In a statement on October 19, 2018 (the “October Statement”), the Financial Action Task Force (the “FATF”) announced that it has adopted changes (the “October Amendments”) to the FATF Recommendations (the “Recommendations”), to clarify the application of the Recommendations to financial activities involving virtual assets with respect to anti-money laundering and counter-financing of terrorism (“AML/CFT”) matters. The October Amendments define the terms “virtual assets” and “virtual asset service providers”, and modify Recommendation 15 (New Technologies) to provide that:
“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.”
Following a July 2018 meeting in Buenos Aires, the G20 Ministers requested clarification from the FATF on how its global anti-money laundering and counter-financing of terrorism standards were applicable to crypto assets. The FATF discussed and adopted the amendments to the Recommendations. These changes were part of the outcomes of the FATF’s plenary which took place from October 17-19, 2018 in Paris, France.
The Recommendations relate only to AML/CFT matters and do not address any potential consumer or investor protection safeguards relating to virtual assets.
Amendments to Recommendations
The October Amendments define “virtual assets” as “digital representations of value that can be digitally traded or transferred and can be used for payment or investment purposes”. According to the FATF, virtual assets include digital representations of value that operate as a medium of exchange, a unit of account, or a store of value – essentially, anything that can be tokenized as an asset and transferred on a blockchain or some other peer-to-peer format. The FATF makes it clear in its Recommendations that virtual assets are distinct from fiat or “real” currency, the designated legal tender of a country.
The October Amendments also define “virtual asset service provider” as “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.”
The FATF previously issued guidance in 2015 to encourage countries to regulate virtual currencies using a risk-based approach. However, some countries have not yet taken steps to impose measures preventing money laundering and terrorism financing using virtual assets. In the October Statement, the FATF called for international action, stating that “[t]here is an urgent need for all countries to take coordinated action to prevent the use of virtual assets for crime and terrorism.” The recent changes to Recommendation 15 (noted above) mandate that all FATF member countries should ensure that virtual asset service providers are regulated for AML/CFT purposes.
As a next step, the FATF will prepare and update its guidance on a risk-based approach to address the regulation of virtual asset service providers, as well as provide guidance for operational and law enforcement authorities on identifying and investigating illicit activity involving virtual assets. The FATF will also review its virtual asset-related standards in the next 12 months to ensure they remain relevant, given the pace of innovation.
In Canada, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act was amended in 2014 to extend the application of the Act to persons “dealing in virtual currencies”, and the related draft regulations providing further detail on AML/ CFT regulation of virtual assets were issued for comment in June 2018. As a FATF member country, further FATF guidance on AML/ CFT regulation of virtual assets will be of relevance to Canada and virtual asset businesses operating in Canada, as Canada finalizes these regulations.