Updated FATF Crypto Guidelines Still ‘Predicated on Centralized Control’
The Financial Action Task Force (FATF)’s recently updated guidance for supervisors overseeing the crypto industry was always bound to create waves in the sector and beyond. Regulators are continuing to gun for crypto compliance – despite claims that they may be trying to force a square peg into a round hole.
Regardless, governments around the world have already begun the process that will see its guidelines – including the potentially problematic Travel Rule – enshrined into their national codes of law.
And William Scott Grob, the Anti-Money Laundering Director for the Americas at the Association of Certified Anti-Money Laundering Specialists (ACAMS), has claimed that the FATF’s latest efforts, are “far from the complete solution needed by the industry” but it’s still “a good attempt by supervisors to get a handle on the issue.”
Speaking to Cryptonews.com, Grob stated that the FATF’s approach to “technical compliance recommendations” may be well-intentioned when it comes to fighting anti-money laundering (AML), counter-terrorist financing (CTF) and non-proliferation financing, but in the real world, “these efforts have yet to dampen financial crime.”
“It is a slow march of incremental steps backward and forward without addressing the criminal activity. If anything, the criminal syndicates have gotten savvier and more technical than their public counterparts.”
Indeed, some would agree that particularly when it comes to crypto, regulators almost always seem to find themselves a step behind both industry innovators and unscrupulous cybercriminals.
An industry expert told Cryptonews.com late last year that the Travel Rule is “not fit for purpose” – due largely to the fact he felt that it was grounded in principles that apply to the conventional financial sector rather than crypto-specific industries.
Grob agreed that the Travel Rule “will not satisfy many crypto advocates without sacrificing the technology requirements” and explained,
“Payment transparency is built on a method of information transmission that allows the sending party, intermediary, and receiver to have clarity on the originator and beneficiary details.”
But, he added, this “conventional approach” seeks to police financial institutions “in a similar manner irrespective of technology.”
Crucially, he noted, the FATF’s approach is “predicated on centralized control exerted on all parties.” And as the very nature of crypto is built around models of decentralization, it appears the regulator is attempting to pull the industry in a direction it cannot and will not go in.
If at first you don’t succeed…
If there is one lesson history will teach the sector on matters such as these, however, it is this: Regulators will not simply pack up and go home if they cannot find a solution that works.
Perhaps, evidence suggests, a top-down solution is not what is required: There are signs that an answer may be found by looking to East Asia, where some nations have been attempting to enlist the help of the private sector in their regulatory efforts.
In its own updated guidelines document, the FATF discusses the case of Japan where the top financial regulator, the Financial Services Agency (FSA) began policing virtual asset service providers (VASPs) in earnest in 2017.
The FSA’s 2017 probes, in the words of the FATF, “found consistent failings in the quality of [Customer Due Diligence (CDD) and Know Your Customer (KYC)] and record-keeping, as well as a lack of regulatory understanding and expertise in key positions.”
The FATF continued,
“Dialogue with the sector can be an important way to address these issues and present best practice. The FSA has periodically reached out to VASPs through mainly the [self-regulatory] Japan Virtual and Cryptoassets Exchange Association to provide feedback on issues it is encountering.”
Grob too feels that Japan and Singapore are on the right path with their dialogue-rich approach to VASP compliance-related matters.
“Both Japan and Singapore emphasize greater private-public collaboration, incubating technology-led solutions, and more meaningful discourse with the virtual asset community. I prefer harnessing technology and the organizations behind the technology as a progressive approach than being punitive with enforcement actions,”
In the short term, it appears that the regulatory landscape is unlikely to change much, as the FATF seems to have a roadmap it does not really care to deviate from.
But there is still some wriggle room, Grob hinted.
In its original guidelines, published back in summer 2019, the FATF introduced Recommendation 15, which, in its own words “requires countries to ensure that service providers also assess and mitigate their money laundering and terrorist financing risks and implement the full range of AML/CFT preventive measures under the FATF Recommendations.”
These include “customer due diligence, record-keeping, suspicious transaction reporting” and “screening all transactions for compliance with targeted financial sanctions.” And the FATF specified that this was to be done “just like other entities subject to AML/CFT regulation.”
But in a recent follow-up report on progress in the Cayman Islands and Denmark, the FATF has shown it can be flexible – to some extent.
Grob says that the FATF “will encourage countries to improve their VASP controls with downgrades of Recommendation 15,” as “the entire approach is to protect” existing “financial systems.”
Regardless, much needs to change if international regulators are really serious about policing the industry.
Grob stated that the FATF “needs to address the gaps in law enforcement and prosecution.”
Instead of continuing to focus its energy on strengthening supervisory regimes and “pressuring regulated entities to enact AML, CTF and non-proliferation controls,” he stated, it is important that regulators realize that the crypto industry is built around a very different set of principles.
“New gaps in knowledge, competency, and technical expertise will emerge as the industry adapts,” he explained.
The key to success, Grob concluded, will involve realizing that previous regulatory efforts have led to little more than “the financial exclusion of higher-risk customers, jurisdictions and channels without addressing criminal activity” – which the ACAMS executive termed “a costly exercise” for both “the consumer and taxpayer.”
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