On 19 October the Financial Action Task Force (‘FATF’) published its revised Recommendations for international standards on combating money laundering and the financing of terrorism and proliferation. The revision amends FATF's Recommendation on New Technologies (Regulation 15) and adds two new definitions to the Glossary: ‘Virtual Assets’ and ‘Virtual Asset Service Provider’. FATF’s definition of 'Virtual Assets' in the standard covers virtual currencies, but also extends to cover the fact that anything can be tokenized as an asset and transferred on a blockchain or other digital peer to peer format. The standard also covers virtual asset service providers, i.e. a crypto currency exchange.
What are the Regulations?
The FATF Recommendations set out a comprehensive and consistent framework of measures which it considers countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. They set an international standard, which countries should implement through measures adapted to their particular circumstances. The FATF Standards comprise the Recommendations and their respective Interpretive Notes, together with the definitions in the Glossary.
Why did they update their Regulations?
The changes were made to clarify how FATF’s Anti-Money Laundering (‘AML’) and Combating the Financing of Terrorism (‘CFT’) Recommendations apply in the context of virtual assets. At the end of its July 2018 meeting in Buenos Aires the G20 asked FATF to clarify, in October 2018, how its standards apply to crypto-assets (see our earlier piece here). The update published on 19 October is FATF’s response to the G20’s request. For more background to their response, see their announcement of 19 October 2018.
What is the new Regulation?
FATF’s Regulation of Virtual Assets was first published in 2012 and has been updated regularly since. In this update FATF has revised its Regulation 15 to read as follows:
15. New technologies
Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. In the case of financial institutions, such a risk assessment should take place prior to the launch of the new products, business practices or the use of new or developing technologies. They should take appropriate measures to manage and mitigate those risks. To manage and mitigate the risks emerging from virtual assets, countries should ensure that virtual asset service providers are regulated for AML/CFT purposes, and licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations.
What are the new definitions?
Virtual Asset A virtual asset is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.
Virtual Asset Service Providers Virtual asset service provider means any natural or legal person who is not covered elsewhere under the Recommendations, and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person: i. exchange between virtual assets and fiat currencies; ii. exchange between one or more forms of virtual assets; iii. Transfer of virtual assets; iv. safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and v. participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
What else is FATF doing to regulate the Fin Tech sector?
To help both governments and the private sector combat money laundering and terrorist financing, FATF has launched a new platform for governments and the private sector to share initiatives and developments in the Fin Tech sector – the FATF FinTech and RegTech Initiative.
Does Cayman have specific legislation on crypto-assets?
Whilst the Cayman Islands Government does not currently have a legislative framework for crypto-assets it is working to put one in place as soon as practicable. As an early move, the financial services regulator (the Cayman Islands Monetary Authority – ‘CIMA’) has recently offered advice to smaller investors to ensure they are aware of risks associated with crypto-assets (see here).
Solomon Harris has many years’ experience in the preparation of all types of Cayman investment and advising on new investment vehicles. We are able to assess and advise on regulatory or legal issues arising from the launch and management of an Initial Coin Offering or funds involving crypto-asset investments. If you require any further information or advice on legal issues relating to appropriate investment vehicles or on an ICO generally, then contact Solomon Harris Partner Richard Addlestone or Senior Associate Tom Wright.
The information contained in this article is necessarily brief and general in nature and does not constitute legal advice. Appropriate legal or other professional advice should be sought for any specific matter.