Cryptoassets and Anti Money Laundering

Criptomonedas y Regulación

Bitcoin, Ethereum, cryptocurrencies, cryptoassets, virtual currenciesBlockchain has brought a whole new vocabulary for describing new forms of possession and transfer of value around the world.

However, while the potential benefits of cryptoassets are many, without adequate regulation, they run the risk of becoming the safest instrument for conducting illegal financial transactions, linked to money laundering and terrorist financing.

In fact, its opacity is one of the main barriers to its adoption. The lack of regulation has even made some countries have opted for the simplest way: its prohibition.

However, it is not possible to curb innovation. Thus, the Financial Action Task Force (FATF-GAFI), the international body for issuing global guidelines on Anti Money Laundering and Counter Terrorism Financing, has been working in crypto assets, looking for a regulated landscape that provides security and avoids their use for ilegal activities.

In June 2019, the Financial Action Task Force (FATF-GAFI) issued updated guidance for a risk-based approach on Virtual Assets (VA) and Virtual Asset Service Providers (VASPs).

This guidance provides additional clarifications on how its recommendations about Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT) should be understood in the context of virtual asset transactions.

What is a Virtual Asset or a Cryptoasset?

The FATF defines Virtual Assests (VA) as a “digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes”. Therefore, Virtual Assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.

To which services and/or products would FATF recommendations apply?

In this context, for the FATF, Virtual Assets Providers are any physical or legal person, who provides services related to virtual assets offer or sale, virtual assets transfer or exchange, including both virtual-to-virtual and virtual-to-fiat. In its consideration of Virtual Asset Providers, it also includes those who offer virtual assets custody or administration services or mechanisms that serve to control them, such as the storage of the private key.

According to the FATF recommendations, VASPs must be regulated for Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT) purposes.

What does to be regulated for Anti Money Laundering and Combating the Financing of Terrorism mean?

According to the FATF Recommendation 15, VASPs must be subject to effective systems for monitoring or supervision, as traditional financial entities have been historically.

This means the implementation of a risk-based approach (RBA) to VA activities and VASPs, the adoption of preventive measures such as Due Diligence and Know Your Customer or transaction monitoring and the reporting of those suspicious cases to the regulators.

 5th European Union Anti Money Laundering Directive

While the FATF dictates global recommendations about Anti Money Laundering and Combating the Financing of Terrorism, each country or economic group must translate them into specific regulations.

In this respect, in June 2018, the European Union published the 5th Anti Money Laundering and Combating the Financing of Terrorism Directive, (AMLD5), which takes into account the FATF recommendations and goes further on a number of issues to promote the highest standards.

This Directive includes the regulation of cryptoassets, as well as the obligations of Virtual Asset Providers in all UE member states. In that sense, the Directive includes the same definitions, scope and obligations the FATF recommendations contain.

The Member States should have transposed this Directive before 10 January 2020.