The Second 12-Month Review of the Revised FATF Standards on Virtual Assets has been published on the FATF website today.
Coinfirm has contributed to the preparation of the paper by providing blockchain analytics data to one of the elements of the review – namely peer-to-peer transactions metrics. Although we would recommend familiarizing one’s self with the summary of the data presented in the paper, the P2P market is not the only subject covered. The document discusses:
The FATF has been continuing its efforts in providing guidance on virtual assets as well as fostering a dialogue between the private and public sectors. Between Sept 2020 and April 2021, FATF hosted or participated in several information sharing and guidance discussion meetings. Coinfirm had the opportunity to participate in meetings devoted to Travel Rule updates, discussion about market trends, and the proposal of updated FATF Guidance on Virtual Assets. We were also proud to present to FATF members the metrics that fed into the report.
Since September 2020 FATF has issued the following papers with guidance relating to crypto-assets:
The paper provides numbers illustrating the progress in implementing the revised FATF standards in crypto, based on the self-assessment questionnaire responses provided by 128 jurisdictions and on mutual evaluations.
The overall conclusion is not optimistic, yet it does not come as a surprise to those close to the crypto-asset industry like Confirm:
After two years many jurisdictions still do not have the basic regulatory framework for VASPs. On a positive note though, the number of jurisdictions that have implemented crypto AML regulations is higher than reported last year.
Data indicating compliance rates:
Based on the data collected by FATF, 2,374 VASPs are registered/ licensed, which doubles the reported number of registered/licensed VASPs recorded in the first 12-month review (1,133 VASPs).
The FATF review concludes that two years after the FATF revised its Standards, most jurisdictions and most VASPs are not complying with the Travel Rule.
The FATF notes that the virtual assets sector market has grown significantly, which appears to indicate that introduced regulation does not stop the business development. In fact, more regulatory certainty may be conducive to business growth.
The review also notes the increasing adoption of virtual assets in the mainstream of the traditional financial sector.
The FATF outlines the following AML/CFT trends observed in virtual assets:
The report provides a concise graphic summary of the metrics provided comparing the results from the seven companies that participated in the exercise. The FATF notes the differences in the statistics provided by blockchain analytics companies explaining various factors that may have influenced these discrepancies, at the same time underlying that:
“Despite these limitations, blockchain analytics can provide interesting insights into the use of virtual assets that are not available with traditional financial products and services. Moreover, blockchain analysis can be useful for investigative purposes to track identified illicit funds or attribute identities of wallet holders. Such tools can be of great potential benefit to law enforcement, FIUs, supervisors, VASPs and the broader private sector in fulfilling their AML/CFT obligations and combating illicit activity.”
Below are two selected graphs from the section of Peer-to-Peer Market Metrics, Graph 2, detailing the proportion of bitcoin transactions that occured without a VASP between 2016-2020 and Graph 3, detailing the proportion of identified illicit bitcoin transactions between 2016-2020. Both graphs show data given by a number of blockchain data analytics firms.
The FATF notes the differences in the statistics provided by blockchain analytics companies explaining various factors that may have influenced these discrepancies. It was the first attempt at gathering market metrics and one of the lessons learnt was the fact that different data providers may have used different definitions of;
The first 12-month review identified five main issues where further FATF Guidance was needed;
To address these five areas, the FATF is updating its 2019 Guidance on virtual assets and VASPs (to be published by Nov 2021).
Definition of virtual assets and VASPs:
The FATF states its focus will be maintained on placing AML/CFT controls on intermediaries – in the absence of clear evidence that P2P transactions constitute a significant portion of illicit transactions and given the strong evidence of the risks posed by deficient or non-compliant VASPs. At the same time, it is clearly noted that if P2P transactions were to increase, FATF Standards may need revision.
Jurisdictions and private sectors need to consider ways to identify and mitigate risks posed by P2P in advance. The FATF revised guidance by November 2021 will provide more information on P2P risk and mitigation.
The FATF will release updated guidance that includes more information on the Travel Rule by November 2021
All jurisdictions should take action to implement the Travel Rule. Rapid implementation by all jurisdictions is believed to act as the catalyst to promote the development of technical solutions and compliance by VASPs.
The overall conclusion is that there is not yet sufficient implementation to enable a global AML/CFT regime for VASPs.
The FATF calls all jurisdictions to implement and enforce AML/CFT requirements for VASPs as soon as possible. If they do not consider that they can effectively regulate VASPs, they should consider prohibiting VASPs through the law while they develop this expertise.
In June 2021 FATF released Guidance on Proliferation Financing Risk Assessment and Mitigation, which – among other things – aligns the proliferation financing obligations across FIs, DNFBPs, and VASPs.