major FATF Guidance on Digital Assets

As the DeFi industry exceeds growth forecasts, it has now significantly attracted more interest from financial institutions and regulatory bodies.

In October 2021, the Financial Action Task Force (FATF), an intergovernmental policymaking organization to tackle money laundering, released a new document updating their guidance for virtual assets and service providers. This updated document provides clarification for VASPs and additional compliance rules for DeFi and NFTs.

Although the DeFi industry is not considered a VASP under FATF standards, the updated guidance states if a developer or maintainer provides VASP services, they are considered a VASP.

Source: https://www.fatf-gafi.org

The other focus areas from the guidance include:

• Updates on the guidance structure to license and register a VASP.
• Breakdown of the principles of cooperation and information sharing among VASP overseers.
• Guidance to countries on the available tools to combat or avert money laundering and terror financing risks.
• Details on how the FATF standards apply to stablecoins.
• Clarifications of the definitions of VA and VASP.

However, this guidance is concerned with the parts of the crypto industry, introducing significant regulatory uncertainty. Therefore, it could considerably impact these industries, including stablecoins, NFTs, and decentralized finance (DeFi).

Let’s explore the how and why:

Stablecoins Impact

The FATF believes that stablecoins, like all other VASPs, are subject to its standards of regulatory oversight. Therefore, the guidance addresses mass adoption, focusing on specific design features that could increase AML risks, especially coins.

Drawing information from DeFi, the FATF argues decentralized governance does not exempt any investment vehicle or service provider from regulation, as anything related to human nature carries inherent risks to users, such as crime or fraud.

As for identifying and understanding stablecoins’ AML risks, the guidance also instructs VASPs to manage and mitigate these risks before implementing stablecoin products. They must do so because there’s a likelihood of losing any interest in those coins if they are found incompatible with regulatory compliance.

Finally, it suggests providers seek approval from the jurisdiction where their focus primarily lies in their region to be licensed as an authenticator (this enhances legitimacy).

NFTs Impact

Under the FATF definition, NFTs aren’t virtual assets while their creators don’t count as VASPs.

However, the FATF stresses regulators should focus on the NFT’s functionality and use cases rather than its marketing.

In particular, the body argues virtual assets may be considered securities if they are operated for payment purposes.

As there is no specific definition for NFT, it could apply to anyone purchasing a token to sell for profit later instead of those who buy tokens because of a connection with the NFT creator.

Countries can use these factors to impose stricter regulations when dealing with NFTs.

DeFi Impact

VASPs are set aside for anyone who controls or influences a DeFi protocol, and they are classified as such because these owners provide VASP services.

Ownership and control are different from providing services because there is always an ongoing business relationship between providers and users even when services are exercised through a smart contract or, in other cases, voting protocols.

In reality, however, most DeFi platforms have no required or specified VASPs, making it difficult for FATF to impose jurisdictions on any particular player within the ecosystem.

Despite regulatory recommendations by FATF to dismiss claims of decentralization, future-facing KYC and AML capabilities are central in FLUID’s design. This compliance enables clients to meet regulatory requirements quickly and safely, which helps regulators conduct their diligence.

How FLUID Remains FATF Compliant

In today’s environment, it’s both challenging and frustrating for exchanges and liquidity nodes owing to an unclear regulatory environment. Therefore, interoperability between such entities would contribute immensely towards a more transparent ecosystem in which digital assets thrive with minimal hindrance when interacting.

FLUID is a DeFi platform intending to capitalize on a tokenized market volume potential worth trillions with a smart order routing engine and liquidity aggregator.

With every asset expected to be tokenized in the future, FLUID is well-positioned for cross-market penetration with zero counterparty risk.

FLUID Finance disrupts the inefficient and opaque way financial institutions organize their liquidity aggregation using blockchain technology. The goal is to unlock new opportunities to improve operational efficiency, lower costs, increase capital utilization, and improve end-user experiences.

As more people get involved in blockchain technology, the regulatory environment quickly changes. For Fluid finance, practicing compliance is an obvious decision.

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