The Financial Action Task Force (FATF) Advocates for the Implementation of Updated Standards on Global Stablecoins
FATF Report to G20 regarding Stablecoins, Paris, 7 July 2020
Stablecoins hold the promise of driving financial innovation and efficiency, thereby enhancing financial inclusion. Although their current adoption is limited, emerging initiatives could achieve global mass-adoption, especially if backed by prominent technology, telecommunications, or financial organizations.
In October 2019, the G20 directed the FATF to evaluate the AML/CFT concerns related to so-called stablecoins, particularly those characterized as “global stablecoins” (i.e., those with mass adoption potential). This report outlines the FATF’s assessment of the AML/CFT concerns associated with stablecoins.
The report presents the FATF’s perspectives on stablecoins and covers the following areas:
- The defining characteristics of stablecoins (Section 1)
- The risks of money laundering and terrorist financing associated with stablecoins (Sections 2 and 4)
- The application of FATF Standards to stablecoins and the various businesses involved (Section 3); and
- How the FATF intends to strengthen the global anti-money laundering and counter-terrorism financing framework for virtual assets and stablecoins (Section 5).
This report coincides with a 12-month review focusing on the implementation of revisions to the FATF Standards. In June 2019, the FATF updated its Standards to clarify the anti-money laundering and counter-terrorist financing requirements applicable to virtual assets and service providers. The FATF’s evaluation of these revisions complements the findings of this report. Notably, the FATF urges all jurisdictions to prioritize the implementation of the revised FATF Standards. The initial step toward a robust global response to stablecoins, and virtual assets at large, is to ensure the adaptation of the FATF’s established Standards into local legislation and operational practices.
The FATF has urged all jurisdictions to implement the updated FATF standards concerning virtual assets and VASPs as a priority.
According to the recent document revised by the global body, stablecoins are designated as virtual assets or traditional financial assets.
Within its jurisdiction, the FATF has identified three areas where stablecoins and virtual assets could pose risks:
Anonymity – VASPs must identify customers and retain transaction records.
Global Reach – The FATF ‘travel rule’ necessitates that VASPs obtain, retain, and exchange information regarding the originators and beneficiaries of virtual asset transfers.
Layering – This refers to the multiple layering of illicit funds within brief timeframes to obscure the origins.
Potential for Mass Adoption – While currently limited, the FATF recommends integrated levels of trust and security consistent with established providers.
- The FATF calls on all jurisdictions to prioritize implementing the revised FATF Standards on virtual assets and VASPs.
- The FATF will assess the implementation and impact of the revised Standards by June 2021 and determine if further updates are warranted. This assessment will involve monitoring the risks associated with virtual assets, the broader virtual asset market, and proposals facilitating mass adoption that may promote anonymous peer-to-peer transactions.
- The FATF will offer guidance to jurisdictions regarding stablecoins and virtual assets, as part of a broader update to its Guidance. This will detail how AML/CFT controls should be applied to stablecoins, including available tools for jurisdictions to address the ML/TF risks linked to anonymous peer-to-peer transactions via unhosted wallets.
- The FATF will strengthen the international framework for VASP supervisors to collaborate, share information, and enhance their capabilities, aiming to establish a global supervisory network overseeing these activities.
However, the FATF advised that the revised standards do not impose AML/CT obligations directly upon users of virtual assets who do not operate as financial institutions or VASPs. Generally, the revised FATF standards are applicable only to intermediaries such as banks, money service businesses, and VASPs.
The standards and controls will explicitly apply only when an individual engages with an AML/CT-obligated entity that must identify their customers and verify identities as part of regular due diligence procedures.
The new regulations enforce anti-money-laundering and know-your-customer requirements on stablecoin issuers like Tether and initiatives such as Libra, initiated by Facebook Inc. to develop global stablecoins. Both stablecoin providers and exchanges supporting these coins will need to establish protocols for transaction monitoring, investigation, and regulatory reporting.
For exchanges already committed to compliance, this transition is unlikely to impose significant changes.
