What has happened?
A global anti-money laundering (AML) body has urged all countries to "urgently" take steps to prevent the misuse of virtual assets.
What does this mean?
The Financial Action Task Force (FATF) has said in a statement that there is "an urgent need" for countries to take co-ordinated action to stop virtual currencies being used to finance crime and terrorism.
Explaining why the move is important, Hogan Lovells Partner Gregory Lisa said:
“It’s notable – and not an accident – that the FATF repeats the use of ‘urgent’ throughout its statement. They see an increasing divide in some jurisdictions that are regulating in this space and those that aren’t. The implicit concern through this guidance is that bad actors will gravitate to the unregulated jurisdictions, jeopardising AML and and combatting the financing of terrorism (CFT) controls worldwide and allowing havens for money laundering, terror finance, and other forms of illicit finance.”
In 2015, the watchdog issued the FATF Recommendations, setting out a risk-based approach to virtual currencies and requirements for combating money laundering and terrorism financing.
Among other things, the risk-based approach requires jurisdictions to identify money laundering and terrorism financing risks, including those linked to new products and practices such as virtual assets, and take steps to mitigate them.
Financial institutions, in particular, should ensure that the risk assessment takes place before launching new products or business practices.
"Given the urgent need for an effective global, risk-based response to the AML/CFT risks associated with virtual asset financial activities, the FATF has adopted changes to the FATF Recommendations and Glossary that clarify how the Recommendations apply in the case of financial activities involving virtual assets," the FATF said.
The changes add new definitions of “virtual assets” and “virtual asset service providers” to the Glossary and also make clear that virtual asset service providers need to be subject to AML/CFT regulations, be licensed or registered as well as monitored to check compliance.
The FATF said:
"All jurisdictions should urgently take legal and practical steps to prevent the misuse of virtual assets. This includes assessing and understanding the risks associated with virtual assets in their jurisdictions, applying risk-based AML/CFT regulations to virtual asset service providers and identifying effective systems to conduct risk-based monitoring or supervision of virtual asset service providers."
The watchdog added that some jurisdictions already regulate virtual currencies according to the 2015 guidance and that these latest clarifications are "largely compatible" with their existing regulatory requirements.
What happens now?
Going forward, the FATF said it will prepare an updated guidance on a risk-based approach to regulating virtual asset service providers, including their supervisions and monitoring as well as guidance for operational and law enforcement authorities on identifying illicit activity involving virtual assets.
“By June, we will issue additional instructions on the standards and how we expect them to be enforced,” FATF President Marshall Billingslea said, as reported by news agency Reuters.
"In light of the rapid development of the range of financial functions served by virtual assets, the FATF will also review the scope of activities and operations covered in the amended Recommendations and Glossary in the next 12 months and consider whether further updates are necessary to ensure the FATF Standards stay relevant," the watchdog added.
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