FATF releases latest crypto regulatory guidelines, DeFi and NFTs may be subject to regulation

The Financial Action Task Force (FATF) officially released its latest cryptocurrency regulatory guidelines on the 28th, urging governments worldwide to expand supervision over cryptocurrency companies. The guidelines also require stricter customer identity verification and reporting of suspicious transactions by cryptocurrency companies to combat money laundering, making the regulation of cryptocurrency companies more specific.

Furthermore, the latest cryptocurrency regulatory guidelines also provide explanations on how regulatory authorities should view NFTs and DeFi.

Established in Paris, France in 1989 by representatives of the G7 countries, FATF currently has over thirty member countries and is one of the most important international organizations in the global fight against money laundering. Although the organization's guidelines do not have legal force, they have significant influence in setting standards for government anti-money laundering and counter-terrorism financing policies. Therefore, these guidelines may impact the regulatory direction of governments towards cryptocurrencies.

According to reports, FATF first issued a draft guidance on virtual assets in 2019. The draft called for cryptocurrency exchanges and money transmitters, collectively known as virtual asset service providers (VASPs), to adhere to standards applicable to traditional financial companies. In particular, the so-called "travel rule" requires VASPs to collect and transmit information about the originator and beneficiary of the transactions.

However, there were concerns about the technical implementation of the draft at that time, as FATF's technology was unable to securely transmit information. As a result, FATF began working on proposing solutions. During the review process, FATF continued to raise standards, clarifying the risks of non-custodial wallets and proposing the application of travel rule standards to entities within the decentralized finance (DeFi) sector that are not easily classified.

Subsequently, some jurisdictions began implementing regulations based on this draft, while FATF continued to review and amend the draft guidelines and review the implementation process in jurisdictions to understand feedback from the crypto industry on its proposed standards.

Many are still unclear how FATF will apply the standards for virtual asset service providers to DeFi. For this reason, from July to October, FATF continuously expanded the content of the guidelines through additional clarifications and finalized the draft at a plenary meeting.

FATF stated that its obligations are based on providing basic financial services, regardless of the entity's operational model, technological tools, ledger design, or any other operational functions. Therefore, the services of VASPs should be analyzed based on what they offer to understand if they comply with the textual definitions, rather than how they should adapt to the concepts defined by FATF.

Is NFT a Virtual Asset (VA)?

For the FATF, VAs are not just about value represented digitally, they must also have tradable or exchangeable components, meaning their value must be transferable, not just a way of recording information.

The guidance clarifies that while NFTs may not appear to constitute VAs, if their use cases meet FATF standards, NFTs should be regulated, even if their general utility does not fit the VA definition. Therefore, FATF recommends adopting a "functional approach" and a case-by-case basis for regulating these cross-border new assets.

According to the guidance, NFTs that do not seem to constitute VAs on the surface may be considered VAs if used for payments or investments during their operation; under FATF standards, NFTs are covered under financial assets. Thus, although NFTs are excluded from FATF's definition of VAs, they will still be covered as financial assets under FATF's standards.

Issues with DeFi

For centralized entities, if the entity is transferring, exchanging, or providing custody services, it can be bound by VASP standards, which is clear, but what is less clear is how it applies to blockchain-based services like decentralized applications (DApps).

It is correct to say that DApps are not VASPs because the FATF guidelines do not apply to software. However, even if certain parts of the protocol are decentralized or automated, as long as the creators, owners, operators, or anyone with control or sufficient influence over the DeFi arrangement, they could also be considered VASPs. In short, FATF requires the owners and operators of protocols in each country to comply with VASP standards.

FATF leaves significant room for each country to decide how to handle DeFi. To encourage the development of DeFi, the FATF guidelines recognize that jurisdictions will need to continually reassess new projects and their relationship with the guidelines. However, it also emphasizes that there are still natural persons or legal entities who label themselves as "decentralized" but have control or sufficient influence, which is common. Therefore, FATF suggests that jurisdictions apply the VASP definition without considering entities' self-descriptions as decentralized.

This article is authorized reprinted from Horizon News Network