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The implementation of Financial Action Task Force (FATF) standards on virtual assets (VAs) and virtual asset service providers (VASPs) falls way short of what is necessary, according to a new report from the watchdog.
The task force’s targeted update highlights the lack of progress worldwide in adopting the "Travel Rule", a critical measure for anti-money laundering (AML) and counter-terrorism financing (CTF).
According to the update, nearly one-third of jurisdictions have yet to pass legislation implementing the Travel Rule, including many that classify VAs/VASPs as high risk. And even some jurisdictions that have such legislation in place show low levels of supervision and enforcement.
Despite an increase in compliance since the 2023 update, with 25 percent (24 out of 98) of jurisdictions now largely adhering to FATF standards, overall global implementation remains limited.
FATF urges all jurisdictions to implement its standards, including the Travel Rule, for VAs and VASPs. To support this, it will:
- Assist lower-capacity jurisdictions with significant VASP activities.
- Share best practices and monitor trends in areas such as decentralised finance (DeFi), stablecoins, unhosted wallets and P2P transactions.
- Collaborate with member countries, the global network, technical assistance providers and the private sector to address progress and challenges.
Vixio's Horizon Scanning tool shows that nations have implemented Travel Rule-related legislation and regulatory proposals during 2023 and 2024 as well.
For example, the Capital Market, Insurance and Savings Authority (CMISA) of Israel issued a draft directive adopting amendments to the existing anti-money laundering and counter-terrorist financing rules, as well as the Travel Rule for virtual assets, in June.
Meanwhile, the South African Financial Intelligence Centre (FIC) consulted on its directive to introduce a travel rule for crypto-asset transfers by crypto operators between April and May.
In Dubai, the Financial Services Authority (DFSA) published Consultation Paper 153, which updates the Regulation of Crypto Tokens. With the consultation open until March 4, it included questions regarding the implementation of the Travel Rule.
While at EU level, after a consultation period beginning in November 2023, the European Banking Authority (EBA) released its “Guidelines on Information Requirements in relation to Transfers of Funds and Certain Crypto-Assets Transfers under Regulation (EU) 2023/1113”.
Continued challenges
The report acknowledges that jurisdictions and VASPs face numerous challenges implementing the Travel Rule.
However, despite some positive developments, such as increased crypto-asset transaction volumes and the use of tools to mitigate illicit finance risks, gaps in implementation and lack of enforcement in various jurisdictions hinder widespread adoption by the private sector.
The lack of interoperability of Travel Rule compliance tools remains a significant issue. Although there has been some progress, differences in system design and data protection rules continue to create challenges.
Partial solutions are available, but they add extra technical, operational and financial burdens, according to FATF.
The industry is frequently using messaging standards based on ISO 20022 — otherwise known as the Inter-VASP messaging standard for Travel Rule information — and sees potential in further developing standards to enhance message transitions.
However, the increasing complexity of VA transfers, including those by professional traders and brokers, means existing compliance tools may not be adequate for all transaction types.
Nations’ (lack of) progress
As of April 2024, FATF and its Global Network assessed 130 jurisdictions for compliance with the revised Recommendation 15, requiring VASPs to be regulated for AML/CTF.
Only one jurisdiction is fully compliant, with 25 percent (32 jurisdictions) largely compliant. This means 75 percent (97 jurisdictions) are only partially or not compliant, reflecting no change from the previous year.
Jurisdictions continue to face challenges in conducting risk assessments and developing regulatory regimes for VASPs, according to FATF, with around three-quarters (98 jurisdictions) having not adequately implemented the requirement to assess risks associated with VAs and VASPs.
This aligns with a March 2024 survey by the standard setter, which found that nearly one-third of respondents do not conduct such assessments.
Fundamental requirements such as implementing the Travel Rule, managing ML/TF risks and enforcing compliance measures remain problematic, according to FATF.
For example, despite FATF's 2021 guidance on risk-based approaches, many jurisdictions still struggle with assessing and mitigating risks related to VAs and VASPs, the Paris-based organisation warns.
More than a quarter of the surveyed jurisdictions are undecided on how to regulate the sector, a slight improvement from 2023.
The majority, 60 percent, allow the use and operation of VAs and VASPs, but 14 percent prohibit them. The latter figure is steadily increasing, particularly in the Middle East, North Africa and Asia-Pacific.
These prohibitions vary, with some jurisdictions banning all VASP activities and others imposing partial bans, such as prohibiting virtual assets as a means of payment while allowing trading and related services.
Prohibiting virtual assets remains challenging, often being resource-intensive and complex to enforce, and can drive activities to other jurisdictions, creating spillover risks.
Consequently, few jurisdictions that prohibit VAs have been assessed as largely compliant with FATF standards.
Jurisdictions have made progress in licensing or registering VASPs: 87 percent now require VASPs to be licensed or registered, and 69 of these have issued licences or registrations. This is a significant improvement from 2023, when only 44 percent had done so.
However, this progress is not fully reflected in assessment results, FATF says, with only 31 percent of jurisdictions satisfactorily meeting licensing or registration requirements.
Most jurisdictions that issued licences also conducted supervisory inspections (78 percent) and enforcement actions (77 percent), up from 61 percent each in 2023.
