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Global AML Watchdog Calls For Greater Regulation Of Cryptocurrencies

The Financial Action Task Force (FATF) has published new recommendations for greater regulation of cryptocurrencies, Gizmodo reports. FATF is a global anti-money laundering watchdog, which was created in 1989 to support financial crime regulation on an international scale.

FATF has no legal powers, but it is an influential policy-making body, with knowledge and insight into the legislative and regulatory workings of its members and associates. It has developed a set of FATF Standards, which aim to promote a coordinated global response to prevent organized crime, corruption, and terrorism.

FATF recently published updated guidance about the regulation of the virtual asset sector. As this is such a fast-moving sector that makes highly sophisticated use of technology, it is no surprise that monitoring and regulation present a significant challenge.

Because the technology has developed at such a swift pace, the darker corners of the cryptocurrency markets have become a hotbed for fraudulent activity. The recent spate of ransomware attacks, for example, usually request that the victim pays the cybercriminal in a virtual currency, which is more difficult to trace.

Unsurprisingly, the new FATF recommendations are seeking to bring the virtual asset industry in line with the existing regulatory framework for banks and other financial institutions. It calls for more stringent measures to verify the identity of users and promote the regular reporting of suspicious activity to regulators.

The report notes: “The majority of VA-related [virtual asset] offenses highlighted in the report focused on a predicate or ML [money laundering] offenses, but, criminals also made use of VAs to evade financial sanctions and to raise funds to support terrorism.”

It continues: “The types of offenses reported by jurisdictions include ML, the sale of controlled substances and other illegal items (including firearms), fraud, tax evasion, computer crimes (e.g. cyberattacks resulting in thefts and ransomware), child exploitation, human trafficking, sanctions evasion, and TF [terrorist financing].”

While the report makes a case for urgent reform to prevent more funds from flowing into the hands of terrorists and organized crime gangs, it acknowledges that some changes cannot take effect immediately. FATF recommends that regulators show some level of flexibility during the initial rollout, to allow for real-world issues.

The reality is that virtual asset firms will need time to ‘retrofit’ the necessary compliance tools in their systems. As a sector that’s focused solely on innovation and development for the last 10 years, it has yet to be discovered how quickly they are able to adapt to an organized regulatory framework.

One prediction is that once the sector has shed its murky underbelly, it will quickly become more mainstream, and somewhat ironically, traditional banks and financial institutions may start to enter the cryptocurrency market.

The biggest challenge is perhaps the monitoring of travel between ‘unhosted wallets’ or ‘non-custodial wallets’ and the sharing of user data securely. These are considered higher-risk transactions and should be subject to more rigorous scrutiny and restrictions, the report suggests.

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