Intergovernmental organization FATF turns its vigilant sight to the cryptocurrencies. In the recent weeks the organization has published report on the United Kingdom Financial System, where they note the fact that existing anti-money laundry (AML) policy is clearly lacking. Generally speaking, the existing policy is deemed to be highly effective but it undeniably can’t function adequately when it comes to the digital currency industry. The U.K’s authorities are urged to improve the existing legal framework as it is happening in other countries right now.
There is a significant financial motivator behind it. Social and economic costs of organised crime take a hefty sum of money out of the royal coffers - around $30 billion a year. The biggest offenders are: illegal drugs ($13.5 bln) and fraud ($11.2 bln). According to the FATF’s report, British government fully understands the problem and their efforts to cut off the illicit financial sources are on part with the international standards. However, the data from the reports obviously shows that their legal framework is unable to deal with the new challenges such as crypto.
And it’s not only about the international community, it’s about the market as well: existing crypto exchanges are under a constant threat of being forced to relocate due to the inadequate legal status. Furthermore, the failure of the national stablecoin project clearly shows that crypto infrastructure that already exists in the country is very weak and quite fragile. And this situation is quite dangerous for the financial stability as well, therefore FATF strongly advocates covering virtual currencies exchange providers by AML/CTF requirements and expand all related supervision to them.
Despite the fact that FATF isn’t a legal institution, its recommendations have the power of law. David Tevfik SAYIN, fintech and it-company director from Istanbul (Turkey), believes that the intergovernmental group can be called international mega-regulator. For instance, the payment gateway processors (white labelled) and merchant account suppliers are forced to deal with limitations issued by FATF, despite the fact that the organization's pieces of advice are recommendations, and not legal obligations. The real power behind them is provided by sanctions of the international community.
Back in 2015, when the interest towards the crypto was on the rise, along with the efforts to combat the global terrorist threat, FATF took a close look towards the young industry. As a result - Guidance for a Risk-Based Approach to Virtual Currencies was published. And according to the book, every financial entity should weight out all pros and cons when dealing with digital asset based products or business by carrying out a risk assessment before launching it.
However ignoring or paying little to no attention towards FATF is possible but that will come at a cost. Countries or organisations that repeatedly refuse to work with the task force and follow their recommendations about AML/CTF, are at serious risk of getting “blacklisted” which means a status close to the terrorist supporters.
A good example of precautions that organisations are taking to avoid FATF wrath is Bithumb, fifth largest exchange in the whole world (with daily trading volume of $400 million), that took an entire “extra mile” to please them. Back in May the platform has banned trading for clients from 11 countries from the organisation’s blacklist that include DPRK, Iran, Yemen, Bosnia and Herzegovina and other countries and territories.
And it was not only about them, this was influenced by the country's officials and Korea Blockchain Association that is serving as a middleman between the country and market’s players that are getting ready for the upcoming test from FATF coming in 2019-2020.
And there is a solid reason for all this - Taiwan has served as a good example of the negative consequences that can happen with the repeated violators. At the moment they are taking a lot of measures to change that: for example Taiwanese clients of the crypto exchanges are working within a strict KYC framework. You either reveal your real identity or bank will put your operation on hold and report about it.
There is a reasoning for such a restrictive measure - back in 2016 New York state’s financial regulator fined Mega International Commercial Bank for anti-money laundering violations an overall lax attitude towards the negligent attention to violations in general. Mega International Commercial Bank of Taiwan, the New York branch, was “indifferent” to risks associated with transactions involving Panama, a high-risk area for money laundering, the New York State Department of Financial Services (NYDFS) and they were backhanded by $180 Mln - gigantic fine. From that point the country leaders and financial institutions are taking all possible precautions to lower the risks of the further fines.
And their efforts are paying off - FATF excluded Taiwan from the list of the high risk countries that includes Afghanistan, Laos, Vietnam and many other countries in the region. But despite all that - a lot of questions in the country are left unanswered and government hopes to create a new positive movement by forming new legal framework for the digital economy in the Taiwan’s financial system.
But it’s not that easy - requirements and norms change on the regular basis as well. In this october FATF has published a new set of recommendations additional to the recommendations from 2015. Those are adding such definitions as “virtual assets’ and “virtual asset service providers” to the organisation’s glossary and states that latter ones require additional supervision within existing AML/CFT politics. Those companies are also urged to get a license, registration and be monitored on a constant basis.
In the next year the task force is going to release additional recommendations for the virtual asset service providers as existing ones are not on par with the realities of the today’s market. “In the previous guidelines all was so funny, - David Tevfik SAYIN explains, - [virtual currencies] were elected as like non-wealth products of the market, even they meant that the digital currencies in fact could not be classified as trading instrument or buy&sell currency.” Since that moment the role of cryptocurrency has been significantly increased becoming a subject of political discussion.
One of highlights of the recent G20 meeting was a question of the legal regulation and taxation of the digital assets. It is planned that existing legal system will get a further expansion, that extends towards the international payment systems which includes cryptocurrencies. Governments throughout the world are keen on protecting the rights of the members of the market but they also want to get taxes from the industry. But there is a vast array of issues here, since it is hard to put the assets under a certain asset class or jurisdiction. Because of that a lot of countries will be forced to create a new mechanisms of taxation that won’t be attached to their home country alone.
But before that FATF has placed national governments into the complicated situation with strict deadlines. To the June of 2019 nations should figure out a new procedures of registration and form a new legal status for the crypto exchanges and all companies that provide encrypted wallets for their clientele. And countries that won’t get into the guideline are going to be at risk of getting into the “bad guys” list.
Such rigid terms of work are not making this any easier since possibilities of coming up with a new type of global taxation system in such a small windows are rather slim and overall doubtful. This urges countries to take a proactive stance since otherwise political gains are not going to be backed by economic benefits of any sorts.
The recommendations’ influence on digital economy is controversial. “Many of the recommendations are pinning down the market, - David Tevfik SAYIN says, - However, we may say that it drives the market to produce safer and more qualified products.”
On the global level, there is a well established and developed system of financial security. But it’s oriented on the traditional institutions and it’s not easy (if possible at all) to use its guidelines for the digital economy world. And it’s about the specifics of the system that are vastly different, it’s also about its scale.
“We are at the beginning now. Now the market capacity is waiving around 100 Billion USD; to make a match we have to think how big the derivative assets market: 300 Billion or 1 Trillion? All the REAL assets on the world have been assumed as 300 Trillion USD. So the derivative market is 1.2 quadrillion USD” - David Tevfik SAYIN illustrates the ratio of digital and traditional assets in the word scale.
From the day one, digital currencies market has established itself as a global entity that challenges the existing financial systems and legislators that forget about the other countries and their system. This whole new situation is calling for the new standards but right now it’s hard. The “playfield” is changing on a constant basis and FATF reports themselves show that they are getting outdated at the previously unprecedented speed.