FATF Recommendations on Virtual Assets and VASPs

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Context

• The Financial Action Task Force (FATF), a global watchdog for money laundering and terrorist financing, has identified gaps in the implementation of its standards concerning virtual assets and virtual asset service providers (VASPs).

Virtual Asset Service Provider (VASP)

A Virtual Asset Service Provider (VASP) is defined by the Financial Action Task Force (FATF) as a business that conducts one or more of the following actions on behalf of its clients:

• Exchange between virtual assets and fiat currencies
• Exchange between one or more forms of virtual assets
• Transfer of virtual assets
• Safekeeping and/or administration or virtual assets or instruments enabling control over virtual assets
• Participating in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset

This definition encompasses a range of crypto businesses including exchanges, ATM operators, wallet custodians, and hedge funds. FATF further recommends that VASPs be subject to the same stringent AML/CTF and KYC requirements as traditional financial institutions.

FINDINGS

1. Survey and Roadmap:

• The FATF conducted a survey on the implementation of its standards on virtual assets and VASPs.
• A roadmap was established in February 2023 to enhance the implementation of these standards.

2. Publication of Findings:

• The FATF has published a paper on "Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity".
• This paper outlines the status of implementation by FATF members and other relevant jurisdictions.

3. India's Compliance:

• India has conducted a risk assessment on virtual assets and VASPs.
• It has explicitly prohibited their use but is compliant with legislation/regulation requiring VASPs to be registered or licensed.
• India has included VASPs in its supervisory inspection plan and has taken enforcement actions against them.

4. Global Snapshot:

• China, Egypt, and Saudi Arabia have explicitly prohibited the use of virtual assets and VASPs.
• Seychelles and Indonesia are in progress regarding the prohibition.
• The table includes FATF members and 20 jurisdictions with materially important VASP activity.

5. Importance of Regulation:

• The FATF emphasizes the importance of regulating VASPs due to their borderless nature.
• Failure to regulate in one jurisdiction can have global implications, especially concerning money laundering and terrorist financing.
• Recent incidents, such as ransomware attacks and financing of weapons of mass destruction, highlight the urgency of effective regulation.

Conclusion:

The FATF's assessment underscores the need for robust regulation of virtual assets and VASPs to mitigate risks associated with money laundering and terrorist financing. Countries must collaborate to ensure comprehensive implementation of FATF standards in this rapidly evolving landscape.

PRACTICE QUESTION Q. Explain the regulatory challenges posed by Virtual Asset Service Providers (VASPs) in combating money laundering and terrorist financing. How can effective regulation of VASPs contribute to global financial integrity?