Crypto takes steps towards FATF Recommendations Compliance – by Malcolm Wright

virtual currency joining FATF club

As promised Malcolm Wright provides an update to Financial Crime News on the Crypto Industry’s response to the challenge laid down by FATF to adopt wire transfer standards, in this follow on from his June piece “Crypto asks for more Effective Regulation,” and after the v20 Summit held last week.  

On 28 and 29 June 2019, the crypto industry met in Osaka, Japan on the sidelines of the G20 to discuss how it would find an appropriate response to the newly released FATF Recommendations for AML governance of the crypto industry. The discussion focussed on how the industry could implement a solution to fulfil wire transfer requirements that exist already in the traditional banking sector. Helpfully, just one week earlier the FATF released Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers that provided clarification and direction for Virtual Asset Service Providers, or VASPs as well as countries and the traditional financial sector.

The two-day event was well attended by the FATF, regulators and legislators, industry associations, vendors, and some of the largest global virtual asset exchanges. And although no one solution was agreed upon, there was broad consensus on what the next building block should look like on the road to compliance with the recommendations.

The delegates were also able to hear extensively from Tom Neylan of the FATF who provided considerable feedback on the expectation of the FATF, particularly with regards to timing. Essentially, that upon the 12-month review scheduled for June 2020 the FATF expects both meaningful progress by the industry as well as countries in ensuring the new recommendations are implemented.

At the end of two days, several references had been made to SWIFT with regards to the inter-VASP messaging required to meet the wire transfer recommendations. It may be helpful at this point to remember how SWIFT came into being; that in 1973, 239 banks from 15 countries founded SWIFT in order to create a shared worldwide data processing and communication link. Its definition was narrow and evolved over time to include both more members and more services. Essentially though, it was driven by individual industry participants who wanted to establish a global standard.

And so, it would seem the call from the major exchanges in the room at the V20 was to follow this well-trodden path. Not another industry body or association of associations, but a not-for-profit entity with a distinct purpose that would drive the governance, protocols, technology and operationalisation of the solution. Thoughts were given to location of the organisation, with suggestions muted that Switzerland or Belgium may be strong candidates.

Delegates were also fortunate enough to hear from Sian Jones, founder of Coinsult and Senior Advisor on DLT to the Gibraltar FSC, who was able to draw on her extensive blockchain and protocol experience to guide the room on what it will take to produce the new global solution.

I also introduced four guiding principles. Namely.

1. Any solution should minimise regulatory impact

• Where solutions require regulatory change, barriers to adoption are created. Regulatory change takes time, so the less regulatory change required to accommodate any solution, the better.

• Data privacy, data sharing, and data security need to be respected on a jurisdictional basis. This should be regarded as a red line.

2. Any solution should be globally available

• Solution fragmentation will increase implementation costs and complexity, as well as increasing margins for error and omission

• To prevent solution fragmentation, the industry must adopt a common, global standard

3. Any solution should minimise implementation cost

• Solutions will require both network infrastructure and firm-level integration

• High cost to implementation will harm smaller firms and risk innovation

4. Any solution should be open source / not-for-profit

• Solutions should not benefit a party for financial gain. Commercial interests will cloud the picture and moreover create fragmentation of those that support and those that don’t.

As might be expected there was plenty to discuss around what a solution might look like with several options proposed in the interactive workshops. Against the guiding principles above and those presented by Sian Jones many would not be able to fulfil the criteria to become a global standard. There was also a danger of the crypto industry over-engineering a solution that then comes with the risk of inertia in implementation.

Ultimately, delegates were reminded of the reason for the recommendation in the first place; to prevent terrorists and criminals from having unfettered access to the financial system, and that there were two requirements that must be fulfilled by the solution:

• To make every reasonable effort to prevent funds being sent to a sanctioned entity.

• To have originator and beneficiary information readily available to law enforcement officers upon appropriate request without reliance on a counterparty VASP.

Coming away from the V20 and having spoken at length with several of the largest global VASPS, I was encouraged by the desire to find the right solution, and to work towards the establishment of a member-led independent body to direct the implementation of the FATF Recommendations. For those interested, I have written a longer article on what this body, and the solutions, would have to consider.

Malcom Wright is Chief Compliance Officer at Diginex and is based in Hong Kong. Malcolm chairs the AML Working Group at Global Digital Finance, an industry-led initiative setting codes of conduct and best practices for the crypto-asset industry.

Prior to this, Malcolm held several senior leadership roles including Chief Compliance Officer at a leading FinTech unicorn.

In his earlier career, Malcolm held senior leadership roles within Thomson Reuters’s anti-financial crime business, including overseeing the development and launch of World-Check One and sitting on the leadership that brought the world’s first KYC Managed Service to market. Malcolm speaks internationally on a variety of topics. He is an Associate Fellow of the Royal United Services Institute’s Centre for Financial Crime Studies in London.

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Melvin Leong
Melvin Leong
10 months ago

Great updates but yet complete stage until execute guiding principles.