Three decades ago, the intergovernmental Financial Action Task Force (FATF) was created to help tackle illicit finance and ensure the integrity of the global financial system. This was part of an enhanced, and well coordinated multinational anti-money laundering/counter-financing of terrorism (AML/CFT) effort.
With the US now serving as the organisation’s President – Washington assumed this role in July 2018 and will hold it through June 2019 – it intends to mobilize the FATF to arrest the flow of illicit funds tied to the proliferation of weapons of mass destruction while also devising new AML/CFT strategies and tactics across the board. A big part of this campaign involves identifying, tracking and taking down networks that specialize in the handling of virtual or crypto-currencies which are seen often as providing an easy and convenient conduit for the laundering of illicit funds.
That said, experts in the US and elsewhere recognize that most countries, including FATF members, have not developed nor otherwise obtained a comprehensive toolset to better regulate and diligently supervise the crypto-currency sector. Besides AML/CFT concerns, there are other emerging risks. To facilitate routine and consistent customer due diligence and to create a flexible yet firm framework, the FATF has key objectives for the coming year. These include a new project that seeks to identify best practices and also the establishment of a “clearinghouse” for investigators at all levels of law enforcement.
Besides setting out to highlight the best and most relevant tools used to support transnational, regional and local criminal investigations across diverse product and service platforms, Washington intends to highlight the obstacles and technological roadblocks which can undermine investigations.
In the Spring of 2019, a round of International Monetary Fund/World Bank meetings are scheduled to take place in Washington. There, the US hopes to host a ministerial meeting where not only approval of a new FATF mandate will occur but the assembled ministers will be provided with the opportunity to enhance and strengthen the current AML/CFT and proliferation-related financial detection and enforcement system. The intent is to fix any gaps while weighing the importance of sanctions. Much emphasis will also be placed on how exactly countries can be held accountable for their inability or outright failure to implement a sound and effective AML/CFT program.
According to Yaya J. Fanusie, director of analysis for the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance (CSIF), “the FATF is definitely planning to push for greater oversight/enforcement of cryptocurrency exchanges in the coming weeks. This is a big priority of the US with regards to FATF.”
Fanusie said that with respect to Asia – where the flow of crypto-currency is vast and growing steadily larger – he has not detected any noteworthy trends or signs of progress involving US efforts to better track and ensure compliance.
But how is the presence of actors like North Korea affecting compliance and enforcement efforts, and how are the US and its partners responding to this challenge?
Asia Times asked Fanusie by email.
“From my standpoint, it’s difficult to tell. In general, I can say that (the US Department of the Treasury) is taking seriously the risk of various states using crypto-currencies to get around sanctions. I do not know if there has been a particular focus on Asia. What I have seen is Treasury beefing up its capabilities such as by announcing new vacancies for analysts who focus on virtual currencies. But this is for global coverage and not just one region,” said Fanusie.
With China maintaining its tough stance with respect to crypto-currencies – and, despite this, Chinese consumers show no signs of wanting to abandon their attempts to acquire crypto – Beijing’s role in the broader multinational framework of compliance and enforcement has to be called into question. It is becoming increasingly unclear as to whether China, by abruptly changing course, is actually complicating the situation rather than helping to solve any regulatory and compliance-related problems. Fanusie, however, does not view China’s decision to crack down on crypto-currencies as a specific complication.
“Honestly, it seems pretty clear that there were lots of scams and frauds happening in China’s gangbusters crypto scene in 2017 and part of the crackdown was to try to curb such activity. However, Chinese consumers still trade in crypto in vast numbers. They simply use exchanges which may be located outside China,” said Fanusie. “China is an important place to watch because what seems to be happening is more about controlling the development of crypto-currencies than regulating it.”
“China clearly has a long-term crypto-currency and blockchain strategic plan. It has invested over $3 billion in blockchain projects this year alone. It is looking to create national industry standards for distributed ledger technologies. So, clearly China is looking to lead the blockchain space and leverage it for its broader economic objectives. Other nations need to watch this and assess the potential geopolitical impact. One thing China has been seeking for years is an alternative to the US dollar in global trade. It looks like Beijing may be eyeing digital currency as that alternative,” he added.
The establishment of a special developmental zone in Hainan Province specific to this fast-growing sector is certainly proof of China’s long term intentions. However, there are numerous other large financial hubs in Asia – Singapore, Tokyo, and Seoul to name just three – that are already vying to establish their dominance in the crypto race. So does this mean any attempt to create an effective regional, let alone global, enforcement and compliance apparatus might be, for now, just a pipe dream?
Fanusie disagrees. “It is not a pipe dream,” he says, “but you have to separate enforcement into two categories. One, there’s the need to make sure crypto-currency exchanges operate under the same framework we use to regulate other money service businesses. There really is not much new here for most crypto-currency exchanges except for the fact that many new businesses of this type have sprung up in a short matter of time. So, it is not like you have to reinvent the wheel, it is just a question of making sure these newer startups understand the rules,” said Fanusie. “The second category relates to new innovation even within the crypto-currency space, where startups are developing newer, more experimental models and platforms that go beyond what has been popular during crypto-currency’s first decade. Now you have more anonymous coins like Monero and Zcash as well as new types of exchanges like decentralized exchanges which have features that might not fit exactly under the same regulatory framework.”
Much of what is unfolding is so new and experimental, however, that a new regulatory and enforcement framework is not going to appear overnight.
“We are still seeing how this space is unfolding. This is where regulators are going to have to closely follow developments in the space, communicate regularly with technologists, and start thinking about when (or if) shifts need to be made in regulations,” said Fanusie. “Because so much is happening so quickly in Asia, regulators outside the region should see all this activity as a bit of a petri dish to inform any potential regulatory adjustments that may be needed in the coming years.”