Why DeFi must strike a delicate balance in regards to FATF guidelines

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In March, the Financial Action Task Force [FATF] issued draught recommendations on the risk-based approach to virtual properties. This recently drafted guideline emphasises the importance of anti-money laundering and know your customer [KYC] laws for not only stablecoins but also decentralised finance [DeFi] and non-fungible token [NFT] funds.

The FATF has been working to develop a regulatory standard for crypto services, and according to Dave Jevans, CEO of Cipher Trace, one of the six areas the guideline aims at is virtual asset service providers [VASP].

In an interview with Laura Shin, Jevans noted:

“The first is what is a virtual asset and what is it that we call “virtual asset service provider”. So, what’s a VASP? I think that’s a broad area that we need to focus on as far as DeFi and DeFi providers, are things suddenly going to change where you have a whole new set of regulations applied to you because now you have become a VASP versus an information provider, an oracle provider- you’re running everything on smart contract.”

This is a major move forwards, since the FATF proposed and finalised this guideline almost two years ago. The Travel Rule described virtual asset service providers as businesses that pass funds in the form of cryptocurrency, such as crypto exchanges, and required businesses to provide KYC details for both the sender and the receiver of transactions.

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Many large exchanges have closed their doors due to a lack of enforcement now that countries are starting to enforce these rules.

As the field of DeFi and NFTs grew in popularity, the FATF revised its guidelines to reflect this. If finalised, the study would force countries to insure that DeFi networks have a kind of KYC rules to follow, even if there is no single entity in charge of a live network. Jevans continued:

“It is not attempting to regulate software but those who develop software and gain a benefit from it later whether it’s directly through transaction fees or indirectly through the price of a coin going up that they used to pay for fees and things of that nature, would potentially fall under the umbrella of VASP, which would broadly cover pretty much every DeFi product.”

Since the DeFi space is already evolving, the new guidance will play a critical role in shaping the future of numerous DeFi initiatives. According to reports, Gibraltar has revised its guidance notes to comply with FATF regulations, and South Africa has done the same. When countries follow the new standards, DeFi providers will have to work out how to comply with the regulations while remaining decentralised.

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