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.

The updated guidance sets out new requirements, amends existing ones and clarifies the 2019 guidance, which this update will replace.

The revised document updates six main areas to:

(1) clarify the definitions of VA and VASP to make clear these definitions are expansive and there should not be a case where a relevant financial asset is not covered by the FATF Standards (either as a VA or as a traditional financial asset);

(2) provide guidance on how the FATF Standards apply to stablecoins;

(3) provide additional guidance on the risks and potential risk mitigants for peer-to-peer transactions;

(4) provide updated guidance on the licensing and registration of VASPs;

(5) provide additional guidance for the public and private sectors on the implementation of the ‘travel rule’; and

(6) include Principles of information-sharing and co-operation among VASP supervisors. The guidance has also been updated to reflect the passage of time and the publication of other relevant FATF reports.

The revision sets out functions and assets that are within scope of the guidance, for example  stablecoins and virtual assets issuers; and those that fall outside, such as cloud service providers. It also provides options to ban or restrict the use of unhosted wallet software providers.

The update also expands the travel rule requirements, where VASPs have to submit information to counterpart VASPs with regard to transaction originators and beneficiaries.

These changes to the pre-existing guidance aim to maintain a level playing field for VASPs, based on the financial services they provide in line with existing standards applicable to financial institutions and other AML/CFT-obliged entities, as well as minimisng the opportunity for regulatory arbitrage between sectors and countries.

The consultation closes on 20 April 2021 and the updated guidance is likey to be adopted at the June FATF plenary session.

Firstly, in March of this year FATF will publish, for consultation, an update to it’s Guidance for Virtual Assets and VASPs.  This Guidance, first published in June 2019 in support of the FATF Standards  (read more here) and subjected to a 12-month review in June 2020 (read more here), will be updated to address specific areas, including:

• how to apply the FATF Standards to so-called stablecoins
• how public and private sectors can implement the travel rule. The ‘travel rule’ is a key AML/CFT measure, which mandates that VASPs obtain, hold and exchange information about the originators and beneficiaries of virtual asset transfers.
• how to address the risks of disintermediated peer-to-peer transactions. 

Once the FATF has considered feedback it expects to publish the revised Guidance in June 2021. 
 
Secondly, and concurrently, the FATF has also launched its second 12-month review looking at global  implementation of the FATF Standards on virtual assets, and identifying any further challenges.

The report notes that both governments and industry have made some progress in implementing the FATF standards covering VASPs, but there is much more to be done. Companies and governments have also made progress towards compliance with the “Travel Rule”. FATF plans to issue updated guidance, continue to work with the private sector, continue to promote international cooperation, and expects to issue another report reflecting further progress in 12 months.

VASPs should expect:

1. increased government regulations to conform to the FATF standards over the next year;
2. emphasis from both regulators and counterparties to comply with the Travel Rule, no later than June 2021; and
3. eventually, enforcement activity.

The FATF issued a report to the G20 finance ministers and central bank governors to review of the implementation of its revised standards on virtual assets and VASPs. This report was anticipated as a follow-up from last year’s review to determine the status of implementation of the FATF recommendations, to determine whether any revisions were required, and to announce anticipated next steps.

The report is titled 12-Month Review of the Revised FATF Standards on Virtual Assets and Virtual Asset Service Providers.

Virtual assets and VASPs

The report sets out how money laundering and terrorism financing risks and the virtual asset market have changed since June 2019; jurisdictions’ progress in implementing the revised standards; the private sector’s progress in implementing the revised standards, including the development of technical solutions for the implementation of the Travel Rule; issues identified with the revised FATF standards and guidance; and next steps regarding virtual assets.

State of the Jurisdictions

That report finds that both the public and private sectors have made certain progress in implementing the revised FATF standards, which were issued in June 2019.  The report notes that although regulatory oversight of VASPs is “generally nascent, there is evidence of progress.” According to the report, many jurisdictions have taken steps towards codifying the standards into their national legal/regulatory regimes. Of those jurisdictions responding to the FATF survey, 35 out of 54 reporting jurisdictions said they have now implemented the revised standards, with 32 countries regulating VASPs and three prohibiting their operation. Nineteen reporting jurisdictions had not yet implemented the standards.

But importantly, these survey responses are self-assessments, not actual FATF evaluations. Moreover, because the survey was voluntary across FATF’s membership (as well as FATF-Style Regional Bodies), the Report acknowledges that potentially many more than 19 jurisdictions had no current regime (or less-than-expected rules) in place.

The Travel Rule

One area that has received significant attention in this space involves the Travel Rule, which requires covered financial institutions (including VASPs) to obtain, maintain, and transfer information regarding the originators and beneficiaries of certain transactions. This Rule, which is already in place in certain jurisdictions (such as the United States), appears in Recommendation 16 of the 2019 FATF Report.

The 2020 Report notes that FATF has been monitoring the progress in developing solutions to, and compliance with, the Travel Rule, and that implementation of the Travel Rule has been less than for other AML/CFT rules. The Report notes an international industry-wide initiative, which includes a “common universal language for communication of the required originator and beneficiary information between VASPs.”

But it also notes that “[i]n line with decentralisation ethos that underpins virtual assets, there appears to be a general desire for multiple potential solutions, rather than one centralised travel rule solution.” Despite potential issues regarding interoperability between multiple standards, and concerns with how VASPs should deal with other VASPs which are located in jurisdictions which have not yet implemented the Travel Rule (known as the “sunrise issue”), the FATF report does not dictate how solutions should develop.

Importantly, despite acknowledging these issues, the FATF Report “calls upon the VASP sector to redouble its efforts towards the swift development of holistic technological solutions encompassing all aspects of the travel rule.” Curiously, the Report notes that because Recommendation 16 was delayed, this “adds to the importance of the quick development of technology solutions.”

And as described below, the FATF concluded that it would not – at this time – further revise its AML/CFT standards on virtual assets and VASPs, but notes that when it conducts its next review by June 2021, jurisdictions will have had time to implement the rules (including the Travel Rule) into their national law, and “the VASP sector will have had time to implement travel rule solutions globally.”

Next steps

While the Report acknowledges the progress that has been made on overall AML/CFT implementation, the FATF is sanguine about the additional work to be done. Although it considered whether any of the Recommendations and Standard needed to be revised, the Report concludes that they would not, and that updated guidance should be used at first, and that future revisions to the standards would be considered if the FATF’s further review “identifies issues which updated Guidance cannot resolve.”

To conclude, the FATF said that, in the coming year, it will: 

• continue its enhanced monitoring of virtual assets and VASPs, resulting in another 12-month review, to be published in one year (i.e., by June 2021);
• release updated guidance on virtual assets and VASPs, including stablecoins and the Travel Rule;
• continue to promote the understanding of ML/TF risks involved in transactions using virtual assets with public advisories, including red flag reports and case studies;
• continue and enhance its engagement with the private sector through the FATF’s Virtual Assets Contact Group; and
• continue its program of work to enhance international cooperation with the regulators of VASPs.

In June 2019, the FATF revised its standards to explicitly impose anti- money laundering/combatting terrorist financing (AML/CFT) obligations on virtual assets and virtual asset service providers (VASPs) and undertook a 12-month review on the state of implementation.

The review, which was completed in 2020 surveys the global implementation of the new FATF standards by governments and industry.

The FATF Plenary also adopted a report for the G20 Finance Ministers and central bank governors on the AML/CFT and counter-proliferation financing (CPF) implications of so-called “stablecoins.”

The FATF Plenary further endorsed continued scrutiny of virtual assets by approving a second 12-month review for completion in 2021 and committed to providing updated guidance on virtual assets, including stablecoins.

However, the challenge today is the effective implementation of the FATF Standards. The FATF evaluation of effectiveness by countries show a focus on processes more than outcomes, and that the implementation of a risk-based approach by most countries remains in its infancy.