FATF includes DeFi in guidance for crypto service providers

Decentralized finance's market capitalization has reached a new all-time high of $145.5 billion dollars, according to the TradingView index. The previous ATH was reached back in May when Ethereum's price was also topping out at the price of $4,170.

Decentralized finance, or DeFi, continues driving more interest from regulators, becoming a part of major international rules designed for virtual asset service providers, or VASPs.

On Oct. 28, the Financial Action Task Force, or FATF, issued a new update for its 2019 guidance for a risk-based approach for virtual assets and VASPs, paying particular attention to the DeFi industry.

The new guidance addresses issues identified in the FATF’s 12-month review of the revised FATF standards on virtual assets and VASPs requiring further clarification, also reflecting input from a public consultation in March and April 2021.

The authority has provided significant additional guidance regarding the DeFi industry despite DeFi applications not being a VASP under the FATF standards, as the standards “do not apply to underlying software or technology.” However, the updated guidance states that DeFi developers and maintainers can actually be considered as VASPs:

“Creators, owners and operators or some other persons who maintain control or sufficient influence in the DeFi arrangements, even if those arrangements seem decentralized, may fall under the FATF definition of a VASP where they are providing or actively facilitating VASP services.”

According to Pelle Brændgaard, CEO of crypto compliance startup Notabene, the new guidance is looking to determine VASPs in the DeFi ecosystem based on revenue of its participants. “If a business is extracting transaction fees or direct revenue from a protocol that they control, they likely will be classified as a VASP. More fully decentralized protocols could be covered under certain cases as well, but not all cases,” Brændgaard said.

Apart from providing significant additional guidance on DeFi, the new FATF guidance also address nonfungible tokens, stating that NFTs are excluded from the FATF definition of virtual assets, but “would be covered by the FATF standards as that type of financial asset.”

“Given that the VA space is rapidly evolving, the functional approach is particularly relevant in the context of NFTs and other similar digital assets. Countries should therefore consider the application of the FATF standards to NFTs on a case-by-case basis,” the document reads.

The update also calls for increased urgency for global regulators to implement the Travel Rule, an Anti-Money Laundering and Counter Financing of Terrorism regulation for financial institutions introduced by the FATF in 2019. “Countries may wish to take a staged approach to enforcement of travel rule requirements “but should continue to ensure that VASPs have alternative measures in place” to mitigate money laundering risks associated with crypto transfers in the interim, the document notes.

“With this updated Guidance, FATF is increasing the urgency yet also acknowledging the real-world issues VASPs and Travel Rule service providers like us have pointed out to them over the last year. They are now recommending that regulators be flexible during the initial rollout,” Brændgaard said.

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