FATF’s guidelines for incorporating DeFi into encryption service providers

Decentralized finance (DeFi) continues to attract regulatory interest and is becoming part of the main international rules designed for virtual asset service providers (VASP).

Thursday, the Financial Action Task Force (FATF) release New updates to the 2019 risk-based virtual assets and VASP methodology guidelines, with special attention to the DeFi industry.

The new guidelines address the issues identified in the FATF’s 12-month review of the revised FATF virtual assets and VASP standards that require further clarification, and reflect the public consultation opinions in March and April 2021.

Despite the fact that DeFi applications are not considered VASPs under the FATF standard, the agency has provided important additional guidance on the DeFi industry because these standards “do not apply to underlying software or technology.” However, the updated guide states that DeFi developers and maintainers can actually be considered VASPs:

“The creators, owners and operators or some other people who maintain control or sufficient influence in DeFi arrangements, even if these arrangements appear to be decentralized, may fall under the FATF’s definition of VASP. They are providing or actively promoting VASP service.”

According to Pelle Brændgaard, CEO of encryption compliance startup Notabene, the new guidelines aim to determine the VASP in the DeFi ecosystem based on the income of participants. “If companies withdraw transaction fees or direct revenue from agreements they control, they are likely to be classified as VASPs. In some cases, more fully decentralized agreements can also be covered, but not in all cases,” Brændgaard told Cointelegraph.

In addition to providing important additional guidance for DeFi, the new FATF guidance also involves non-fungible tokens (NFT), stating that NFTs are excluded from the FATF’s definition of virtual assets, but “will be covered by FATF standards as such financial assets “

“Given the rapid development of the VA space, functional methods are particularly important in the context of NFTs and other similar digital assets. Therefore, countries should consider applying the FATF standard to NFTs based on specific circumstances,” the document reads.

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The update also calls on global regulators to implement travel rules, anti-money laundering and anti-terrorist financing supervision for financial institutions more urgently FATF launched in 2019The document states: “Countries may wish to adopt a phased implementation of travel rules requirements, but should continue to ensure that VASP takes alternative measures” to reduce the money laundering risks associated with cryptocurrency transfers during this period.

“With this updated guideline, the FATF is increasing its urgency, but it also acknowledges the real problems that VASP and travel rules service providers like us pointed out to them last year. They now recommend that regulators remain flexible when they are initially introduced,” Brændgaard Say.