For over five years, including within this blog, we have written about the changes in application of anti money laundering and counter terrorist financing (AML/CFT) regulations to activity involving crypto assets. But further legal changes and notable new interpretations continue to arise.
As I wrote nearly a year ago, at the request of the G20 countries the issue of crypto assets was taken up recently by several key global organisations involved in establishing standards in specific fields. One of them is the Financial Action Task Force (FATF), an international organisation appointed to develop and assist in implementing and monitoring standards for combating money laundering, financing of terrorism, and financing of the proliferation of weapons of mass destruction.
The details of the fruits of the FATF’s efforts have now been released. These involve first and foremost:
- FATF Recommendations revised to reflect crypto assets
As updated in June 2019, FATF Recommendation 15, concerning new technologies, has been significantly revised. The second paragraph of this recommendation now addresses crypto assets and reads as follows:
“To manage and mitigate the risks emerging from virtual assets, countries should ensure that virtual asset service providers are regulated for AML/CFT purposes, and licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations.”
This is a brief statement with serious consequences. It means that AML/CFT will be applied to a new set of entities, known as virtual asset service providers. VASP operations will require a licence or at least entry in a relevant register. By contrast, previously the FATF Recommendations covered primarily entities involved in the exchange of cryptocurrencies into traditional currencies, and other entities operating on the boundary between the traditional financial system and the world of blockchain.
- Adoption of definition of VASP
A definition of “virtual asset service provider” (VASP) is published in the glossary included in the recommendations:
“Virtual asset service provider means any natural or legal person who is not covered elsewhere under the Recommendations, and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:
i. exchange between virtual assets and fiat currencies;
ii. exchange between one or more forms of virtual assets;
iii. transfer of virtual assets;
iv. safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
v. participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.”
This definition of VASP greatly expands the group of entities covered by AML/CFT regulations. Undoubtedly many question marks will be raised about various business models and whether they fall within the classification of the aforementioned services. Point (iii) is striking for the meaning of the word “transfer” in the context of blockchain, while point (v) clearly extends to numerous services connected with organising initial coin offerings. The new definition of “virtual assets” is equally broad and undoubtedly covers most types of crypto assets now functioning on the market, including various tokens.
- Adoption of interpretative note and position of the FATF
The changes in the FATF Recommendations also include the Interpretive Note to Recommendation 15, which forms a part of the Recommendations, as well as the position issued by the FATF on virtual assets and VASP. There the FATF makes numerous interpretations of the new recommendation under a range of factual scenarios, including some of the most innovative ones, e.g. connected with decentralised applications (dapps). These documents should be analysed closely by all entities involved in crypto assets, bearing in mind that the definition of this notion is unusually broad.
The FATF Recommendations do not constitute binding law. The practice nevertheless shows that the Recommendations are consistently implemented by most jurisdictions around the world. The latest changes in EU law on AML/CFT (directives AMLD4 and AMLD5), subsequently implemented also in Poland, rely to a great extent on the FATF Recommendations. Therefore, it is probably only a question of time before the new Recommendations are implemented in the EU and consequently also in Poland. Market participants should carefully follow the unfolding of events. There is a great risk that the anticipated proposals for new regulations will only exacerbate the existing doubts in interpretation.