FATF Final Guidance Includes More Clarification On DeFi And NFTs

FATF Extends Crypto Policy Work to DeFi and NFT

The FATF first published a crypto guideline back in 2019 known as the Travel Rule, to regulate and monitor cryptocurrency exchanges, with the aim of abating terrorist financing and money laundering activities allegedly associated with cryptocurrencies. While some countries have been implementing the FATF guidelines, the agency continues to make amendments.

Following feedback received in April 2021 after publishing new draft guidance, the FATF released an updated and final policy on Thursday (October 28, 2021). According to the update, the FATF said that while NFTs are not generally considered as VAs based on the agency’s definition, some NFTs, however, may be regarded as virtual assets if used for investment or payment.

An excerpt from the guidance reads:

“Some NFTs that on their face do not appear to constitute VAs may fall under the VA definition if they are to be used for payment or investment purposes in practice. Other NFTs are digital representations of other financial assets already covered by the FATF Standards. Such assets are therefore excluded from the FATF definition of VA, but would be covered by the FATF Standards as that type of financial asset.”

The body also stated that DeFi is not VASP, since the standard did not apply to the underlying software. However, the FATF said that

“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.”

The FATF defines a VASP as a “natural or legal person”, who, as a business, carries out certain operations on behalf of another natural or legal person. Such operations include conversion of crypto to fiat and vice versa, virtual asset transfer, exchange between one or two crypto assets, etc.

Based on the FATF’s definition of VASP, some cryptocurrency proponents might argue that putting DeFi, which is decentralized, into the VSP category, is flawed. Meanwhile, major economies have started employing DeFi rules similar to the FATF guidance, and like the Travel Rule, the agency’s policy might serve as a rallying point for Defi regulations.

Global Crypto Market Attracting International Regulatory Action

With the continuous growth of the cryptocurrency market, currently valued at over $2 trillion, international watchdogs globally have increased regulatory scrutiny on the emerging sector.

Back in September 2020, the European Commission proposed the Markets in Crypto-Assets Regulation (MiCA), a regulatory framework for the crypto industry, which would regulate digital wallet providers and cryptocurrency exchanges.

Also, the DeFi sector, which has been growing in popularity and market value, has received particular attention from regulators. Earlier in June, the World Economic Forum (WEF) released a policy toolkit on DeFi.

The toolkit, which was developed in collaboration with the Wharton Blockchain and Digital Asset Project, seeks to help policymakers to understand the DeFi marketplace, as well as the benefits and potential risks associated with the industry. Also, legal practitioners, regulatory experts, DeFi entrepreneurs, academics, and technologists were involved in creating the policy toolkit.

Meanwhile, industry stakeholders have called on the regulators to allow DeFi laws to be flexible, or the risk killing innovation.

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