Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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3 Key Takeaways: FATF’s Latest 12-Month Virtual Assets Review
Elliptic | David Carlisle | Jul 5, 2021
Today the Financial Action Task Force (FATF), the global standard-setter for anti-money laundering and countering the financing of terrorism (AML/CFT), released its second 12-month review on virtual assets (You can read our summary of its first report from July 2020 report here).
The FATF’s report provides an overview of progress that governments around the world, and virtual asset service providers (VASPs) in the private sector, are making in implementing the FATF’s guidance on virtual assets like Bitcoin.
See: Analysis: Proposed FATF Guidance for Virtual Assets and VASPs
The report also features a landmark market metrics study of key trends in virtual asset transactions based on blockchain analytics. Elliptic was privileged to have contributed our data and analysis to the FATF’s study, along with several of our peers.
Here’s our summary of three key lessons from the FATF’s review, which is a must-read for anyone in the AML/CFT compliance space.
1. Blockchain analytics shows that changing the FATF standards to cover peer-to-peer transactions (P2P) is currently unnecessary. However, VASPs still need to be alert to risks associated with P2P transfers.
A key question facing the FATF is whether it should fundamentally change its Standards to address specific features of virtual assets.
In particular, the FATF has asked whether its Standards, which place the focus of AML/CFT control measures on regulated intermediaries such as VASPs, need to be altered to account for the P2P nature of virtual assets. Because virtual assets allow counterparties to transact P2P without a regulated entity present, the FATF has suggested that it may need to amend its Standards to enable direct regulatory oversight of P2P activity in virtual assets.
In its new report, the FATF asks whether it should undertake such a fundamental revision of its Standards now. To assist in answering that question, the FATF commissioned a market metrics study to evaluate the scale of P2P activity in virtual assets, and to assess the associated risks.
See: WEF Insight Report: Digital Assets, Distributed Ledger Technology, and the Future of Capital Markets
Elliptic contributed data to the study, as did six other blockchain analytics firms. The study examined five years’ worth of transactions in Bitcoin, Ethereum, and Tether - three of the largest virtual assets.
The FATF’s conclusion based on the study is clear and direct: there is not sufficient evidence at present to suggest that the FATF needs to revise its standards to address P2P transactions directly.
First, there is no clear evidence that P2P transactions are becoming more important than before. VASPs continue to remain an essential part of virtual asset ecosystems, which suggests that placing regulation on intermediaries remains the optimal approach for now.
Second, there is no clear evidence that criminals are relying more heavily on P2P transactions than in the past. While blockchain analytics data used in the study suggests that fully-P2P transactions involve a slightly higher proportion of illicit activity than transactions involving VASPs, there is no indication that this is becoming more severe over time.
As Elliptic has demonstrated separately, even where criminals use intermediary unhosted wallets, they cash out their illicit Bitcoin proceeds through VASPs more than 80% of the time. Policy measures aimed at P2P transactions are therefore misplaced, since VASPs can ultimately file suspicious activity reports on funds they handle that have passed through intermediary wallets.
See: ‘Last year we saw about a 300% increase in transactions just using cryptocurrency’: Coinpayments CEO
The FATF’s use of blockchain analytics to inform its decision-making on key matters of policy is also an important sign that policymakers are realizing the potential of blockchain data as a source of important information on virtual assets. While the FATF makes clear in its report that it could still revise its Standards in the future to directly cover P2P activity, its decision not to do so at present is a welcome and innovation-friendly one.
However, the FATF’s report does raise concerns about the use of unhosted wallets for illicit purposes that VASPs and FIs should take into account. The report highlights that the proceeds of ransomware are often moved through unhosted wallets, including privacy wallets, which Elliptic’s research has shown are growing rapidly in popularity with criminals.
According to the FATF, these risks are significant, and could become more severe over time, so “jurisdictions and the private sectors need to consider ways to identify and mitigate risks posed by P2P in advance.”
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