Cryptocurrency firms could be forced to take greater steps to combat money laundering under new guidelines released on Thursday by the Financial Action Task Force, an international body that coordinates government policy on illicit finance.
The task force called on governments to broaden regulatory oversight of crypto firms and force more of them to take measures such as checking the identities of their customers and reporting suspicious transactions to regulators.
The FATF’s guidelines don’t have the force of law, and would need to be implemented by national regulators in each country. Still, the Paris-based group is influential in setting standards for government policies against money laundering and financing of terrorism, and its guidelines could shape new crypto regulations around the world. More than three dozen countries are FATF members, including the U.S., China and much of Europe.
Representatives of the crypto industry criticized a draft version of the guidelines that the FATF released in March, saying they would undermine privacy, stifle innovation or simply not work in the context of blockchain and digital-asset technology.
Among the targets of the FATF’s guidelines is decentralized finance, or DeFi for short. DeFi is an umbrella term for various efforts to implement traditional financial activities—such as lending or trading—using software rather than a central intermediary to oversee transactions. DeFi has grown rapidly since last year, with over $100 billion of assets posted as collateral in various DeFi projects, according to data provider DeBank.
The guidelines take aim at DeFi projects such as decentralized exchanges, in which crypto traders can swap assets with each other, typically on an anonymous basis. The task force said the people or companies that own or operate such decentralized platforms could be considered virtual asset service providers, or VASPs, a designation that would force them to check users’ identities and take other measures against money laundering.
DeFi developers say their software runs autonomously on the Internet, governed by decentralized communities of users, and thus shouldn’t be the subject of regulation, which typically focuses on financial intermediaries. The FATF cast doubt on such claims in its guidelines. “It seems quite common for DeFi arrangements to call themselves decentralized when they actually include a person with control or sufficient influence,” the task force wrote.
In other parts of the guidelines, the FATF said companies behind stablecoins should be required to comply with anti-money-laundering rules. Stablecoins, like tether, are digital coins that seek to track the value of a traditional currency like the dollar.
The task force also beefed up an existing rule that requires VASPs to track and share information about customers making virtual-currency transfers—for instance, if a trader moves bitcoin from one crypto exchange to another. Under the enhanced version of the rule, the firms must check that neither the sender nor the recipient of the fund transfer are subject to sanctions.
In the U.S., crypto exchanges such as Coinbase Global Inc. and Kraken already comply with rules against money laundering by verifying customer identities and reporting suspicious transactions to the Financial Crimes Enforcement Network, or FinCEN, a unit of the Treasury Department.
But some countries have looser regulatory regimes and are home to crypto firms that don’t police rigorously for illicit activity. The FATF could potentially crack down on such countries by adding them to its list of jurisdictions with deficient protections against money laundering and terrorism financing. Being added to the FATF’s so-called gray list can harm a country by leading to decreased foreign investment and making banks reluctant to do business there.
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