FATF ¦ Virtual Assets: Targeted Update on Implementation of the FATF Standards on VAs and VASPs

Global Financial Crime and Virtual Assets: FATF’s 2024 Update on Standards Implementation

The Financial Action Task Force (FATF) has been pivotal in shaping global policies to combat financial crimes such as money laundering (ML), terrorist financing (TF), and proliferation financing (PF). Since 2019, FATF extended its anti-money laundering and counter-terrorist financing (AML/CFT) standards to virtual assets (VAs) and virtual asset service providers (VASPs). With the rapid growth of digital currencies and decentralized finance, the FATF continues to monitor and update regulations to mitigate emerging risks.

Current State of Global Implementation of FATF Standards on VAs and VASPs

Despite ongoing efforts, the global implementation of FATF’s Recommendation 15 (R.15), which governs VAs and VASPs, remains inconsistent and incomplete. As of April 2024, only 25% of assessed jurisdictions were largely or fully compliant with R.15, a proportion unchanged since 2023. The majority — 75% — are either partially compliant or non-compliant, highlighting significant regulatory gaps worldwide.

Many jurisdictions still face challenges in conducting adequate ML/TF risk assessments for virtual assets. Nearly one-third have not completed such assessments, limiting effective risk mitigation strategies. Moreover, over a quarter of jurisdictions have yet to decide on their regulatory approach to VASPs, with some opting to permit VAs and others partially or explicitly prohibiting them. However, evidence suggests that prohibition is difficult to enforce effectively, often requiring substantial resources and expertise.

The Travel Rule: Progress and Persistent Challenges

The Travel Rule, an extension of FATF Recommendation 16 into the virtual asset sphere, requires VASPs to securely collect and transmit originator and beneficiary information during VA transfers. Jurisdictions have made progress; 70% have enacted legislation implementing the Travel Rule as of 2024, up from previous years. However, about one-third of jurisdictions at high risk for ML/TF have not yet passed such laws.

Enforcement remains weak globally. Less than one-third of jurisdictions with Travel Rule legislation have taken supervisory or enforcement actions against non-compliant VASPs. Challenges persist including interoperability among Travel Rule compliance tools and varying national requirements, which complicate counterparty due diligence and effective information sharing.

Bastian Schwind-Wagner_Follow "Despite progress since 2019, global compliance with FATF standards on virtual assets remains insufficient, exposing financial systems to continued risks from money laundering and terrorist financing. Urgent action is needed from both regulators and the private sector to fully implement AML/CFT frameworks, including the Travel Rule, to safeguard the integrity of virtual asset markets."

Emerging Risks: Stablecoins, Decentralized Finance, Unhosted Wallets, and NFTs

Virtual assets continue to be exploited by illicit actors including state-sponsored groups like North Korea (DPRK), scammers, and terrorist organizations. DPRK uses sophisticated laundering methods involving anonymity-enhancing coins and decentralized finance (DeFi) platforms.

Stablecoins, particularly Tether’s USDT, are increasingly used in illicit activities including terrorist financing. Several jurisdictions have begun regulating stablecoin issuers and intermediaries with AML/CFT measures and Travel Rule obligations.

DeFi presents unique challenges due to its decentralized nature and difficulty in identifying responsible entities. While about half of advanced jurisdictions require DeFi entities meeting VASP criteria to be licensed or registered, many struggle with enforcement.

Unhosted wallets and peer-to-peer (P2P) transactions remain difficult to monitor. Although transaction volumes through unhosted wallets decreased in 2023, many jurisdictions have yet to fully assess associated risks or put comprehensive mitigation measures in place.

Non-Fungible Tokens (NFTs) are being regulated as virtual assets in some jurisdictions where they are used for payment or investment purposes. While NFTs are rarely linked directly to terrorism or proliferation financing, they are vulnerable to fraud, scams, theft, and money laundering.

Recommendations for Public and Private Sectors

The FATF urges all jurisdictions, especially those with significant VASP activity, to implement a full AML/CFT framework for virtual assets without delay. This includes conducting thorough risk assessments, licensing or registering VASPs appropriately, enforcing compliance with the Travel Rule, and addressing emerging risks related to stablecoins, DeFi, unhosted wallets, P2P transactions, and NFTs.

VASPs and compliance tool providers should review and enhance their Travel Rule tools to ensure full compliance with FATF standards. Enhanced compatibility between different tools is critical to effective implementation.

Next Steps

FATF plans continued outreach, technical assistance, knowledge sharing, and monitoring of global implementation progress through 2025. The organization will update public tables tracking jurisdictional compliance and publish further targeted updates reflecting new developments in virtual asset markets.

The FATF recognizes the evolving nature of virtual assets and remains committed to adapting standards to address emerging threats while supporting innovation in the financial ecosystem.

Dive deeper

• FATF ¦ Virtual Assets: Targeted Update on Implementation of the FATF Standards on VAs and VASPs ¦ Link