Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers

The FATF established new AML (Anti-Money Laundering) and CFT (Countering the Financing of Terrorism) regulations for virtual assets (VA) and virtual asset service providers (VASPs) in Paris on June 27, 2023 for the prevention of crimes and terrorist activities. The three assessments performed by FATF have analyzed compliance with their VA and VASP standards. This document provides an assessment of FATF Recommendation 15 compliance alongside its Interpretative Note R.15/INR.15 that contains Travel Rule requirements for countries. The document evaluates both new risk factors and market evolution aspects of Non-Fungible Tokens (NFTs), Decentralized Finance (DeFi), Peer-to-Peer transactions (P2P), unhosted wallets, and stable coins.

FATF’s report shows that jurisdictions face difficulties in implementing vital requirements which include risk evaluations alongside regulations for VASPs as well as monitoring assessments. The 98 FATF mutual evaluation and follow-up reports conducted since R.15/INR.15 revisions show that 75% of jurisdictions either have partial compliance or no compliance with FATF requirements. The vital implementation of the Travel Rule for battling money laundering plus terrorist financing has also been inadequate. A response analysis from FATF’s 2023 Survey reveals that more than 50% among 151 participating jurisdictions have not commenced implementation of the Travel Rule. The lack of regulation regarding virtual asset service providers and virtual asset risks constitutes a serious problem. Unregulated circumstances produce major gaps which criminals can utilize to their advantage. Jurisdictional authorities need to speed up their implementation of R.15/INR.15 because their immediate adoption is crucial to stop terrorists and criminals from misusing VA and VASPs.

The FATF report commends private sector members for their joint initiatives which boost industry adherence to Recommendation 15 and its Interpretative Note 15 by adopting the Travel Rule. The FATF report highlights that all stakeholders must perform the necessary steps to identify and minimize risks combined with their continued efforts to develop and deploy Travel Rule-compliant tools.

Unhosted wallets along with DeFi networks represent a small number of transactions but still carry risks from improper utilization while handling peer-to-peer exchanges. Sanctioned parties could possibly be involved with these risks. FATF plans to conduct continued surveillance of money laundering risks because of potential evolution in this sector.

The FATF demands that all countries should rapidly establish and execute FATF Standards on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) with the Travel Rule requirements. The FATF released a framework during February 2023 to improve the implementation of R.15. In accordance with this framework and in light of the report’s findings, FATF goals involve:

• The organization should maintain outreach programs alongside support measures for jurisdictions which demonstrate limited operational capacity.
• The FATF will track and disclose all actions taken by its member jurisdictions and key jurisdictions which conduct VASP activities to fulfill Recommendation 15 together with its Interpretative Note 15.
• The FATF should actively engage in knowledge exchange regarding DeFi, P2P and unhosted wallets together with their issues, and they must track industry trends for substantial market developments which might need further attention.
• The implementation process will be evaluated through AML assessments to determine how much progress has been achieved and what obstacles remain. The process requires member nation and private sector’s continuous communication regarding advancements and obstacles.