compliance/aml news roundup – FCA Chair Lays out Token Regulation Challenges
Here’s our latest roundup from the Compliance and Legal Teams here at BCB Group, providing insights into the recent news highlights in the worlds of compliance and AML, crypto-focused and beyond.
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FCA CHAIR LAYS OUT TOKEN REGULATION CHALLENGES
The FCA Chair, Charles Rendell, recently gave a speech to the Cambridge Symposium on Economic Crime addressing the need for greater regulatory clarity surrounding cryptocurrency markets, especially with regards to consumers falling victim to fraud.
During his speech, Charles Rendell cited the recent case of Kim Kardashian, who promoted Ethereum Max on her Instagram. Whilst not necessarily a scam itself, the ad-hoc financial promotion to her 250 million+ followers sounded alarm bells for the FCA. The FCA has long promoted self-regulation by online platforms to mitigate against scams, but this instance marked the need for a more permanent solution with regards to speculative tokens. From October 2020 to May 2021, it was reported that approximately 7,000 people had reported losses totalling more than $80 million after falling victim to cryptoasset scams. These individuals are lured to websites that look like investment opportunities and tricked into ‘giveaway scams’ which promise to multiply any cryptocurrency you send manyfold.
Whilst regulators globally have been proactive in regulating VASPs (Virtual Asset Service Providers), the creation of tokens, as well as their purchase and sale, is currently unregulated. In the UK specifically, cryptoassets are not covered by the Financial Services Compensation Scheme which means that consumers are not protected in the event of losses and the victims of scams are often left with little means of recourse. Whilst acknowledging that this is clearly a huge issue that needs to be addressed, Rendell also made it clear that innovation in the space is vital and should not be sacrificed. Rendell further emphasised how protection needs to be instilled not at the expense of individual freedom, making decisions for which they are responsible. We hope that future FCA guidance and policy will also aim to strike this balance.
Source: Elliptic Blog
BASEL INSTITUTE ON GOVERNANCE REPORTS ON THE AML RISKS OF VIRTUAL ASSETS
The Basel Institute on Governance has released the 10th edition of their AML Index Report which ranks global money laundering and terrorist financing risks for 2021. In it they have identified four main AML risk trends:
- How the slow implementation of beneficial ownership registries is creating safe havens for dirty money;
- That most jurisdictions have ineffective AML systems when compared to the risks posed;
- The issues posed by the ongoing underperformance on compliance with AML / CFT standards by non-compliance professions (e.g. lawyers, accountants etc.); and
- The ongoing poor response by jurisdictions to the money laundering threats posed by virtual assets.
A summary of the Institute’s findings as they relate to Virtual Assets can be found below.
The report uses the extent to which FATF Recommendation 15 (as revised in 2018 to deal with virtual assets and VASPs) (‘R.15’) has been implemented by a jurisdiction as the metric by which it assesses how effectively that jurisdiction is combating money laundering in the virtual asset space. Its findings are rather dismal, with only 3 out 27 jurisdictions assessed by the FATF between June 2020 and June 2021 having improved upon their scores, and the majority (19) being downgraded.
They consider regulatory arbitrage to be the main risk posed by virtual assets. They highlight their serious concern that a failure to implement a cohesive regulatory program on a global scale will result in those measures that are implemented being largely ineffective at combating illicit virtual asset activity. In other words, they envision that patchwork regulation will lead to illicit actors simply conducting their activities in laxer jurisdictions (as happens in many other typologies of financial crime). They have lauded the European Commission’s ambitious plan to harmonise AML/CFT legislation, in relation to VASPs, across all EU jurisdictions, however, again they highlight the necessity for such regulation to be omnipresent if it is to be effective.
The Institute also identified three main gaps that apply across the board when it comes to jurisdictions’ implementation of R.15 to the regulation of virtual assets. Perhaps the greatest concern to stakeholders is the general lack of understanding, be it on account of a lack of expertise or knowledge (or both), demonstrated by the very bodies responsible for regulating the space. In fact, it might well be that the second identified gap, the ‘sluggish’ pace at which jurisdictions are implementing regulation, is due in large part to their lack of understanding. The final gap that they have identified is the weak implementation of the ‘travel rule,’ with the requisite information not being obtained or made available to the relevant authorities. This is perhaps unsurprising given the difficulties that have been encountered by many within the space to find an effective solution to the imposition of the travel rule (a concept developed for traditional finance) onto VASPs.
The full report can be found here.
AFTER EL SALVADOR’S ESTABLISHMENT OF BITCOIN AS LEGAL TENDER LAST WEEK, SEVERAL COUNTRIES HAVE MADE THEIR OWN HEADWAY ON ESTABLISHING REGULATORY FRAMEWORKS FOR CRYPTOASSETS
Panama Legislator Proposes Crypto Regulation
Proposed Panamanian legislation will regulate cryptocurrency and potentially transform banking systems in the state. The draft bill would recognise crypto assets as an alternative payment method for legal transactions. Congressman Gabriel Silva, who introduced the bill last week, argues that it would make Panama ‘compatible with the digital economy, blockchain, crypto assets and the internet.’
Currently, cryptocurrency use is not illegal in Panama, which has no constitutionally enforced currency or central bank. Although defined by the Financial Action Task Force as a jurisdiction with ‘strategic deficiencies’, FATF notes the ‘high-level political commitment’ made by the state to strengthen its anti-money laundering and counter-terrorist financing regime.
The bill also proposes broader developments, potentially revolutionising Panama’s financial systems by establishing enhanced banking interoperability for services such as Paypal.
Ukraine Parliament Passes Crypto Asset Regulation
The Ukrainian Parliament recently passed a draft law that would regulate and legalise all virtual assets. The bill passed with 78 percent of those present voting in favour, signalling considerable domestic approval of cryptocurrency legalisation.
The bill’s passing seems natural given Ukraine’s stance on virtual assets, and solidifies Ukraine’s growing cryptocurrency regulatory framework, the roadmap of which was set out by the Ministry of Digital Transformation in July this year. The roadmap establishes five development aims: provision of an appropriate legal framework; establishment of a stable taxation regime for three to five years; facilitation of bank accounts for crypto companies; issuance of a central bank digital currency; and, enhancement of protection of private property through court reformation. Ukraine has already taken action with regard to a crypto asset taxation regime, with a 2019 draft bill that would tax assets at 5 percent in the first five years after the law is enforced, rising to 18% – the personal income tax rate – after that.
This parliamentary action will no doubt be popular domestically, given that Ukraine is already a world leader in crypto adoption, according to a 2021 Chainanalysis report.
LAOS LAUNCHES CRYPTOCURRENCY MINING AND TRADING TRIAL
Laos has authorised six companies to begin trading and mining cryptocurrencies as part of a government trial. This move by the Laotian government runs contrary to the ban on purchasing and selling cryptocurrencies, which has been in place for three years, and follows only a month after the government reiterated its stance against cryptocurrency usage.
The Ministries of Technology and Finance will spearhead efforts to research and develop rules and regulations governing the use of cryptocurrencies domestically, working alongside the Bank of Laos and Electricite du Laos in this endeavour. The results of this collaboration will be presented to the Prime Minister from 16th-17th September.
The move comes in the wake of two events: China’s ban on cryptocurrencies, and Laos’ push towards renewable energy. The former has displaced miners, who are now seeking cheap energy and greater regulatory stability. The latter comprises an ‘unprecedented’ boom in dam-building on the Mekong, as the nation seeks to double hydropower capacity between 2020 and 2030 to become the ‘battery of Southeast Asia.’ Laos’ location, renewable energy supply and potential for regulatory clarity could establish the nation as an attractive prospect for miners.
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