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Expert Takes: Implications Of New FATF Guidelines For Virtual Assets – BlockTribune

source-logo  blocktribune.com 23 March 2021 03:18, UTC

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The Financial Action Task Force (FATF), a global anti-money laundering watchdog, has released an updated guidance on digital assets and virtual asset service providers (VASP).

Some important changes in the updated guidance are as follows:

  • DEXs or decentralized/non-custodial crypto exchanges and crypto-asset escrow services are considered Virtual Asset Service Providers (VASPs)
  • Stablecoins are virtual asset (VAs) and FATF Standards apply to these financial instruments
  • Only non-fungible tokens or NFTs that are able to potentially carry out money laundering (ML) and terrorism financing (TF) activities may be considered VAs
  • VASPs need to “assess and mitigate” proliferation financing (PF) risks
  • “Best practices” for counterparty VASP due diligence
  • Options for “mitigating peer-to-peer transaction risks”
  • Updated Travel Rule “clarifications and guidance”

The FATF guidance has clarified the definitions of Virtual Assets and Virtual Asset Service Providers. It also clarifies that for the purposes of FATF, central bank-issued digital currencies (CBDC) are not considered digital assets, though still makes the point that they are categorically considered fiat currency and thus still fall within the FATF responsibility. The guidance considers decentralized exchanges, platforms, or apps to be VASPs.

Below are some expert insights from the crypto and blockchain industry on the news.

Ilia Maksimenka, CEO and Founder of Plasma.Finance:
“The Travel Rule of FAFT has always been criticized in the past for its perceived lack of pragmatism, and it does appear as if this due diligence requirement on some VASPs could be problematic, particularly for DEXs that primarily operated without any need for identification or background checks on customers.
The new guidance calls for limiting the scope of customers’ ability to transact anonymously. However, it is highly unlikely this guidance can be respected in the decentralized space without a central authority or a standard for identification for users transacting on Uniswap or other DEXs. If identification of wallets or verified ownership of funds is enough to satisfy the regulations, then this could be a starting point. But to impose personal identification on DEXs would be at odds with their business model.”
Cyrus Taghehchian, CEO and Founder of Splyt:
“While the new proposal to FAFT regulations on the decentralized industry as a whole may seem intimidating, identifying NFTs as VAs could bring much needed legitimacy to this new concept. 
And instead of a vulnerability, we encourage FAFT to consider NFTs as an ally that will help bring transparency and traceability to VA exchanges and transactions in the future. Moving these operations to the blockchain under NFTs can then identify good faith behaviors and put a spot light on criminal activity because of NFTs unique identifier technology. 
That said, the Financial Action Taskforce is an international NGO policy body. Countries agree to observe their policy statements but they don’t actually make laws. It’s basically, the Karen’s of the financial world. They are issuing guidance on Stable Coins, NFTs, and DeFi as they are the new “hot” thing that regulators (The US and UK) are looking at right now. 
Essentially, FATF is behind the curve on this one. For example the UK FCA review period on stable coins closed yesterday. It’s impact it going to be minimal, many countries are already looking at and into stable coins (and VA’s/DeFi/NFts). It’s unlikely they will find anything new from what these larger, G7 governments will discover/find out.”
Russell Liu, CEO of Deeper Network :
“The new definitions put up by FATF seek to hold the creators of dApps and DEXs responsible for how the services of their application are used. This will quite certainly stifle open-source innovation to some extent. Developers may no more be able to develop and publish applications just for the sake of technological innovation. 
Take for example the hack of Andre Cronje’s gaming platform Eminence. Soon after Cronje mentioned its unaudited smart contract in a tweet, people poured $15 million into the contract. The contract was hacked and the funds drained.
In such a case, chances are, the new guidelines will allow FATF to hold the creators of DeFi applications responsible for the loss. And if that is to be, the decentralized space and the developer community need to tread with utmost caution.
This builds better security for the users but as a result, demands developers to be extra cautious with what applications they publish. They will not enjoy as much freedom as they have so far.”
blocktribune.com