FATF Needs to Narrow Down on DeFi Oversight; Not A One Size Fits All

The Financial Action Task Force (FATF) will need a new approach in crypto policing, according to XReg consulting senior partner, Siân Jones, who was speaking during the second V20 Virtual Asset Providers Conference. She particularly noted the emerging trends in Decentralized Finance (DeFi), a niche that Jones recommended FATF pay closer attention to to understand the nitty-gritty that would form part of future policy oversight.

So far, the FATF Travel Rule is the most advanced piece of oversight that governs Virtual Asset Service Providers (VASPs). The initiative, which came into action last year, requires service providers in the crypto sector to share personally identifiable information (PII) for transactions above $1,000 from one platform to another. To comply with the Travel Rule, stakeholders have some solutions, with the most popular being the InterVASP Messaging Standard (IVMS 101).

FATF Should Narrow Down on DeFi

While the Travel Rule has done it for most regulators, Jones brought FATF to pace with the developments in DeFi. She explained that DeFi removes intermediaries who would eventually make it hard for the AML watchdog to implement oversight on crypto activity within this space. Jones believed that FATF must consider new approaches to curb AML and terror-financing within this nascent industry. She said that,

“The tried and tested methods work, after a fashion, in the traditional world of money. Arguably, they can be made sort of fit the intermediated crypto world. They do not necessarily fit a DeFi world where they are not fit for purpose.”

Crypto Community More Effective in One Voice

Jones, who told DeFi stakeholders they need to ‘wake up and smell the coffee’ in matters regulation, also had some suggestions for the crypto community to enhance the cooperation in forming policies. She noted that FATF ought to double down its efforts in engaging the crypto community, including the DeFi developers. Likewise, the crypto community needs to work closer with FATF and present its opinion in a unified voice.

“Equally, the industry needs to work more closely together to present a unified voice and its engagement with the FATF and regulators.”

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Author: Edwin Munyui

FATF Releases Red Flag indicators To Identify Money Laundering Using Crypto

  • The Financial Action Task Force (FATF) releases report on how to identify possible red flags in crypto money laundering rings across virtual asset service providers, or VASPs in short.
  • The regulator highlights a number of ways that crypto exchanges can stop and curb illegal and illicit activity.

The report titled, Virtual Assets – Red Flag Indicators of Money Laundering and Terrorist Financing, outlines several red flags including those arising from irregular transaction patterns, anonymous transactions, arising from senders and receivers and sources of wealth profiles of the crypto users.

One of the red flags arises from the size and frequency of transactions whereby a money launderer could make multiple high frequency transactions over a period of 24 hours or staggered and regular transactions which stop shortly after they are made. Moreover, transferring virtual assets to exchanges with low or non-existent AML/CFT rules is also considered a red flag.

User profiling is also an excellent way of noticing possible money laundering and terrorist financing. Here, exchanges are tasked with checking on the transactions made and comparing it with the user’s profile.

This arises when a user deposits an unusual amount to their wallet which does not match the traders profile or recent transactions. This could signal the deposit is subject to checks of money laundering, scamming or a money mule. The report reads on transaction patterns as a red flags stating,

“Conducting a large initial deposit to open a new relationship with a VASP and funding the entire deposit the first day it is opened, and that the customer starts to trade the total amount or a large portion of the amount on that same day or the day after, or if the customer withdraws the whole amount the day after.”

Also quick deposits and withdrawals of full balance of virtual assets in a short period of time raises eyebrows.

Virtual asset accounts with no logical business explanation making frequent deposits and transfers off the exchange to less KYC friendly exchanges poses a red flag. Accumulation of funds from several unrelated exchanges or wallets sending small amounts to one virtual asset account before fully withdrawing the funds may be a money laundering scheme.

Regulators should also follow users who use anonymity enabled public cryptocurrencies and privacy coins such as Monero, Zcash and Dash closely, the report states. Also the exchange of public and transparent crypto coins such as Bitcoin for the anonymity enhanced cryptocurrencies also raises questions on the actions of the trader.

FAFT has pushed through KYC/ AML regulations and compliance rules for VASPs across the globe in a bid to curb money laundering and terrorist financing using crypto. The “Travel Rule” recommends that the 200 countries that follow it, say to mandate VASPs such as custodians and crypto exchanges to retain and share any information on possible illicit and illegal trades happening on their platforms.

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Author: Lujan Odera

Germany Vows To Fight Money Laundering And Terrorism Financing As New FATF President

In a document released to the public on July 7, 2020, the incoming German president of FATF, Dr. Marcus Pleyer, vows to “strengthen the FATF’s governance, enhance its strategic focus, and increase its public visibility.” Marcus further calls on the FATF Secretariat and members alike to help in the fight against terrorism financing, migrant smuggling, environmental crimes, and money laundering in a new digital transformation of AML/CFT act.

The team will study the challenges and opportunities presented with new financial technologies and operational changes to help AML compliance. FATF will also focus on enhancing data pooling and analysis to enable the private sector to remain AML/CFT compliant using artificial intelligence and big data analysis.

The German Presidency, lasting from 2020-2022, will also develop solutions to deal with the current challenges brought on by the global COVID-19 pandemic, the statement says.

The AML/CFT regulations set in place aim at building on initiatives within the FATF Global Network to prevent money laundering and counter-terrorism, among other illicit activities, including illegal arms trafficking, financing of ethnically or racially motivated terrorism, and migrant smuggling.

Germany Crypto Regulation Outside FATF

Germany is witnessing a spike in regulatory policies being set up surrounding crypto and digital assets. There is a recent bump in crypto custodian license requests across the country following the release of crypto services guidelines earlier this year by the top financial regulator Bafin, who named cryptocurrencies as financial instruments.

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Author: Lujan Odera

Counting Down the Final Days for Crypto Exchanges and Wallets to Set in Motion FATF’s Travel Rule

  • The FATF 24th Meeting will be to analyze the adoption of the Travel rule by member states in VASPs in their jurisdictions.
  • Most of the member states are facing compliance crunches as industry expert estimates only 10% have rolled out effective steps.

The Financial Action Taskforce (FATF) members have an impending 24th June meeting. They will be scrutinizing how well the ‘travel rule’ has been discharged to the various Virtual Asset Service Providers (VASP).

Travel Rule

In June 2019, the FATF updated guidelines that essentially covered the banking sector and other traditional financial systems. They extended the travel rule to now cover crypto exchanges and wallet providers amongst other VASPs. They would now be required to meet the same information exchange guidelines as other financial institutions when ownership of the virtual assets changed.

The travel rule was formulated to counter AML and CTF practices. It obligates financial institutions to improve their KYC protocols by ensuring collection and information sharing by requesting names, possible addresses, and account numbers to establish the parties involved in the respective transactions. This would create an audit trail, hence cracking down on criminal fronts leveraging the Virtual Assets infrastructure.

Shortly after presenting the new amendments to the travel rule, the FATF gave their member countries a year to enforce the VASPs in their jurisdictions. They would then hold a meeting to analyze steps and measures taken to align with the new standards. Although the guidelines might not be binding, the organization has warned that members not conforming with the standards might be kicked out of the body.

Countries Grappling With Compliance

CoolBitX CEO Michael Ou has offered insight into how various countries were fairing so far in the adoption of the new guidelines. Remarking that with close to two hundred member states, only 20 of them had tweaked their regulations to include the new travel rule amendments.

The remainder of the nations were on course with implementation but not fully there yet. His company is working with regulators to develop tech that will bolster compliance with the Travel Rule. They recently released their version of a solution dubbed Sygna Bridge to solve compliance woes.

He anticipates that the meeting will help the VASPs set actual deadlines for compliance with FATF standards. However, other analysts in the industry don’t share the same opinion. Siân Jones XReg Consulting expects that it would take considerably longer before all the member states achieve full compliance.

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Author: Lujan Odera

New Messaging Standard Pushes Crypto Industry Closer to FATF ‘Travel Rule’ Compliance

Crypto firms have made a step towards FATF compliance following the release of a messaging data standard for the Virtual Asset Service Providers (VASPs).

The initiative has been dubbed ‘IVMS101’ and was pioneered by the Joint Working Group on InterVASP messaging standards (JWG).

This milestone is set to revolutionize how crypto firms will be sharing data with regulators like FCA, FinCEN, MAS, JFSA, and the FATF.

According to the IVSMS101 whitepaper, adopting this standard will facilitate the exchange of KYC/AML information by VASPs in a harmonized manner.

Notably, the project is a product of three key stakeholders with interests in VASPs: International Digital Asset Exchange Association, Global Digital Finance, and the Chamber of Digital Commerce.

Sian Jones, the convener of JWG, has since confirmed that the team’s vision of a standard data model is now a reality:

“I’m pleased to confirm that the working group approved the final text and that the IVSMS101 data model standard now exists,”

InterVASP Messaging Standard, IVSMS101

With this tech in place, all VASPs will be required to integrate the IVSMS101 standard for interoperability and efficient communication.

Basically, the IVSMS101 pegs its underlying design on a universal language that will simplify the process of decoding information shared by ecosystem participants. The paper notes that such an approach, not only enhances regulation but also minimizes the cost of sharing information.

The International Digital Asset Exchange Association (IDAXA) said through an email to Coindesk that the launch of a common standard is a step in the right way since the Virtual Asset guidelines were published by FATF back in June 2019,

“Coming up with the Intervasp Messaging Standard 101 (IVMS101) as a common standard is definitely the first step in the right direction.”

As we approach FATF’s one-year progress review, the IVSMS101 standard will be a key topic. Sian Jones has been commended by the Chamber of Digital Commerce for steering and delivering on the project in good time:

“Our members have worked hard to create this standard and achieve consensus in advance of FATF timelines – a real achievement in such a complex area.”

Currently, the standard has already gained traction amongst crypto industry stakeholders with notable firms like TRISA and Sygna Bridge backing the initiative.

Despite the strong value proposition, IVSMS101 has yet to clear the air on how entities in regulated jurisdictions will communicate with those in less strict environments. What is, however, evident is the shift towards the sunrise phase where the industry is seeing more execution based on the plans and designs laid out earlier on.

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Author: Edwin Munyui

As Digital ID Systems Expand, FATF Releases Guidance for Financial Institutions

  • The FATF organization released a 77-page guidance in digital identity for financial institutions, specifically regarding cryptocurrency and the use of DLT.
  • The guidance focuses on certain “areas of focus” like the way that digital identity impacts policies for AML/CFT.

Cryptocurrency is in a constant state of innovation lately, and the whole of the financial world needs to be prepared. The Financial Action Task Force (The Financial Action Task Force is preparing financial institutions and governments on the expansion of digital identification systems by sharing its latest AML and CFT guidelines.) has already prepared for the way that digital identification systems are evolving, and they’ve recently published draft guidance on this exact topic to help financial institutions be ready as well.

The guidance came out on Thursday regarding digital identity, which is meant to support regulated entities, governments, and other stakeholders. The guidance elaborates on the enforcement of regulations concerning anti-money laundering and counter financing terrorism. This organization, which functions across multiple governments, hopes to focus on the issues that continue to arise for security and transparency, especially as financial transactions start becoming more digital.

According to the website, FATF has offered several questions that are meant to be “areas of focus.” By November 29th, 2019, private stakeholders are meant to offer feedback via email. The areas specifically include risks that may be threatening to the ability to enforce AML and CFT regulations, as well as the way to improve transaction monitoring and the possibility of impacting requirements for keeping records for FATF.

One of the tools named as a way to improve digital ID network growth is blockchain technology, or distributed ledger technology.

Authorities have been urged by FATF to:

“develop clear guidelines or regulations allowing the appropriate, risk-based use of reliable, independent digital ID systems by entities regulated for AML/CFT purposes.”

Crypto exchanges and other regulated institutions need to:

“take an informed risk-based approach to relying on digital ID systems for Customer Due Diligence.”

The guidance, which takes up 77 pages, discusses many issues that digital ID systems may face, like the way to use them for due diligence regarding customers. Along with helping financial institutions, the guidance is also supposed to be part of the efforts to reduce the risks of money laundering and terrorist financing, correlating with additional stablecoins being launched in the market. FATF highlighted the necessity for digital identity involving payment systems, helping to identify the stakeholders involved in stablecoin-related transactions.

The blockchain industry has seen a lot of activity from FATF this year, as the organization published new guidance over the summer involving cryptocurrency exchanges and other VASPs. This guidance pushed for countries to implement strict KYC protocols, managing the risks involved with digital asset transfers.

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Author: Krystle M

Global Monetary Enforcer FATF Shares Concerns About Libra And Stablecoins

The Financial Action Task Force (FATF), one of the most important financial regulators in the world, has recently voiced some concerns about Facebook’s Libra project. According to the institution, Libra and other stablecoins could pose several risks if they were to achieve mass adoption, especially when considering money laundering and terrorist financing.

Xiamgmin Liu, the president of the organization, has talked about the future and the dangers that stablecoin projects such as the Libra could pose to society. He affirmed that if stablecoins were very widespread, they could bring in new risks to the table.

According to the president, it is the responsibility of the FATF to prevent any kind of money laundering, especially when it involves new technologies and regulations. Because of this, they would have to take a very close look at these projects to prevent them from creating unnecessary risks.

Ever since the announcement of Libra, the regulators from all over the world seem to have woken up to the “dangers” of cryptocurrencies and stablecoins. While Bitcoin was often seen by many as a speculative asset or a coin used by criminals, corporate projects such as Facebook are seen as real threats to the sovereignty of countries and are receiving scrutiny.

Many authorities from all over the world seem to be concerned with the Libra and its possible uses for money laundering as well as its ability to threat national fiat currencies in countries that are not very stable. Facebook also does not have a good track record when it comes to keeping the data of its clients private, so the situation only gets worse.

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Author: Silvia A