USING A RISK-BASED APPROACH TO REGULATING VIRTUAL/CRYPTOCURRENCIES
Seodi White
Public Policy, Legal and Regulatory Advisory, Gender Mainstreaming at Seodi White Consult
By Seodi White
20th September 2022
The Financial Action Task Force (FATF)[1], an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing, and the financing of weapons of mass destruction proliferation works as a technical advisor to its Members. The FATF policy recommendations are recognized as the global anti-money laundering (AML) and counter-terrorist financing (CFT) gold standards.[2]
The FATF has included in its recommendations, how countries can regulate virtual /cryptocurrency transaction systems within the ambit of anti-Money Laundering and counter-terrorist financing. The organization recommends that countries adopt the Travel Rule which essentially requires Virtual Asset Service Providers (VASPs) and other financial institutions to share relevant originator and beneficiary information alongside virtual asset transactions, therefore helping to prevent criminal and terrorist misuse.
In this regard, the FATF has developed definitions that member countries can adopt in their efforts to regulate the virtual/cryptocurrency space whilst being mindful of a risk-based approach to virtual/cryptocurrency regulation.
?The following definitions are of utmost importance:
Financial Institution:
The FATF has defined this as any natural or legal person who conducts as a business one or more of several specified activities or operations for or on behalf of a customer.
Virtual Asset (VA):
This is defined as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes.
Virtual assets do not include digital representations of fiat currencies or securities.
Virtual Asset Service Provider (VASPs):
This is defined as any natural or legal person that is a business that 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.
Smart Contract:
This is a computer program or a protocol that is designed to automatically execute specific actions such as VA transfer between participants without the direct involvement of a third party when certain conditions are met.
领英推荐
Risk-Based Approach:
A risk-based approach means that countries, competent authorities, and banks identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed, and take the appropriate mitigation measures in accordance with the level of risk.
·??????How Countries Can Use the Definitions to Regulate Virtual/Cryptocurrencies Using A Risk-Based Approach (RBA)
Bearing the above-recommended definitions in mind, the question that arises at the country Level is: Who can be identified as a VASP?
The reason why the determination of who a VASP is and who may not be is important is that the regulation of virtual/cryptocurrency transactions targets those who control the blockchains who are then identified as VASPs. The FATF advises that the determination of whether a service provider meets the definition of a VASP should consider the lifecycle of products and services. For Example:
Who launches the product? Who holds the administrative key? Who retains access to the platform or collects fees or realizes profits? ?
These are the agents who conduct risk assessments before the launch or use of the platform and take appropriate measures to mitigate the risks. Countries are expected to put mechanisms in place that ensures that these parties are properly identifiable, and effectively regulated and such regulations should be enforced where there are breaches.
·??????Challenges
Regulatory agencies in countries need to support innovative practices around virtual /cryptocurrencies to spur financial innovation and efficiency and improve financial inclusion. Financial inclusion, particularly for those in the global south who by jurisdiction remain outside traditional financial systems architecture is important. However, it is also true that the very same people who become included in innovative designs like virtual/cryptocurrency frameworks can also be harmed by the same system by unscrupulous players who use the system for harm. Such as engaging in criminal activities that are predicate to money laundering, or actual money laundering,
?Achieving a balance between the two cannot be overstated, however, the reality is far from rosy.
?Take the Global South where I live and where I come from, for example, many countries in this part of the world (except Australia and New Zealand) have substantive systemic deficiencies in their public service regulatory institutions regarding both expertise in virtual/cryptocurrency and blockchain transactions and management which then results in weak regulatory frameworks that fail to effectively capture the essence of how to regulate this space using a risk-based approach.
Further, where regulatory frameworks may be in place, mechanisms for enforcement of the same would be another challenge, due to expertise and adequate resources in the enforcement space. Even if expertise was in place; to this day many countries in this part of the world suffer from very limited internet coverage and low electricity penetration as well erratic electricity output. These, not only do they press serious limitations on the private sector growth with regards to the implementation of various innovations in this space but also due to the limited expertise, approvals for operationalization such as licensing may not be as forthcoming as they would in more developed countries. In addition, there also may be a reluctance to undertake effective engagement from the public regulatory systems because the systems simply lack expertise.?
As it’s been proved elsewhere spaces, where inadequacies exist in the manner, outlined, criminal enterprises take advantage and illegally operate and proliferate the systems creating a negative feeling and more reluctance by the public sector to create an enabling environment for such innovative practices.
The question is how can global structures like the FATF support Global Southern Based countries to be at par with Global Northern-based countries in developing credible effectively reliable virtual /cryptocurrency spaces?
In the next couple of articles, I will highlight how the FATF is taking this challenge. I will also give examples of how other countries have put in place Anti-money laundering laws within the virtual/cryptocurrency space.
?
[1] https://www.fatf-gafi.org/home/
[2]?????FATF (2021), Second 12-month Review Virtual Assets and VASPs, FATF, Paris, France, www.fatf-gafi.org/publications/fatfrecommendations/documents/second-12-month-review-virtual-assetsvasps.html
??????????Accessed on 22/8/2022 at 1.27 pm CAT