FATF releases updated virtual asset and virtual asset service provider guidance

On 28 October, the Financial Action Task Force (FATF) issued an update for its 2019 Guidance for a Risk-Based Approach to Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) (Updated Guidance) in relation to anti-money laundering and countering financing of terrorism (AML/CFT).  This followed the FATF’s Second 12-Month Review of the Revised FATF Standards on Virtual Assets and Virtual Asset Service Providers (Virtual Assets Review) released earlier this year.

The Updated Guidance and a summary document, as well as the FATF’s International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (FATF Recommendations), can be found on the FATF website.  We have, in previous releases, discussed both the 2019 guidance and the Virtual Assets Review.

Who needs to read it?  Why?

This will be of direct interest to VASPs and any others involved in the business of VAs.  As the economy continues to become increasingly digitised, this range of entities will keep expanding.

While FATF guidance can assist with the interpretation of domestic law, such as the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act), it is also an indicator of the potential direction of law reform in New Zealand.  VAs and VASPs were raised as a topic of interest in the recent consultation document for the Ministry of Justice’s Statutory Review of the AML/CFT Act (Statutory Review) (our discussion of which can be found on our website).

What does it cover?

The Updated Guidance is intended to help countries and VASPs understand their AML/CFT obligations, and effectively implement the FATF’s requirements as they apply to this sector.

According to the FATF Recommendations, a VA is “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes”, while a VASP is a person that, as a business, conducts one or more of a range of prescribed activities related to VAs.

The Updated Guidance substantially expands on the previous 2019 guidance.  The revisions focus on six key areas, namely:

  • clarification of the definitions of VAs and VASPs;
  • guidance on how the FATF Standards apply to stablecoins and entities involved with them;
  • additional guidance on the risks and tools available to countries to address the money laundering and terrorist financing (ML/TF) risks for peer-to-peer transactions;
  • updated guidance on the licensing and registration of VASPs;
  • additional guidance for the public and private sectors on the implementation of the “travel rule”; and
  • principles of information-sharing and co-operation amongst VASP supervisors.

The Updated Guidance points out that the VA and VASP definitions are intended to be expansive.  The FATF expects jurisdictions to use the fundamental concepts to take a functional approach able to accommodate technological advancements and innovative business models.

Assets or services should be considered on the basis of their characteristics, not the technology they employ or the terminology used to describe them.  For example, the Updated Guidance notes that:

  • non-fungible tokens may, based on their nature, generally not be considered VAs, but their function or use in practice can change this;
  • providers of ancillary infrastructure, or developers of software or hardware, would not generally be VASPs, unless the particular facts and circumstances actually trigger the definition; and
  • digital currencies issued by central banks would, for the FATF’s purposes, be categorised as fiat currency rather than VAs, and fall outside the scope of the Updated Guidance.

Our view

The Updated Guidance is timely and to be welcomed, especially if it results in greater clarity in relation to the application of the regime in New Zealand under the AML/CFT Act.

As we raised in our discussion of the 2019 guidance, many participants in the VA space in New Zealand find the current ambiguity frustrating, with supervisor guidance indicating coverage beyond that provided for on the face of the AML/CFT Act.  As a result, there can be an uneven playing field, with those who take a high-compliance approach facing competition from those applying the law strictly as written.

Further, the ambiguity means market participants are reliant on individual supervisor guidance or legal advice in order to know how to comply, and that guidance can vary depending on when it is given and can be understood differently by different participants.

If the Statutory Review takes on board the Updated Guidance and results in changes to the AML/CFT Act, many of those concerns will be resolved.

Further, the Updated Guidance explicitly recommends that jurisdictions should, in regulating VASPs, be aware of the impacts that may have on other areas, such as financial inclusion and financial innovation.  This will be crucial to keep AML/CFT obligations proportionate to actual risks.

This is also an important reminder that we need to balance our understandable desire to “becom[e] the hardest place in the world for money laundering, terrorism financing, and financing the proliferation of weapons of mass destruction” (as stated in the Terms of Reference for the Statutory Review) against the risk of unintended consequences, such as driving legitimate innovation offshore or excluding law-abiding citizens from the financial system.

In the context of the 2019 guidance, we previously raised that any New Zealand regulation of VAs should be designed with how other jurisdictions do so in mind.  If not, it risks pushing talent and innovation overseas, without materially reducing ML/TF risk.  This is reinforced by the FATF in the Updated Guidance, encouraging countries to strive for “even and efficient implementation globally in order to avoid jurisdictional and supervisory arbitrage”.

What next?

Given the timing, any changes to the regulation of VAs and VASPs in New Zealand would come out of the ongoing Statutory Review.  That also provides an opportunity for anyone wishing to submit on how VAs and VASPs should be treated by the New Zealand AML/CFT regime.  Submissions close at 5pm on Friday 3 December 2021, and may be emailed to aml@justice.govt.nz.

If you have any questions in relation to VAs, VASPs, or the AML/CFT regime generally, or would like assistance with submissions, please contact one of our experts.

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