The Financial Action Task Force (FATF) has recently evaluated the implementation of its recommendations by governments, and the results are disappointing. The progress in combating money laundering and terrorist financing, especially in relation to cryptocurrencies, has been slow. As a result, cryptocurrencies continue to be used for illegal purposes such as funding terrorism.
In a new report, the FATF assesses the state of money laundering and cryptocurrencies. While the international organization acknowledges that some progress has been made by national governments in implementing measures to combat money laundering and terrorist financing, many are lagging behind, particularly in implementing the Travel Rule, a key element of FATF measures. The past year has seen only marginal improvements in many aspects, leaving service providers vulnerable to abuse.
The FATF is an international working group that develops recommendations for national governments on combating money laundering. It works closely with the G20 and exerts pressure on governments through black and grey lists. The FATF has issued a series of recommendations and instructions for cryptocurrencies, also known as virtual assets.
However, the implementation of these recommendations has been lacking. Out of 130 jurisdictions, 97 are only partially or not at all compliant with FATF recommendations. A quarter of governments have not even begun to implement the recommendations. Only a quarter are mostly compliant, with no progress seen in the past year.
The challenges lie in the fact that the FATF has adopted rules that are similar to those for traditional banks, including the Travel Rule, which requires sender and receiver data to accompany electronic transactions. These rules are difficult to implement for cryptocurrencies, with less than a third of governments actually enforcing and monitoring the Travel Rule.
The use of “unhosted wallets,” self-managed wallets of users, also poses significant challenges as they are not compatible with the Travel Rule. This has led to a lack of evaluation of the specific risks associated with self-hosted wallets and peer-to-peer transactions, even in the most advanced regulatory jurisdictions.
The report also highlights the use of stablecoins for terrorist financing, raising concerns about the anonymity and security of such transactions. While some media outlets have questioned the evidence provided by the FATF on this issue, the report references a briefing by the UN Security Council’s Counter-Terrorism Committee on the trends of cryptocurrency use by terrorist groups.
Despite the concerns raised, the use of cryptocurrencies by terrorist groups remains a small portion of their overall funding, with the majority still coming from cash, informal networks, and traditional financial institutions. The ability to track and trace cryptocurrency transactions offers a potential advantage in combating terrorist financing.
Stablecoin providers have indicated their willingness to introduce risk reduction measures and cooperate with law enforcement agencies to freeze or burn stablecoins when necessary. If a larger portion of terrorist financing were to shift to stablecoins, it could potentially disrupt traditional funding channels and enhance efforts to combat terrorist financing.
In conclusion, while the challenges in implementing FATF recommendations for cryptocurrencies persist, there is potential for stablecoins to play a positive role in the fight against terrorist financing. By addressing the vulnerabilities in the current system, there is hope for progress in combating illegal activities in the cryptocurrency space.
