The report found that many countries have yet to "fully implement" the FATF’s requirements on virtual assets and virtual asset service providers to prevent their misuse for illicit finance.

"The lack of implementation of these requirements... leaves significant loopholes globally, that criminals and terrorists exploit." said the FATF.

The report provides an update on country compliance with FATF’s Recommendation 15 and its Interpretative Note (R.15/INR.15), including the Travel Rule, and updates on emerging risks and market developments, including on decentralized finance (DeFi), peer-to-peer transactions (P2P), and non-fungible tokens (NFTs), unhosted wallets, and stablecoins.

While some jurisdictions have introduced regulations, FATF found that global implementation is "relatively poor" and compliance remains behind most other financial sectors. Based on 98 FATF mutual evaluation and follow-up reports since the standards on virtual assets and VASPs were adopted, 75% of jurisdictions are only partially or not compliant with the FATF’s requirements.

There has also been insufficient progress on jurisdictions implementing the Travel Rule, which is a key AML/CFT measure, said FATF. Of the 151 jurisdictions that responded to the 2023 Survey, more than half have not taken any steps towards implementing the Travel Rule. FATF said this is a "serious concern as the risks posed by virtual assets and VASPs continue to increase and the lack of regulation creates significant loopholes for criminals to exploit." This shows there is "an urgent need for jurisdictions to accelerate implementation and enforcement of R.15/INR.15 to mitigate criminal and terrorist misuse of virtual assets and VASPs."

The report acknowledges collaboration among the private sector members to improve industry compliance with R.15/INR.15 including the Travel Rule and highlights that all players need to have appropriate risk identification and mitigation measures and continue to work towards fully compliant Travel Rule compliance tools.

Although DeFi and unhosted wallets, including P2P, do not account for a large share of transactions, they "are at risk of misuse, including by sanctioned actors." FATF will therefore continue to monitor the illicit financing risks and developments in this sector.

FATF called on all countries to urgently implement the Standards on virtual assets and VASPs, including the Travel Rule. In February 2023, the FATF adopted a roadmap to improve implementation of R.15. In line with this roadmap and to address the findings of the report, the FATF will:

• continue to conduct outreach and provide assistance to low-capacity jurisdictions;
• identify and publish steps FATF member jurisdictions and other jurisdictions with materially important VASP activities have taken towards implementing R.15/INR.15;
• facilitate sharing of finding, experiences, and challenges including relating to DeFi, unhosted wallets, and P2P and monitor market trends in this area for material developments that may necessitate further FATF work;
• continue to engage with member countries and the private sector on progress and challenges; and 
• conduct a further review on progress and remaining challenges for implementation by June 2024.

FATF said that four years after strengthening its standards to address virtual assets and virtual asset service providers (VASPs), global implementation of these measures "remains relatively poor". Based on FATF mutual evaluation and follow-up reports, "almost three quarters of jurisdictions are only partially compliant or not compliant with the FATF’s requirements."

More than half of survey respondents have not taken any steps towards implementing the Travel Rule, which FATF said was a "key requirement to prevent funds being transferred to sanctioned individuals or entities."  FATF called on all countries to apply the AML/CFT rules to VASPs without further delay, saying the lack of regulation creates "significant loopholes for criminals to exploit and closing the gaps in global regulation of virtual assets is an urgent priority."

FATF said it will publish a report on 27 June 2023 urging countries to "swiftly implement" the FATF Recommendations on virtual assets and VASPs, including the Travel Rule, to close these loopholes. The report will also highlight emerging risks, including from "DPRK’s illicit virtual asset-related activities, which are used to finance their WMD programme, as well as from decentralised finance, and peer-to-peer transactions." 

At the meeting, the FATF agreed on a roadmap to strengthen implementation of FATF Standards on virtual assets and virtual asset service providers. As part of this work, in the first half of 2024, the FATF will report on steps FATF members and FSRB countries with materially important virtual asset activity have taken to regulate and supervise virtual asset service providers.

This report comes three years after FATF extended its anti-money laundering and counter-terrorist financing measures to VAs and VASPs to prevent criminal and terrorist misuse of the sector.

The report builds on the FATF’s previous two reviews on implementation by providing a short update on the latest country compliance with FATF’s Recommendation 15 and its Interpretative Note (R.15/INR.15). The report places a specific focus on FATF’s Travel Rule to respond to FATF’s June 2021 findings that countries and private sector face particular challenges in this area. Further, the report includes relevant emerging risks and market developments, including on Decentralised Finance (DeFi), Non Fungible Tokens (NFTs) and unhosted wallets.

At the meeting, among other things, FATF:

• Finalised a targeted update on the implementation of the FATF standards to prevent the misuse of virtual assets and Virtual Asset Service Providers (VASPs) for money laundering, and the financing of terrorism and proliferation. FATF is due to publish a report at the end of June 2022, focussing on the implementation of FATF's travel rule, which requires VASPs to collect or send information on the identities of the originator and beneficiary with virtual asset transfers. The report will also provide an update on emerging risks and market developments that FATF continues to monitor, such as DeFi, NFTs and unhosted wallets.
• Discussed progress in developing guidance that aims to help countries implement the revised requirements of FATF relating to implementing the FATF standard on beneficial ownership information for legal persons. FATF intends to finalise the guidance in October 2022. 
• Finalised a report sharing good practices and recommendations for combating money laundering and terrorist financing by sharing information while adhering to data protection and privacy. This is the first report that provides tangible examples of information sharing initiatives with analysis of the data protection implications. It highlights the importance of collaboration and co-operation between anti-money laundering and data protection authorities and is due to be published in July 2022.

The report found that 58 out of 128 reporting jurisdictions have implemented the revised FATF standards, with 52 of these regulating VASPs and six prohibiting the operation of VASPs. The remaining 70 jurisidictions have not currently implemented the revised Standards in their national law, which means that there is not a global regime to prevent the misuse of virtual assets and VASPs for money laundering or terrorist financing. 

There has been progress in the development of technological solutions to enable the implementation of the ‘travel rule’ for VASPs. However, the lack of implementation of travel rule requirements by jurisdictions is acting as disincentive to the private sector, particularly VASPs, to invest in the necessary technology solutions and compliance infrastructure to comply with the ‘travel rule’.

The report finds there has been strong and rapid growth in the virtual asset sector since the FATF revised its Standards. The FATF has not seen any evidence that the revisions have stifled innovation in the sector, which suggests that greater regulatory certainty and strong AML/CFT controls at the international level can act as a facilitator to business development and public adoption.

However, FATF has observed that ML/TF trends for virtual assets have continued, in particular there has been a large increase in the use of virtual assets to collect ransomware payments and to commit and launder the proceeds of fraud.

The report concludes that is it not necessary to amend the revised FATF Standards at this time, except for technical amendments to apply the FATF's recent changes on proliferation financing to virtual assets and VASPs. 

Looking ahead, the FATF will focus on implementing the current FATF Standards on virtual assets and VASPs, including finalising the revised FATF Guidance on virtual assets and VASPs by November 2021, accelerate the implementation of the travel rule; and monitor the virtual asset and VASP sector.