FATF’s New Guidance Takes Aim at DeFi
31 Mar 2021

The narrative

The Financial Action Task Force (FATF), the inter-governmental watchdog that establishes standards for anti-money laundering (AML) and know-your-customer (KYC) requirements, has published new draft guidance for decentralized platforms.

Why it matters

FATF made headlines two years ago when it proposed – and then finalized – guidance urging nations to implement KYC requirements for all crypto exchanges. The so-called Travel Rule defined virtual asset service providers (VASPs) as businesses that transfer funds in the form of cryptocurrency (i.e., crypto exchanges, among others) and mandated that the businesses should have KYC information for both the sender and the recipient of these transactions.

Countries are beginning to implement these recommendations – South Korea recently brought new anti-money laundering (AML) rules into effect, resulting in at least one major exchange shuttering its operations in the country.

This month’s updated draft guidance massively expands the types of entities that might fall under FATF’s umbrella.

Breaking it down

FATF’s new draft guidance, published on March 19, now draws a distinction between fungible tokens and non-fungible tokens (NFTs), adds descriptors for decentralized exchanges and decentralized finance (DeFi) and specifies who might be held liable for enforcing KYC requirements for DeFi platforms, according to my colleague Ian Allison:

“NFTs and DeFi present additional challenges to the FATF, which is already struggling to graft money-laundering rules onto pseudonymous-by-design transactions in the flourishing cryptocurrency industry.”

In other words, FATF moved quickly in response to the rapid growth of NFTs and DeFi over the past year. The updated guidance, if finalized, would ask countries to ensure that even DeFi platforms have some form of KYC rules, even if there’s technically no single party responsible for a live network.

“It’s called ‘updated guidance’ but really it is a sweeping expansion of the way FATF thinks about and defines virtual asset service providers in particular. It really is a move by FATF to react in almost real time to some of the technical advances that are really sweeping crypto right now,” said Ari Redbord, a former U.S. Treasury Department official who’s now head of legal and government affairs at TRM Labs.

By Nikhlesh De, Coindesk, 30 March 2021

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