More than 17,300 cryptocurrencies exist today listed on 457 Exchanges with a Total market cap of $1.6 Trillion, many of them have no volumes or the developers have walked away from the project. Some were likely created solely for speculation purposes or even outright fraud.
The anonymity of crypto assets also creates data gaps for regulators and can open unwanted doors for money laundering, as well as terrorist financing. Although authorities may be able to trace illicit transactions, they may not be able to identify the parties to such transactions. Additionally, the crypto ecosystem falls under different regulatory frameworks in different countries, making coordination more challenging. For example, most transactions on crypto exchanges happen through entities that operate primarily in offshore financial centers. This makes supervision and enforcement not only challenging but nearly impossible without international collaboration.
According to the latest data from Chainalysis, the total cryptocurrency value received by illicit addresses grew to a new all-time high of $14 billion in 2021. Although the new all-time high is almost twice the $7.8 billion that was recorded in 2020, it represents just 0.15% of the 2021 cryptocurrency transaction volume.
Financial Action Task Force (FATF), an intergovernmental body formed to combat money laundering. It was established in July 1989 by the G7 Summit at the Arche de la Defense in France. The task force was convened from the G-7 member States, the European Commission, and eight other countries. The Economic Declaration from that G-7 Summit states that the task force is convened “to assess the results of cooperation already undertaken in order to prevent the utilization of the banking system and financial institutions for the purpose of money laundering, and to consider additional preventive efforts in this field, including the adaptation of the legal and regulatory systems so as to enhance multilateral judicial assistance”.
It periodically lists out countries and jurisdictions that are identified as having strategic deficiencies in their regimes to counter money laundering. The list is referred to as the FATF grey list.
Since its inception, the global agency has played a key role in identifying and preventing financial crime by setting standards and promoting the effective implementation of legal, regulatory, and operational measures. Today, FATF is regarded as the global anti-money laundering watchdog and its policies are highly regarded and treated as law by members and many non-members. The agency has more than 200 countries and jurisdictions as its subjects. It has developed the FATF Standards, ensuring a “coordinated global response to prevent organized crime, corruption, and terrorism”. By working against money laundering, the agency looks to tackle other crimes such as illegal drug deals, human trafficking, and funding for weapons of mass destruction.
The FATF is involved in reviewing money laundering and terrorist financing techniques and constantly strengthens its standards to address new and emerging risks. The task force also monitors countries to ensure they implement its standards fully. The process of monitoring the implementation of its Recommendations is done through peer reviews or “mutual evaluations” of member countries. Following the review, the FATF lauds good efforts from countries and also holds non-complying countries to account.
To identify non-complying countries, FATF has maintained the FATF blacklist or the “Call for action” countries and the FATF grey list or the “Other monitored jurisdictions” since 2000. The FATF blacklist is the agency’s official list of “Non-Cooperative Countries or Territories” (NCCTs) which it judges to be non-cooperative in the global fight against money laundering and terrorist financing.
According to the FATF, the NCCTs are those having “significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation”. In connection with the blacklisted countries, the agency cautioned its members “to apply enhanced due diligence, and in the most serious cases, to apply counter-measures to protect the international financial system from the ongoing money laundering, terrorist financing, and proliferation financing risks emanating from the country”. As of 3rd August 2020, North Korea and Iran were on the FATF blacklist.
The FATF standards require countries to assess and mitigate their risks associated with virtual asset financial activities and providers; license or register providers and subject them to supervision or monitoring by competent national authorities. VASPs (Virtual assets service providers) are subject to the same relevant FATF measures that apply to financial institutions.
This guidance will help countries and VASPs understand their anti-money laundering and counter-terrorist financing obligations and implement the FATF’s requirements as they apply to this sector. The guidance provides examples and potential solutions to implementation obstacles.
The 2021 Guidance includes updates focusing on the following six areas:
- Clarification of the definitions of virtual assets and VASPs.
- Guidance on how the FATF Standards apply to stablecoins.
- Additional guidance on the risks and the tools available to countries to address the money laundering and terrorist financing risks for peer-to-peer transactions.
- Updated guidance on the licensing and registration of VASPs.
- Additional guidance for the public and private sectors on the implementation of the ‘travel rule’
- Principles of information-sharing and co-operation amongst VASP Supervisors.
FATF Rules describes only Governments are “competent authorities” to monitor cryptocurrencies
Financial Action Task Force (FATF) travel rules:
The FATF Recommendation 16 on Wire Transfers, “Travel Rule,” requires member countries’ virtual asset service providers (VASPs), financial institutions, and obliged entities to exchange originator and beneficiary identifying information with counterparties during transmittals above $1,000.* It is important to note that different jurisdictions have different transaction threshold amounts.
FATF stipulates that in transactions over a certain threshold, the originator VASPs must include and send the following:
- The name of the originator
- The blockchain address of the originator
- The identity of the originator’s VASP
- The originator’s identification number, e.g., National ID number or Passport number
- The virtual asset type and the amount being transmitted, and
- The identity of the beneficiary’s financial institution
- The name of the beneficiary
- The blockchain address or account number of the beneficiary
During the second 12-month review of the revised FATF standards on virtual assets and VASPs that came out in March 2021, the FATF advised their members to implement the travel rule into their domestic legislation “as soon as possible,” including consideration of a staged approach to implementation as appropriate. FATF members shall discuss implementation status through outreach by June 2022.
Regulation of crypto-assets, in particular Bitcoin, the largest one by market cap, requires global coordination. The reason is simple and technical. While the owners of Bitcoin are local users, the blockchain ledger on which it runs is global. Any transaction requires amendment of all ledgers globally. Hence, unlike gold or securities, there is no local custody or local exchange of Bitcoin. This is why no open economy itself can regulate Bitcoin or other crypto-assets. This incapability leads either to fear and rules that would completely ban the exchange of crypto-assets, which, in turn, will be futile because of the very reason that the assets are global in nature. Alternatively, it results in a complete lack of regulation, which is not only a risk for ordinary users and a lack of guidance for institutional investors but also creates global money laundering and terrorism financing issues.
The G20 or Group of Twenty is an intergovernmental forum comprising 19 countries and the European Union (EU) should have a full grasp of regulation of crypto-assets, providing guidance to national regulators on the nature of the technology and regulatory best practices. It should task OECD(Organisation for Economic Co-operation and Development), in cooperation with the FSB(The Financial Stability Board), the FATF, and the IMF, to prepare guidelines for the regulation of crypto-assets.
The first generation of the internet economy was shaped around big tech companies without an emphasis on sustainability and inclusivity. The second generation of the internet economy will be shaped around the crypto-economy. While it is right that the crypto-assets do not at the moment pose a risk to global financial stability, it is G20’s imperative to act as a leader in shaping the regulatory architecture of the future internet economy.
Blockchain strengthens risk management in one area that has made great strides in fighting Anti-Money Laundering (AML) is the use of Blockchain technology to effectively identify suspicious transactions by tracking customer transactions and activities in real-time. AML refers to activities aimed at preventing crimes such as drug-related crimes, terrorist crimes, smuggling crimes, corruption and bribery crimes, crimes against the order of financial management. Nevertheless, the ways the laundering of money is organized are diversified, and the process is complicated, as the internationalization of circulation increases the difficulty of tracing the whereabouts of funds. Once money laundering occurs, it will hugely harm the safety of the international financial system. The integration of property of Blockchain, such as decentralization, anonymity, immutability, makes this new technology valuable. Know Your Customer (KYC) needs a company to verify the identity of its clients and predict potential risks of illegal intentions for the business relationship.
Blockchain technology is used to optimize the financial institutions’ AML and KYC processes, which are also crucial for the development of the crypto industry. First, the ins and outs of each fund of financial transactions can be traced back to prevent supervision through the tamper-free time stamp of distributed ledgers and the characteristics of public autonomy of the whole network. Vulnerabilities, laws, and regulations are not perfect, resulting in the flow of illegal. Second, the entire block network data is stored on each node to achieve information shared and reduce the duplication of audit work.
Third, the credit history and transaction information of all participants are stored in the general ledger of the Blockchain and shared by each node. When the KYC process is passed, all the new customers’ data can be quickly located, saving time and improving efficiency. Blockchain technology can save personnel and technology costs for AML and KYC.