Virtual Assets and Anti-Money Laundering and Combating the Financing of Terrorism (1): Some Legal and Practical Considerations

FinTech Notes, October 14, 2021

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Canonical URL: Virtual Assets and Anti-Money Laundering and Combating the Financing of Terrorism (1): Some Legal and Practical Considerations

Authors: Nadine Schwarz, Ke Chen, Kristel Poh, Grace Jackson, Kathleen Kao, Maksym Markevych
Published: October 14, 2021
Series: FinTech Notes
DOI: https://doi.org/10.5089/9781513593760.063

Purpose: to assist countries in understanding and mitigating money laundering (ML), terror financing (TF), and financing of the proliferation of weapons of mass destruction (PF) risks related to virtual assets (VAs).
This is the first of two FinTech Notes dedicated to VAs and anti-money laundering and combating the financing of terrorism (AML/CFT).
Scope: broad—explains why VAs are vulnerable to misuse for ML/TF/PF, clarifies which assets and service providers should be subject to AML/CFT measures, discusses measures all countries should take, and addresses actions necessary in instances of criminal misuse of VAs.
A second FinTech Note (separate) focuses on the AML/CFT regulatory and supervisory framework for virtual asset service providers (VASPs).

VAs exhibit vulnerabilities that can facilitate ML/TF/PF; the note explains the mechanisms and characteristics that create these vulnerabilities.
Clarification is provided on which assets and service providers fall within the remit of AML/CFT measures.
The note is intended to provide policy makers and AML/CFT authorities with an overview of legal and operational considerations for implementing a sound AML/CFT framework for VAs and VASPs.
Illustrative references to specific types of VAs, VASPs, and related products appear in some instances; these are strictly illustrative and do not constitute endorsement.

Both FinTech Notes are based on Financial Action Task Force (FATF) standards.
The notes draw heavily on the FATF’s 2019 “Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers.”

Countries should take measures to mitigate ML/TF/PF risks posed by VAs and VASPs; the note discusses the measures all countries should take (no detailed checklist reproduced here beyond the source scope).
The note discusses the type of action necessary in instances of criminal misuse of VAs.
The second FinTech Note will focus on the AML/CFT regulatory and supervisory framework for VASPs (for more detailed regulatory/supervisory guidance).

At the time of drafting, no country had been assessed against the new standards.
Many country authorities were in the process of establishing how best to incorporate the new standards in their AML/CFT framework.
Because of the contemporaneous stage of national implementation and absence of assessment outcomes, the note does not refer to specific country examples.