November 09, 2021

What FATF’s Latest Guidance Means for DeFi, Stablecoins and Self-Hosted Wallets

By Yaya J. Fanusie

The Financial Action Task Force (FATF)’s long-awaited update to its guidance on virtual assets lays out a comprehensive set of guidelines to regulate the quickly evolving cryptocurrency space. With this update released, digital assets firms in the coming years are likely to encounter more clarity on anti-money-laundering and combatting the financing of terrorism (AML/CFT) regulations around the globe, even if some jurisdictions do opt for more restrictive policies than others.

The intergovernmental body’s updated guidance should not surprise anyone who has been tracking regulator discussion on crypto illicit finance, but it does address topics that have faced great regulatory uncertainty, such as decentralized finance (DeFi), stablecoins and “travel rule” compliance.

CBDCs will likely be regulated as fiat currencies and including them under the guidance for permissionless virtual assets may complicate matters.

What it offers is not one way of dealing with these issues, but it unpacks and defines the risks that jurisdictions must address, often providing a diversity of approaches to keep emerging digital asset developments within a solid regulatory perimeter.

Here are some key takeaways for regulators, along with practical implications for the digital asset industry.

DeFi usually isn’t decentralized—FATF warns regulators to not blindly accept the crypto industry marketing that loosely calls various platforms “decentralized.” In function, these platforms typically have a natural, if not legal, person somewhere who controls or influences their activities. The term “controls or influences” is key and offers a framework to analyze who should be the entity obliged to follow AML/CFT regulations. In FATF’s view, almost all DeFi platforms are still Virtual Asset Service Providers (VASP). FATF offers a broad playbook for bringing DeFi platforms under regulatory oversight, including one suggestion that if a DeFi platform truly has no entity running it, a jurisdiction could order that a VASP be put in place as its obliged entity.

Read the full article from Coindesk.

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