NFT wins, DeFi loses, the rest remains the same


Financial Action Task Force (FATF) Released the long-awaited guide Regarding virtual assets, develop standards that may reshape the cryptocurrency industry in the United States and around the world. The guide addresses one of the most important challenges for the crypto industry: to convince regulators, legislators, and the public that it will not promote money laundering.

The guide pays special attention to the parts of the crypto industry that have recently brought significant regulatory uncertainty, including decentralized finance (DeFi), stable coins, and non-fungible tokens (NFT). This guide mainly follows the emerging methods of DeFi and stablecoins by U.S. regulators. On the positive side for the industry, FATF seems to be less aggressive towards NFTs, and it can be said that it requires the assumption that NFTs are not virtual assets. However, if the NFT is used for “investment purposes,” the guide opens the door for members to supervise the NFT. We expect this guidance to add momentum to the NFT rebound that has been going on for most of 2021.

related: Draft FATF guidelines for DeFi compliance

Expand the definition of virtual asset service providers

FATF is an intergovernmental organization whose mission is to formulate policies to combat money laundering and terrorist financing. Although FATF cannot formulate binding laws or policies, its guidance has a significant impact on the anti-terrorist financing and anti-money laundering (AML) laws of its members. The U.S. Department of the Treasury is one of the government agencies that usually follows and implements regulations based on FATF guidance.

The FATF’s highly anticipated guidance takes a “broad approach” in expanding the definition of a virtual asset service provider (VASP). This new definition includes the exchange between virtual assets and legal currency; exchanges between various forms of virtual assets; the transfer of digital assets; the custody and management of virtual assets; participation and provision of financial services related to the offer and sale of virtual assets .

Once an entity is marked as a VASP, it must comply with the applicable requirements of the jurisdiction in which it does business, which usually include implementing anti-money laundering (AML) and anti-terrorism programs, obtaining a license or registration with the local government and being supervised or supervised by that government.

In addition, FATF definition Virtual assets (VA) broadly:

“The digital representation of value can be digitally traded or transferred, and can be used for payment or investment purposes.” But it does not include “digital representations of legal tender, securities, and other financial assets that have been covered elsewhere in the FATF proposal.”

In summary, the FATF’s definition of VA and VASP seems to extend AML, anti-terrorism, registration and surveillance requirements to most participants in the encryption industry.

Impact on DeFi

FATF’s guidance on the DeFi protocol is not clear. FATF first stated:

“DeFi applications (ie software programs) are not VASPs under the FATF standard because the standard does not apply to the underlying software or technology…”

The guidance doesn’t stop there. Instead, FATF explained that the creator, owner, operator, or other person who maintains control or sufficient influence on the DeFi agreement “may fall under the FATF’s definition of VASP, and they are providing or actively promoting VASP services.” The guide Continuing to explain that the owners/operators of DeFi projects eligible for VASP distinguish them “according to their relationship with the activities they carry out.” These owners/operators may exert sufficient control or influence on assets or project agreements. This influence can also exist by maintaining “an ongoing business relationship between them and users,” even if it is “executed through smart contracts or in some cases voting agreements.”

According to this language, FATF recommends that regulators should not simply accept the “decentralization” proposition, but make their own efforts. The FATF even suggested that if the DeFi platform does not have an entity to run it, the jurisdiction can order VASP to be put in place as an obligatory entity. In this regard, FATF has hardly changed the regulatory status of most participants in DeFi.

related: DeFi: In a world without borders and managed by code, who, what and how is it regulated?

Impact on stablecoins

New guide Reiterate The organization’s previous position was that stablecoins (cryptocurrencies whose value is linked to a store of value such as the U.S. dollar) are subject to FATF as a standard for VASP.

The guide addresses the risks of “mass adoption” and examines specific design features that affect the risks of AML. In particular, the guidelines refer to the “central governance body of stablecoins” as VASP, “usually covered by FATF standards.” FATF draws on its general approach to DeFi and believes that the proposition of decentralized governance is not enough to evade regulatory scrutiny. For example, even if the governing body of stablecoins is decentralized, FATF encourages its members to “identify obligated entities and…reduce related risks…regardless of the organization’s design and name.”

The guide calls on VASP to continuously identify and understand the AML risks of stablecoins before launching, and to manage and reduce risks before implementing stablecoin products. Finally, FATF recommends that stablecoin providers should seek to obtain licenses in the jurisdictions where they primarily conduct business.

relay: Regulators come for stablecoins, but where should they start?

Impact on NFT

Along with DeFi and stablecoins, NFT has become popular and has now become the main pillar of the contemporary crypto ecosystem.In contrast to the broad approach to other aspects of the encryption industry, FATF recommends that NFT “is generally not considered [virtual assets] According to the definition of FATF. “This can be said to assume that NFTs are not VAs, and their issuers are not VASPs.

However, similar to its approach to DeFi, FATF emphasizes that regulators should “consider the nature of NFT and its function in practice, rather than what terms or marketing terms it uses.” In particular, FATF considers “used for payment or investment purposes.” The NFT may be a virtual asset.

Although the guide does not define “investment purpose”, the FATF may intend to include those who purchase NFTs and intend to sell them in the future for profit. Although many buyers buy NFTs because of their connections with artists or works, most industries buy them because they have the potential to appreciate. Therefore, although FATF’s approach to NFT does not seem to be as extensive as its guidance on DeFi or stablecoins, FATF countries may rely on the language of “investment purpose” to implement stricter supervision.

related: Unfungible tokens from a legal perspective

What the FATF Guidelines mean for the crypto industry

The FATF guidelines pay close attention to the aggressive stances of U.S. regulators on DeFi, stablecoins, and other major parts of the crypto ecosystem. Therefore, centralized and decentralized projects will find themselves increasingly under pressure to comply with the same anti-money laundering requirements as traditional financial institutions.

Looking to the future, as we have already seen, the DeFi project will dig deeper into DeFi and try new governance structures, such as a decentralized autonomous organization (DAO) that is close to “truly decentralized”. Even this method is not without risk, because FATF’s extensive definition of VASP poses problems for key signers or private key holders of smart contracts. This is especially important for DAOs, as signers can be classified as VASPs.

Given the FATF’s extensive explanation of who “controls or influences” the project, cryptocurrency entrepreneurs will face an uphill battle not only in the United States but also all over the world.

This article is created by Jorge Pesso and John Bugnatch.

The views, thoughts and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article is for general reference only and should not and should not be regarded as legal advice.

Jorge Pesso Served as the general counsel and chief compliance officer of Tacen Inc., a leading software development company that develops blockchain-based open source software. Before joining Tacen, Jorge provided consulting services for technology companies, cryptocurrency exchanges and financial institutions before the SEC, CFTC and DOJ, and accumulated extensive legal experience.

John Bugnatch Served as the policy director and legal assistant of Tacen Inc. John is an expert in governance, security, and development. His research and work focus on important intersections between history, politics, economics, and other fields to generate effective analysis, dialogue, and participation.