Crypto DeFi firms may need more oversight, global watchdog says

Calls for increased disclosure and oversight of the crypto ecosystem.
Image: Wei Leng Tay, Bloomberg
Crypto firms that offer stablecoins, blockchain-based decentralised finance apps and services supporting peer-to-peer transactions may be required to keep tabs on their users’ identities and funds as a way of preventing money laundering and terrorism financing, a global watchdog said.In updated guidance issued Thursday, the Financial Action Task Force – which makes anti-money-laundering rules followed by governments worldwide – called for increased disclosure and oversight of the crypto ecosystem. The organisation has members from about 200 countries, and its guidance is followed by agencies such as the U.S. Treasury, which is among regulators that are expected to release their own guidance for stablecoin oversight in the coming days.

The FATF’s updated guidance builds on prior guidelines issued in 2019, as well as a follow-up report from 2020. They challenge an industry that claims it doesn’t need to adhere to many of the existing financial regulations, and they impose new rules on everything from crypto exchanges to custodians in the $2.5 trillion cryptocurrency market.

“We expect that the countries will implement this as soon as possible,” FATF President Marcus Pleyer said on a call with journalists last week.

Broadly, FATF said that just because some function has become automated via a smart contract on a blockchain, that “does not relieve the controlling party of obligations.” Many of those parties may be defined by FATF as virtual asset service providers (Vasp), and will have to abide by related anti-money-laundering rules, be licensed or registered, and be supervised.

Here are some highlights of the FATF guidance:

  • Stablecoins: Effectively, stablecoin providers and even exchanges and custodians that support stablecoins will have to abide by all existing rules, and conduct thorough anti-money-laundering and anti-terrorism-financing checks. FATF urged countries to mitigate risks before new stablecoins are even launched, and to continue monitoring the efforts thereafter.
  • Peer-to-peer transactions. FATF said countries can impose requirements such as additional record-keeping or limiting transactions to only certain approved addresses. “The rapid evolution of this sector means that changes in the level and nature of the risk are likely to come quickly and to merit concerted supervisory attention,” the guidelines said.
  • DeFi: Creators, owners and operators — or people who have influence over a DeFi app’s functionalities — may need to comply with FATF rules, the guidelines said. “It seems quite common for DeFi arrangements to call themselves decentralised when they actually include a person with control or sufficient influence, and jurisdictions should apply the Vasp definition without respect to self-description,” the guidelines said. Even if a team of developers behind a DeFi dapp — designed to let people trade, lend and borrow without intermediaries — sold or distributed related governance tokens to investors and users, the team would be responsible for anti-money-laundering checks, the guidance said. If a central party responsible for the service can’t be identified, countries can ask a regulated entity to be involved in the dapp’s activities to help with mitigating the risks.
© 2021 Bloomberg L.P.

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