Dear Financial Action Task Force…
MAMA’s Response to the Public Consultation of the FATF Draft Guidance on a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers
We greatly appreciate the opportunity to offer feedback on the draft guidance you have provided with regards to virtual assets.
We are particularly grateful for the opportunity given the complexities and capacity for inclusive innovation surrounding decentralised technologies. We assume a risk based approach is not intended to hinder the development of an ecosystem still largely in its incipient phase of development. In addition, it is worth acknowledging that current approaches regarding regulation might not be entirely suitable and therefore would suggest considering guidelines consistent with the operating parameters of this new ecosystem.
With the current draft guidance, there are two areas which are of particular concern to us:
A. The definition of “virtual assets” and the expansion of scope of the term “Virtual Asset Service Providers” (“VASP”) to include non-custodial peer-to-peer (“P2P”) platforms.
B. The targeting of developers behind decentralized applications.
AML regulations were originally designed for financial intermediaries with actual and legally relevant control of and power (custody) over certain assets owned by third parties. Furthermore they were intended to be purely for monitoring and reporting purposes. By shifting and expanding the VASP definition to include operators and developers of non-custodial platforms we fear you may inadvertently generate serious risks and adverse consequences for the development of a multitude of projects with numerous and undeniable societal benefits:
1. The revisions listed above will be perceived as non-technologically neutral.
To make a comparison, a hammer manufacturer is not, as a rule, liable for the activities of its customers; simply because a hammer can be used to hurt someone, does not mean that every manufacturer of hammers must conduct extensive customer due diligence or implement data collection and tracking procedures to ensure they can identify hammers used in a crime. Yet, the proposed guidance seems to contemplate this very idea. We appreciate the difficulties of developing appropriate regulation for such an emerging technology. The solution is not, however, to create a novel legal principle which applies only to the creators of software tools which may have financial uses.
Simply because a hammer can be used to hurt someone, does not mean that every manufacturer of hammers must conduct extensive customer due diligence or implement data collection and tracking procedures to ensure they can identify hammers used in a crime.
The current proposed guidance also carries significant risk of undermining its own policy goals. It contemplates only two possible “solutions” to the AML challenges of virtual assets: either banning them entirely, or subjecting them to a form and scale of international surveillance that is unprecedented. Doing so will not stop innovation, but it will encourage developers and users to avoid VASPs entirely. It is in the interest of AML/CFT policy goals to encourage users and developers to interface — and provide for interoperability — with regulated financial institutions. Moreover, the contemplated guidance simply does not accord with the reality of levels of criminal activity on decentralized blockchain networks.
A recent paper by Michael Morell, former director of the U.S. Central Intelligence Agency, found that the rate of illicit transactions on blockchain networks is less than one percent, and falling rapidly. The paper estimates that as much as four percent of all transactions in traditional financial networks are for an illicit purpose. The facts speak for themselves; the current trajectory of blockchain network payment systems is, in fact, in closer accordance with the goals of the FATF and its member countries than the traditional financial system, without the need for further rulemaking. As Mr. Morell observes, information from traditional reporting entities, combined with the publicly-available transaction records on chain and forensic analysis, could allow for greater global visibility into transactions in the context of criminal investigations, counter-terrorist financing operations, and so forth than is currently available in legacy finance — without the need for the expansive and intrusive approaches embodied in the proposed guidance (Source: https://cryptoforinnovation.org/resources/Analysis_of_Bitcoin_in_Illicit_Finance.pdf)
2. You will create barriers to entry for lowest income people who already struggle to access the financial system today. You will remove all the efficiencies that blockchain technology has promised to bring to the lower end of the financial spectrum.
In the proposed guidance, you state that the “FATF recognizes that other types of policy considerations, separate from AML/CFT, may come into play and shape the regulatory response to the VASP sector in individual jurisdictions.” We agree, and encourage you to consider the ramifications of your rulemaking in that light. The global fight against money laundering and terrorist financing is an important policy goal, one in which the FATF takes a leading role. Failure to adhere to FATF guidance can effectively exclude a country and its residents from global financial systems.
At the same time, many countries have policy goals which are at least as pressing, if not more so, than AML/CFT. In countries with weak or unstable governments and financial systems, technologies such as — in your words — “so-called stablecoins” and DAPPs can enable hundreds of millions of persons to access critical financial services and toolsets. While virtual assets enabling P2P transactions present unique difficulties, they also present opportunities; the opportunity, for example, to free countless millions from inefficient payment systems that not only cost them exorbitant fees, but do not meet the current goals of the FATF themselves.
While virtual assets enabling P2P transactions present unique difficulties, they also present opportunities; the opportunity, for example, to free countless millions from inefficient payment systems that not only cost them exorbitant fees, but do not meet the current goals of the FATF themselves.
If the FATF proceeds in implementing the current draft guidance, it will effectively usurp sovereign nations of the ability to set policy priorities for themselves, and entrench abusive and extractive financial practices in the emerging world. You will, in effect, be condemning the emerging world to policy subjugation in the interests of a single policy goal, enacted in a form at best suitable solely for large and highly-developed economies.
3. This will drive many small to medium sized businesses, developers out of business, while big businesses will get bigger and more powerful.
Disintermediation is a great value driver, not just in finance. Decentralised applications allow users to interact more directly with peers and engage with others more transparently and also with less costs than in legacy applications. In addition, users can benefit from the value creation they generate via, for instance, network effects, in a fashion that is not possible in centralised systems. We also potentially lose out on countless investor-protection benefits; after all, as observed by Jeff Bandman, a former adviser to the CFTC, Bernie Madoff’s famous fraud would have been impossible were the funds held on a public blockchain. (Source: Comments to the SEC Investor Advisory Comm. Meeting, Oct. 12, 2017)
Yet, with the expansion of scope of the definition of VASPs to include non-custodial P2P platforms, you force decentralised applications to become financial intermediaries again, which would destroy all the benefits and the business case as such. The imposed reporting and compliance obligations couldn’t be fulfilled by many small to medium sized businesses or developers and we would continue to see what has been the direction in traditional finance and many industries over the years — a domination of a few big businesses who control the market due to their ability to manage all imposed obligations.
We believe that regulation must refrain from imposing obligations on persons and countries that cannot fulfill these obligations.
We believe that it could be dangerous for an organization without a direct relationship to the citizens of its member countries to effectively entrench the market power of the largest firms in the world, particularly given the current global focus on meeting the needs of underserved, disenfranchised, and economically vulnerable populations. We believe that regulation must refrain from imposing obligations on persons and countries that cannot fulfill these obligations.
4. Your revisions will be perceived as an encroachment on basic human rights of freedom to operate in a private way.
Cash and private transactions are not merely vectors for criminality. The very difficulty of seizure is itself a feature of virtual assets for persons living in countries with repressive or undemocratic regimes. Moreover, the draft guidance as currently proposed would implement a bizarre and frightening global surveillance system. By requiring, for example, VASPs to obtain information on unhosted counterparty wallets from their own customers, the draft guidance encourages mass data collection and surveillance without consent.
By requiring, for example, VASPs to obtain information on unhosted counterparty wallets from their own customers, the draft guidance encourages mass data collection and surveillance without consent.
The FATF rightly calls out, in the proposed guidance, the concerns around privacy involved in blockchain forensic analysis. Such concerns apply with more force to rules regarding unhosted wallets and P2P transactions, given the potential for lack of consent to the kind of data collection and retention conceived of in the guidance. We do not believe it is the intent of the FATF to enable and empower despots and authoritarianism, but we are concerned that such will be the net impact of your proposed changes to the guidance.
5. The additional scope will be prohibitively expensive to enforce and likely to be highly ineffective, as history has shown.
Permissionless blockchains make data open and transparent in a way that has not existed in financial systems. With your commitment to a “risk-based approach”, we encourage you to recognise this advantage, whereby public transactions are less suited for money laundering or criminal activities. Using block explorers and specific risk monitoring and due diligence software could enable not just a powerful mission approach, but also a much more cost-effective option than applying the same regulation procedures as used for non-transparent transactions in traditional finance. We feel that treating new architecture with the same old methods doesn’t qualify as a “risk-based approach” and is out of proportion to what you want to achieve.
We feel that treating new architecture with the same old methods doesn’t qualify as a “risk-based approach” and is out of proportion to what you want to achieve.
Hence, we kindly ask you to reconsider your draft guidance in light of the comments and concerns enumerated above. We look forward to continuing to discuss this issue with you and welcome any feedback on our comments above for re-evaluation of the draft guidance. We have also submitted responses to regulatory framework consultations from e.g. the European Commission, the FSB, the FCA in the UK and the Swiss FINMA. We are also happy to exchange views on the subject bilaterally going forward, and would welcome the opportunity to work with you to ensure that innovation in the decentralised finance space can freely develop to the benefit of consumers and investors around the world, while furthering the fundamental policy goals of FATF in the global effort against money laundering and terrorist financing.
MAMA / Multichain Asset Managers Association
The above response was submitted by e-mail to the FATF on April 20, 2021. Special thank you to all our MAMA members for their work on this, especially to Alexander Lindgren (Partner LLOY Law), Ioana Surpateanu (CSO DIA) and Mona El Isa (CEO Avantgarde Finance).
The Swiss domiciled non-profit is a trade body which represents asset management companies, investors, technology providers, service providers and ecosystem players interested in working towards a new vision for asset management using blockchain technology. Founded in 2017 by Mona El Isa the association has since grown to a network of more than 60 members, including crypto pioneers like Bitcoin Suisse and CoinShares, many crypto hedge funds, DeFi players like Aave and MakerDAO, as well as academic partners such as the Center for Innovative Finance (CIF) of the University of Basel and the Frankfurt School Blockchain Center.