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Updated Guidance from the FATF Regarding a Risk-Based Approach for Virtual Assets and Virtual Asset Service Providers

On October 28, 2021, The Financial Action Task Force (FATF), an inter-governmental body that sets international standards with an aim to prevent global money laundering and terrorist financing, released updated guidance related to Virtual Assets and Virtual Asset Service Providers (VASPs).  This updates guidance previously released by the FATF in 2015, October 2018, and June 2019.

One of the most important hurdles for virtual assets and cryptocurrency to overcome is to convince regulators, legislators, and the public that this growing industry does not foster money laundering and other financial crimes. Key to this challenge is dealing with the fact that many anti-money laundering regulations focus on “know your customer” rules.  On the other hand, a defining feature of much of the virtual asset industry is the anonymity of the “customer” and that “service providers” may be a decentralized code running on a series of nodes without the ability to track or know anything about a customer’s identity or background. In general, the report does a good job focusing on where its authors perceive the actual risk to be, particularly systematic risk and trying to not hamper technological innovation.

Among the important changes between this guidance and the guidance issued by the FATF from June 2019 which it replaces is a focus on stablecoins, virtual assets whose values are pegged one or more other currencies. The potential for stablecoins to be adopted for widespread commerce has led to increased scrutiny of them by global regulators, as these digital assets pose a systemic risk to the economy if a stablecoin were to be criminally exploited or to just flat out fail.

For the growing NFT (non-fungible token) market, this guidance is likely to be of some relief since it indicates that it does not consider most assets that are bought for purely speculative purposes to be virtual asset subject to legal scrutiny.

Finally, with regard to DeFi, or decentralized finance, the guidance indicates that a truly decentralized software protocol would not be considered a VASP under the FATF standards, as the Standards do not apply to underlying software or technology. However, care must be taken that even if those arrangements seem decentralized it may fall under the FATF definition of a VASP where they are providing or actively facilitating VASP services.” 

There are also other important updates related to peer-to-peer platforms and the “travel rules,” among other matters.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume XI, Number 306
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About this Author

Daniel L. McAvoy Shareholder Investment Funds Securities & Corporate Finance Mergers, Acquisitions and Divestitures Corporate and Transactional Joint Ventures and Strategic Alliances
Shareholder

Dan McAvoy focuses his practice on private closed-end investment funds, corporate finance and M&A with a focus on private investment fund transactions, including complex GP-led restructurings and secondary transactions. Dan is a trusted adviser to numerous investment advisers, fund sponsors and investors, and has represented a range of companies, from startups to Fortune 500 companies. Dan has also represented portfolio companies and sponsors through all parts of the corporate life cycle, including formation, venture financings, add-ons, stock sales, asset sales, private and...

212-413-2844
Stephen A. Rutenberg Shareholder Polsinelli New York Bankruptcy and Financial Restructuring Bankruptcy Litigation Capital Markets ,Commercial Lending ,Debt and Claims Trading, Financial Services, Insolvency, Financial Technology FinTech and Regulation
Shareholder

Stephen Rutenberg’s practice focuses on the intersection of special situations investing and FinTech including cryptocurrency and blockchain technology. 

A significant component of Stephen’s practice relates to his work in the distressed debt market, representing clients in the purchase and sale of loans and securities of distressed and bankrupt companies. Recent representations include advising on the purchase, sale and financing of bankruptcy trade claims in several major chapter 11 cases, including Lehman Brothers, and the MF Global and Icelandic bank liquidations. He works with...

212.413.2843
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