Abstract

Virtual assets are now widely available, acceptable and are being used as payment for products. However, in the absence of established regulation and oversight, the sector is often still referred to as the “wild west” of the finance industry. In October 2021, the FATF updated its 2019 Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (VASPs). This updated Guidance forms part of the FATF’s ongoing monitoring of the virtual assets and VASP sector and provides examples and potential solutions to implementation challenges. VASPs are to be subject to the same relevant FATF measures that apply to financial institutions.

Introduction

Virtual Currency/Assets “VA” is fast growing and technologically dynamic, therefore requiring a high level of monitoring and engagement between the public and private sectors. A virtual currency is a digital representation of value only available in electronic form. This value is stored and transacted through designated software, mobile, or computer applications.

Cryptocurrency is a type of virtual currency which is a subset of digital currencies issued by private organizations. It has a good number of advantages.

Crypto Currency and Its Need for Regulatory Guidelines

Cryptocurrency is secured by cryptography, making international payments more efficient, convenient and secure, while removing the cumbersome security process linked to the movement of conventional money. They cannot be issued by a central authority, rendering them immune to government interference or manipulation.

This leads to the dissolution of funds into digital currency for the perpetration of illegal activities which includes money laundering and terrorism financing. In response to this, some countries have come up with guidelines/principles/rules to mitigate the risk associated with it. Also, the  Federal Action Task Force, “FATF” introduced it’s Guidance that requires countries to assess and mitigate the risk of crypto assets activities.

The FATF Guidance

The FATF recommendations are the internationally endorsed global standards against money laundering and terrorism.

In March 2021, it adopted changes to it’s recommendations, clearly stating that they apply strictly to activities involving VA. Recommendation 15 requires that VA Service Providers “VASP” be regulated for Anti-Money Laundering and countering the financing of terrorism purposes, be licensed or registered and subject to effective systems for monitoring supervision.

In the updated Guidance, Countries are allowed to prohibit or limit virtual assets activities based on their assessment of risk and national regulations in order to support other policies not address in the guidance; Information exchange between the public and private sector forms an integral part of countries strategy for combating money laundering; broad definitions of VA and VASP is provided; Automated transaction monitoring and customer risk evaluation are necessary for effective AML, financial institutions must pay attention to customers active in VA activities; Service providers of VA must have Customer Due Diligence and Enhanced Due Diligence procedures in place; Consistent Anti-ML compliance with local privacy laws etc.

Conclusion

The guidance is not binding, however, FATF’s member and observer states will now use itss guidance as a framework for developing their own regulations for their various jurisdictions.