This week in the crypto regulatory update, the Financial Action Task Force (FATF) held its second Plenary in Paris. India is ahead of other jurisdictions in adopting a CBDC, while France and Dubai have taken steps to regulate crypto businesses more strictly.
FATF Plenary – February 2023
On 22-24 February 2023, the Financial Action Task Force (FATF) held its second Plenary in Paris under the two-year Singapore Presidency of T. Raja Kumar. Present for the discussions were delegates from over 200 jurisdictions of the Global Network.
The following topics were covered:
- The suspension of the Russian Federation’s membership
- A member is suspended for the first time since the FATF was founded.
- The FATF issued a statement mentioning it acknowledges the United Nations General Assembly Resolution ES-11/1 requesting Russia to retract its armed forces from Ukraine’s internationally recognized borders. Due to failing to comply with this demand and violating FATF’s core principles, which, as a member, it had agreed to implement and support, Russia will no longer be allowed to participate in FATF meetings or access the Global Network’s files. In turn, the Russian Federation keeps its place and rights as a member of the Global Network of the Eurasian Group on Combating Money Laundering (EAG), meaning it must still implement the FATF Standards and meet its financial obligations.
- Mutual Evaluation Reports will be released by May 2023 for Indonesia and Qatar.
- Morocco and Cambodia are removed from the Grey List
- A series of Strategic Initiatives were discussed:
- Beneficial Ownership of legal persons and legal arrangements
- A report on ransomware attacks’ impact on disrupting the financial flows will be issued in March 2023. It will include a list of risk flags indicating suspicious activities related to ransomware and advice for entities on how to better spot them.
„Given the transnational nature of ransomware attacks, it is essential that authorities in each country build on and leverage existing international cooperation mechanisms to successfully tackle the laundering of ransomware payments. Authorities also need to develop the necessary skills and tools to quickly collect key information, trace the nearly instantaneous virtual transactions and recover virtual assets before they dissipate. This means that authorities must extend their collaboration beyond their traditional counterparts to include cyber-security and data protection agencies.”
- The need to improve the implementation of FATF requirements for VAs and VASPs.
Despite FATF’s issuance of crypto-related recommendations in October 2018 and revised in June 2022, the authority observed that many countries have failed to implement them, including Travel Rule one.
A roadmap to strengthen their implementation was agreed upon and in 2024 a report will be issued “on steps FATF members and FSRB countries with materially important virtual asset activity have taken to regulate and supervise virtual asset service providers.”
- A report showcasing the link between money laundering and art and antiquities was issued.
- Changes in the Vice Presidency were announced.
Between 2023 and 2025, Mr. Jeremy Weil, currently Head of the Canadian delegation to the FATF, will succeed Ms. Elisa de Anda Madrazo, who will step down on June 30, 2023.
Central Bank of Iran (CBI) stated at the ninth annual conference on electronic banking and payment systems that the preliminary stage of the digital rial and is moving forward with its implementation, however, it will be a slow process. Its aim is for the CBDC to be distributed among individuals and banks.
The digital rial is pegged to the Iranian rial at a 1:1 ratio. Mohammad Reza Mani Yekta, Head of the CBI office for supervising payment systems, stated that governing law of the CBDC will align with the rial banknotes.
It was reported that around ten banks have applied to join the project, and all banks in the jurisdiction are expected to offer crypto-wallets to its nationals for the use of the digital rial.
India seems to be ahead of other jurisdictions which are in the preliminary stages of adopting a CBDC. Ajay Kumar Choudhary, Executive Director (ED) at Reserve Bank of India (RBI) stated in a CNBC interview that so far, the CBDC pilot program has generated around 800K transactions and, given the interest of the jurisdiction’s nationals in this type of payment environment, is looking to scale up the number of customers to 1M.
The jurisdiction’s interest in the issuance of the CBDC is based on a vision of financial inclusion via a digital economy.
The bank’s representative stated that the CBDC will act as an alternative to cryptos, as „[i]t is aimed to complement, rather than replac[e] physical currency”, and a foreseeable feature of this project is anonymity due to the expectation that it “needs all features of physical currency”. To this end the bank is looking for an offline solution.
To further the project, RBI is „looking at cross border transactions, linkage with legacy systems of other countries” and is “looking forward to the private sector and fintechs’ participation in CBDC”.
French National Assembly voted in favor of the bill, which brings local legislation closer to proposed European Union standards:
- stricter anti-money laundering rules,
- customer funds must be segregated, and proof thereof must be kept,
- updated guidelines on reporting to regulators,
- customer protection to be enhanced by disclosing detailed risks and conflicts of interest.
By March 16, President Emmanuel Macron needs to either approve it or send it back to the legislature. If passed, the new guidelines will be applied to new entities registered from July 2023 and offering crypto services. Existing ones will need to comply with AMF’s (Financial Markets Authority) regulations until MiCA is passed.
Dubai’s Virtual Asset Regulatory Authority (VARA) issued its first crypto legislation in February 2023, known as the Full Market Product Regulations (FMP).
They apply to the Emirate of Dubai and all its free zones, apart from the Dubai International Financial Centre (DIFC), with immediate effect.
All VASPs offering virtual asset services in Dubai prior to and after the publication of the Regulations are now required to register with VARA to become fully compliant.
There are two parts of the Full Market Product Regulations: the Virtual Assets and Related Activities Regulations 2023 and a number of separate rulebooks.
General overview of the VARA Regulations:
– represent the foundation of the FMP Regulations
– present VARA’s regulatory powers, its licensing and registration requirements,
– describe regulated VA activities
– set out AML requirements and market offenses
There are several rulebooks issued that fall under the following categories:
- The Compulsory Rulebooks
All entities licensed by VARA are under the obligation to follow the:
The Activity-specific Rulebooks
All VARA-licensed entities will provide specific VA activities. For each type, there is a specific rulebook:
f) Payments and remittances services