FATF Pronounces on Crypto Currency

July 30, 2015 By

FATF and digital currencies

The Financial Action Task Force (FATF) has had its eye on digital currency for some time, having mentioned “decentralized digital currencies” as a topic worthy of examination as far back as 2013.

It published a report in mid-2014 and, in March this year, it advocated that each digital currency should be individually evaluated on its merits.

FATF has 36 members representing most of the world’s major economies. It was established in 1989 to combat money laundering, terrorism financing and “other related threats to the integrity of the international financial system”.

FATF published its ‘Guidance for a risk-based approach to virtual currencies’ at a plenary meeting held at the end of June 2015 in Brisbane.

The 48-page document acknowledges that digital currencies carry several economic benefits, such as decreased transaction costs, financial inclusion for those lacking access to banking services and the facilitation of micro-transactions. It warns, however, that such currencies also carry risks of money laundering and terrorist financing and “other crime risks that must be identified and mitigated”.

The taskforce has therefore recommended closer monitoring of digital currency exchanges and gateways in order to counter money laundering and terrorism financing.

Report recommendations in more detail

Adopting the standard description ‘virtual currency payments products and services’ (VCPPS), the latest FATF document singles out currency exchanges for examination, stating that these are the only gateways that currently represent a risk.

It urges its member nations to gain a greater understanding of how digital currencies and VCPPS function, recommending that they should perform their own risk assessments, in order to identify potential risks and to allocate appropriate resources. It added that different agencies and policy groups in each country should share knowledge, so that their risk assessments will be more effective.

The report recommends that all crypto currency exchanges should be registered and licensed and be subject to the same scrutiny as other financial institutions and money transfer businesses. Likewise, VCPPS should do the same client due diligence as their traditional counterparts and, those accepting wire transfers from foreign countries, should have adequate records of senders and beneficiaries.

If VCPPS or individuals do not comply with the above requirements, FATF prescribes that a “range of effective, proportionate and dissuasive sanctions” be implemented.

It acknowledges there are difficulties presented by the largely anonymous (or pseudonymous) nature of a decentralized blockchain, as well as an inability to prevent payments for certain prohibited goods, or person-to-person transactions.

The report also states that there should be international cooperation to assist countries more affected by Money Laundering/ Terrorist Financing crimes, including confiscation of digital currencies and extradition assistance. Furthermore, that any suspicious activity should be reported to authorities, with customers’ identity and digital currency addresses recorded.

Similar to the recent UK Home Office statement, FATF mentions the possibility of entirely new digital currencies being developed, with built-in mechanisms to mitigate the added risks of decentralized currencies.

Crypto currency developments at Barclays

A further, significant crypto currency development that occurred at virtually the same time as the FATF 2015 Report, was the announcement that Barclays has signed off on a proof-of-concept to trial bitcoin technology.

Following an agreement with bitcoin exchange, Safello, the UK bank has said it will explore how blockchain technologies could bolster the financial services sector.

The announcement, made at the Barclays Accelerator demo session in London at the end of June 2015, comes as an increasing number of banks are trialing distributed ledgers, such as Ripple.

Safello was one of 10 FinTech startups taking part in Barclays’ 13-week accelerator programme, which began last year. Housed in London’s Mile End, companies in the scheme receive mentoring and tools from Barclays, alongside £20,000 seed funding from partner Techstars.

Safello’s founder, Frank Schuil, described the programme as a “mutual learning experience” for Barclays and Safello. While exact details of the pair’s proof-of-concept are currently under wraps, he indicated Safello’s bitcoin spending platform could reach an important demographic for the bank.

“Our target group is the millennials that banks find hard to reach and we are doing it with a technology that they need to understand,” he said, adding: “In that way and in other ways we are building a bridge between the traditional financial world and bitcoin.”

Six other startups at the event, including blockchain-diamond-tracker Everledger, are reported to be “exploring opportunities” with Barclays.

The crypto currency sector is one in which Cavendish Trust has significant experience. As a highly successful, multi-jurisdictional and internationally focussed corporate service provider, the company is actively promoting the Isle of Man and its own comprehensive range of services to businesses seeking the best jurisdiction from which to serve their global clients. The Isle of Man has recently passed legislation which brings crypto within AML/KYC regulatory requirements which has helped demonstrate the Government’s commitment to growing the Island’s crypto industry, by providing a well-regulated sector that instills confidence amongst both operators and customers.