Written by Simone Jones on Monday July 15, 2019
1) FATF provides clarification on virtual assets
FATF published guidance for a risk-based approach for virtual assets and virtual asset service providers, building on the clarification it provided in 2018 on how Recommendation 15 apply to those involved in virtual assets. This latest guidance will not only help national authorities determine a regulatory response, but will also help those within the virtual asset industry to better understand anti money laundering (AML) requirements.
Previously the focus has been on institutions that convert virtual currencies to fiat currencies (or ‘real’ money), as this was thought to pose the greatest financial crime risk. This latest guidance includes such providers, but also takes into account those that exchange between one or more forms of virtual assets or provides safekeeping or administration of virtual assets.
Essentially it requires that virtual asset providers will be subject to the same FATF standards as financial institutions, including being regulated and subject to monitoring/supervision. Countries will also be required to assess and mitigate the risks associated with activities involving virtual asset finance and virtual asset providers.
It will be interesting to see how the regulatory landscape develops and how each country will absorb the guidance into their own regulations.
It’s important not to get confused by the term virtual asset. FATF has widened the term from virtual currency to reflect the fact that it’s not only representations of currencies that exist in the virtual world, but investments too.
A digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.
Source: FATF, Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, June 2019
2) FCA focus on crypto-derivatives
Looking a little closer at virtual assets and their potential use for investment, the Financial Conduct Authority (FCA) is proposing a ban on the sale of crypto-derivatives to retail customers.
The market in crypto-derivatives varies widely, with some being subject to regulation and others being unregulated. The FCA had previously issued a Consultation Paper in January 2019 which sought to provide clarification on when cryptoassets (which include crypto-derivatives) would be deemed ‘specific investment’ and therefore subject to regulation.
Derivatives are known to be a higher risk, and derivatives that track the price of cryptocurrencies (known for their price volatility) could be a recipe for disaster for the wrong investor. There is concern from the FCA that the products are causing harm to retail consumers, potentially up to £234 million a year. The proposed ban will not extend to either professional or eligible counterparty clients.
The FCA does acknowledge that the ban can could lead affected customers to invest directly with unregulated cryptoassets, however it will continue to warn potential investors of the risks. Consultation for this proposal closes 3 October 2019.
As a side note, this work by the FCA does highlight the difference in language, with the FCA using the term cryptoassets, as opposed to virtual assets favoured by FATF. Perhaps time will see a consistent use of terminology.
3) Facebook stepping into the virtual currency world
The most widely reported (and contentious) topic has been the announcement from Facebook of its plans to issue a virtual currency.
The currency, known as Libra, was announced on 18 June 2019, and is expected to be launched in 2020 using blockchain technology. It will be available through a number of Facebook-owned platforms, including Messenger and WhatsApp.
Facebook wants Libra to provide increased access to financial services for underserved communities, particularly in developing countries. This isn’t a new issue: the role of mobile financial services in increasing financial inclusion in developing markets has been discussed widely.
This is a continued challenge with virtual currencies – whilst their potential to help increase financial inclusion has been much proclaimed, in reality, they are still difficult to use in daily transactions so are typically used for speculative investment. Will Libra be any different? Facebook’s plans will allow almost any smartphone user to send Libra as easily as a text message, with ‘low to no cost’.
Delving into the regulated world isn’t quite so simple, and a number of regulators from around the world have expressed their concerns of a tech giant moving into the financial services arena. Will regulators be able to keep pace with the tech world’s developments? Whilst jurisdictions such as the UK and US are taking a proactive approach, it’s being handled differently across the world, with some regulators more prepared for change than others.
4) Bitcoin mania 2.0?
The Bitcoin mania of 2017 may be a distant memory, but it seemed that everywhere we looked back then people were talking about its ability to disrupt the traditional banking sector. Are we seeing a resurgence in popularity?
Whilst it has yet to reach the dizzying heights of $20,000, it is now back to trading over $10,000. Facebook’s announcement gave the price of Bitcoin a boost, yet in true Bitcoin fashion the price is volatile, with the value increasing by $500 in the space of 10 minutes on 9 July 2019.
The question remains how feasible it is to use Bitcoin for transactions with such price volatilities. Whilst Bitcoin continues to be the most well-known virtual currency, with big names such as Facebook and JPMorgan developing their own virtual currencies, the future for Bitcoin seems, as ever, difficult to predict.
We are living in a rapidly developing world, with technology companies expanding their reach into areas. A key example of this is Amazon’s Alexa now looking to provide basic medical advice.
Financial services will not be any different. Whether or not virtual currencies become the payment method of choice in the future is almost irrelevant, as innovation will arrive and become the norm as a result. The fundamentals of good compliance risk management remain unchanged: understand the risk and ensure that you have appropriate measures in place to manage the risk.
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