The "A risk-based approach guide to virtual assets and VASPs" published by the Financial Action task force in 2015 was also updated by the Financial Action Task Force (FATF). According to the traditional financial system, the Guideline made recommendations on regulating virtual assets and making AML / KYC laws also mandatory for financial institutions dealing with virtual assets, like many financial institutions.
The updated guide includes restrictions on virtual service providers and VASPs and regulations to increase oversight. Also, the latest guide contains necessary extensions on what makes VASPs. Therefore, participants need to collect a large amount of information about others' activities, and it becomes imperative to implement KYC.
FATF is an organization tasked with developing policies to combat money laundering and financial crime. FATF manual does not contain a legal procedure. However, it specifies essential AML / CTF practices that member financial institutions should adopt. Also, the new guide highlights transactions with non-essential assets such as bitcoin wallets.
FATF audits whether its members are implementing necessary practices to prevent money laundering and terrorist financing. And it detects countries that do not meet the standards and ensures certain sanctions are imposed on financial institutions operating in these countries.
Virtual assets bring many benefits to the world, such as speed and efficiency. On the other hand, in many crimes such as drug trafficking, fraud, tax evasion, and human trafficking, it becomes a source of income for criminals.
FATF strengthened anti-terrorism finance standards to prevent virtual assets from being used in money laundering and terrorist financing activities. A virtual asset service provider (VASP) will be liable to enforce AML / CTF and all other obligations, and criminal sanctions may be imposed on the digital asset organization that fails to comply.
In line with the new Guideline published by FATF, any natural or legal person conducting one or more of the following transactions on behalf of another natural or legal person as a business is called a virtual asset service provider.
Under the new Guideline published by FATF, virtual asset service providers include:
- Providing exchanges between virtual assets or fiat currencies. The exchange between one or more virtual assets
- Transferring between virtual assets
- have control over virtual assets or protect and manage virtual assets
- an issuer that engaging in an activity regarding the offer or sale of a virtual asset, or having an issuer engage in such activity.
FATF Regulations in Virtual Assets
As of February, FATF adopted a "Comment Note" to explain the implementation of regulations for virtual assets and VASPs.
Besides, FATF has expanded the definition of money transfers, regular payments, and other financial activities that pose a money laundering risk beyond virtual assets.
Accordingly, a virtual asset is a digital asset that can be bought and sold digitally, transferred, and used for payment or investment purposes. Virtual assets are not digital representations of any other financial asset, such as fiat currency, securities.
The FATF has agreed to undertake a 12-month review process to measure and audit the revised standards' implementation. Thus, it created a report by monitoring the risk situations of both the private sector and the entire virtual asset sector regarding money laundering and terrorist financing.
The report reveals all the findings of this investigation. According to this report, both the public and private sectors have made significant progress in implementing the revised FATF standards. However, the enforcement of VAsPs and enforcement of AML / CTF obligations by VASPs has dramatically improved.
The fact that virtual assets have a decentralized system is essential for regulators to have more control and be more transparent. It aims to bring a centralized structure to the virtual asset industry with the updates published by FATF.
Although there are some gaps between regulations and reality, the published updates largely control the money laundering risk and terrorist financing in the virtual asset world.