The Tribune

Blockchain technology has revolutionised mutiple products and services in recent years, making it one of our generation’s most fascinating advances. Crypto currencies are enabled by this same blockchain technology. Due to their outstanding capabilities to address specific challenges, crypto currencies have emerged as the most popular blockchain application. As a result, over 300m individuals now own crypto currencies, according to international reports.

Because of this growth, regulation is necessary to ensure a safe environment for innovation, thereby contributing to consumer trust, market order and clarity. According to the World Economic Forum, bespoke frameworks for crypto should be developed to address issues such as financial stability and crime prevention. Further, in October, the Financial Stability Board (FSB) proposed a framework for the international regulation of crypto currencies, noting recommendations that promote the consistency and comprehensiveness of regulatory, supervisory and oversight approaches to crypto-asset activities and markets, and strengthen international co-operation, co-ordination and information sharing.

It also focused on revised high-level recommendations for the regulation, supervision and oversight of “global stablecoin” arrangements to address associated financial stability risks more effectively. This article, the first in a two-part series, assesses the significant responsibility for a risk-based approach by supervisory bodies in their regulation and monitoring of virtual assets and virtual asset service providers.

Money laundering and terrorism financing (TF) risks to understand

Even though governments see the crypto ecosystem as a potential tailwind for economic activity and innovation, they also recognise it is a fast-growing sector that has developed mainly outside the confines of financial regulations or even credible understanding. Several global standards have been issued by the Financial Action Task Force (FATF), with the backing of the G-20, for preventing money laundering and terrorism financing in the crypto space. They incorporate the same safeguards as those used in traditional financial services. Additionally, the FATF’s updated guidance on virtual assets and virtual assets services providers explained that the risk-based assessment (RBA) applies to the allocation of resources by supervisory authorities. Further, to better assess risks in this sector, supervisors should also gain a deeper understanding of the virtual assets services provider market, its structure, and its role in the country’s economy.

Mitigating the risks

Countries must enact legislation ensuring the effectiveness of anti-money laundering/counter-terror financing policies and processes. In addition, these laws should vet the quality of risk management across the company’s operations, departments, branches and subsidiaries, domestically and abroad, as appropriate. Moreover, supervisory bodies should acknowledge that not every virtual asset service provider will adopt the same anti-money laundering/counter-terror financinv controls under a risk-based regime. A single, unwitting or isolated incident involving illicit proceeds does not necessarily invalidate the integrity of a virtual asset service provider’s anti-financial crime controls. Therefore, thought and effort must be given to adjustments to the type of anti-money laundering/counter-terror financing supervision, the frequency and nature of the ongoing supervision, and the intensity of the anti-money laundering/ counter-terror financing supervision and reporting requirements.

Conclusion

In short, because of the growth in both virtual assets and virtual asset services providers, regulations are necessary to ensure a safe environment for innovation. This will build consumer trust, market order and clarity. The second part of this series will discuss the responsibility of entities engaged in virtual asset activities.

• NB: About Derek Smith Jr

Derek Smith Jr. has been a governance, risk and compliance professional for more than 20 years. He has held positions at a TerraLex member law firm, a Wolfsburg Group member bank and a ‘big four’ accounting firm. Mr Smith is a certified anti-money laundering specialist (CAMS), and the compliance officer and money laundering reporting officer (MLRO) for CG Atlantic’s family of companies (member of Coralisle Group) for The Bahamas and Turks & Caicos.