Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers
In Paris on June 27, 2023, FATF extended Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations to virtual assets (VA) and virtual asset service providers (VASPs) in 2019 to prevent their exploitation by criminals and terrorists. Since then, FATF has conducted three assessments, focusing on the adherence to its standards in the VA and VASP sector. This report gives an update on countries’ compliance with FATF’s Recommendation 15 and its Interpretative Note (R.15/INR.15), which includes the Travel Rule. It also addresses emerging risks as well as market developments, including Non-Fungible Tokens (NFTs), Decentralized Finance (DeFi), Peer-to-Peer transactions (P2P), unhosted wallets, and stable coins.
According to FATF’s report, jurisdictions are still grappling with essential obligations such as conducting risk assessments, establishing regulations for VASPs, and carrying out supervisory inspections. Out of 98 FATF mutual evaluation and follow-up reports conducted since the adoption of the revised R.15/INR.15, 75% of jurisdictions are only partially or not in compliance with FATF’s requirements. Progress on implementing the Travel Rule, a crucial measure for combating money laundering (ML) and terrorist financing (TF), has also been insufficient. Shockingly, over half of the 151 Jurisdictions that provided a response to FATF’s 2023 Survey have yet to take any steps toward implementing the Travel Rule. This is a matter of grave concern, given the increasing risks associated with virtual assets and virtual asset service providers. The lack of regulation creates significant loopholes that can be exploited by criminals. These findings emphasize the pressing necessity for jurisdictions to expedite the adoption and enforcement of R.15/INR.15 in order to prevent terrorist and criminal misuse of VA as well as VASPs.
In its report, FATF recognizes the collaborative efforts of private sector members aimed at enhancing industry compliance with Recommendation 15 and its Interpretative Note 15, which includes the implementation of the Travel Rule. The report emphasizes the importance of all stakeholders implementing suitable measures for identifying and mitigating risks, while also stressing the need for ongoing efforts to develop and adopt fully compliant tools that support Travel Rule compliance.
Despite not representing a significant portion of overall transactions, there is a risk of misuse involving unhosted wallets and DeFi platforms, including peer-to-peer transactions. This risk includes the potential involvement of sanctioned actors. Acknowledging this, FATF will maintain a vigilant watch over illicit financing risks and any advancements in this particular sector.
The FATF urges all nations to promptly adopt and implement the FATF’s Standards on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs), which includes the implementation of the Travel Rule. In February 2023, the FATF introduced a roadmap designed to enhance the execution of R.15. Aligned with this roadmap and in response to the insights from this report, FATF intends to:
- Continue engaging in outreach efforts and offering support to jurisdictions with limited capacity.
- The FATF will document and make public the measures undertaken by member jurisdictions and other jurisdictions with significant VASP activities in implementing Recommendation 15 and its Interpretative Note 15.
- Promote the exchange of discoveries, insights, and difficulties, particularly in the realms of DeFi, P2P, and unhosted wallets, and vigilantly observe market trends in these areas for significant developments that may require additional attention from the FATF.
- Maintain ongoing communication with member nations and private sector to discuss advancements and obstacles AML assessment will be carried out to evaluate the progress made and assess the remaining challenges in the implementation process.