The Road to 2021: How FATF’s June Plenary Will Shape Crypto Compliance in the Next 12 Monthsbr>
A year on since the Financial Action Task Force (FATF) first adopted guidelines for the cryptocurrency industry—mandating Virtual Asset Service Providers (VASPs) in over 200 members nations to transmit information about their customers to one another when transferring funds, the global watchdog convened again recently to review the progress of implementation worldwide. First published in June 2019, the ‘Travel Rule’ requirement detailed in Recommendation 16 of FATF’s guidance was conceived to mitigate the risks and combat money laundering and financial terrorism in the crypto industry.
Since then, only 35 (out of 54 monitored) jurisdictions have reported that they’ve created frameworks and legislation aligning with the new guidance, leaving a significant majority of the FATF’s Global Network of nations that have yet to implement regulations. Following its first ever virtual plenary in June, the FATF published its outcomes of the meeting, most notably committing to a second review process in June 2021, reaffirming its stance towards the full implementation of its Travel Rule guidance, as well as confirming that its existing standards will continue to apply to the increasingly-popular stablecoin sector. As the crypto industry continues to edge towards mainstream adoption, it is important to take stock of what another year of FATF guidance will mean for the industry.
Industry Response to the Post-Plenary Findings
With the FATF’s renewal of its 12-month review process, the post-plenary report provides few surprises for crypto industry experts as it had clearly outlined expectations early on for jurisdictions and VASPs to develop regulation and technical solutions to facilitate the Travel Rule. This was confirmed at a recent Travel Rule Summit hosted by Global Digital Finance, where a FATF representative elaborated that the second review process due in 2021 does not mean an extension of the deadline, and that the FATF is not softening their stance on the effective implementation and other obligations under the revised standard.
As stablecoins gain relevance in today’s economy, and with the development of several Central Bank Digital Currencies (CBDCs) by central banks around the world in recent times, the FATF’s continued emphasis and guidance on stablecoins was also to be expected, given the G20’s proposal to the FATF to consider Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) issues relating to stablecoins in October 2019. With stablecoins seeking to address issues such as volatility within the virtual assets sector, the FATF’s commitment towards the regulation of stablecoins should help to harmonise the regulatory landscape across digital assets and is a necessary step to encourage the establishment and legitimacy of the virtual assets sector.
Global Progress of FATF Member Nations
Achieving a state of total comprehensive regulation of the crypto industry is a complex effort, due to the different intricacies of each market and jurisdiction. However, we have already seen 35 countries reporting that they have implemented regulations that align with the Travel Rule and have demonstrated real progress in the advancement of their respective crypto sectors. Asian countries such as Korea, Japan, and Singapore have already established—or are on their way to establishing—legislations and clear, defined regulations that are Travel Rule-compliant, solidifying their place as regional hubs for digital payments adoption and fintech innovation.
Outside of Asia, Canada, the UK, the Cayman Islands, Bermuda, Abu Dhabi, and Switzerland are close to or have already implemented FATF-compliant regulations in their respective jurisdictions, while the United States has clarified its stance on existing regulation but has yet to enforce compliance of the Travel Rule for crypto assets. In Europe, conflicting regulations such as the General Data Protection Regulation (GDPR) adds privacy concerns to the Travel Rule due to the sharing of customer information required, and its own Anti-Money Laundering (AML) regime 5AMLD have caused most of the EU to fall behind on FATF’s own timelines. Complexities such as these contribute to the “sunrise” problem, where each country is expected to reach a state of full compliance at different times in slightly different ways. With nearly 90% yet to implement fully-aligned regulations, continued FATF guidance in the next year till 2021 will be a welcome move by the crypto industry, as more jurisdictions close in on implementation of Travel Rule-compliant regulations.
The Road to 2021, and the Need for Greater Interoperability Across TSPs
While authorities in each jurisdiction aim to keep up with the 2021 deadline, the need for robust solutions that help VASPs reach a state of compliance makes up the other half of the equation. With a number of TSPs presently working towards solutions that meet the needs of each region, it is important to note that there will not be a global “one size fits all” solution that works across all VASPs globally. TSPs will have to cooperate with each other, tackling key issues such as the VASP discovery problem—how different originator and beneficiary VASPs identify each other and transmit key information—and interoperability issues such as the use of different protocols and messaging formats. The implementation and development of messaging standards such as IVMS101 by the Joint Working Group for InterVASP Messaging Standards is crucial in the quest for interoperability, removing a big pain point for VASPs.
As Dr. Marcus Pleyer of Germany assumed the position of President of the FATF in July for a two-year period, the crypto industry can expect to witness the digital transformation of AML/CFT that he has already prioritised at the start of his tenure. With the FATF extending its commitment to the space, the organisation has also expressed that it will work to develop an international framework for authorities to coordinate and share information about VASPs, which will make the Travel Rule more effective. The continued guidance from the FATF towards the crypto industry as well as the development of solutions and standards to meet the Travel Rule paint an optimistic picture for the future of crypto, as we look forward to the maturation of the virtual asset sector.