Virtual Asset Service Providers

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What’s in today’s article?

  • Why in the News?
  • About Virtual Asset Service Providers (VASPs)
  • About Financial Action Task Force (FATF)
  • Objectives of FATF
  • Members of FATF
  • What are FATF 'Grey List' and 'Black List'?
  • Significance of the FATF
  • News Summary

Why in the News?

The Financial Action Task Force (FATF) has found that many countries are yet to fully implement its requirements aimed at preventing misuse of virtual assets and virtual asset service providers (VASPs).

About Virtual Asset Service Providers (VASPs)

  • Virtual assets (crypto assets) refer to “any digital representation of value that can be digitally traded, transferred or used for payment”.
  • A Virtual Asset Service Provider (VASP) is defined by the Financial Action Task Force (FATF) as a business that conducts one or more of the following actions on behalf of its clients:
    • Exchange between virtual assets and fiat currencies
    • Exchange between one or more forms of virtual assets
    • Transfer of virtual assets
    • Safekeeping and/or administration or virtual assets or instruments enabling control over virtual assets
    • Participating in and provision of financial services related to an issuer's offer and/or sale of a virtual asset
  • This definition encompasses a range of crypto businesses including exchanges, ATM operators, wallet custodians, and hedge funds.

About Financial Action Task Force (FATF)

  • The Financial Action Task Force (FATF) is an intergovernmental organisation founded in 1989.
  • It is an initiative of the G7 countries to develop policies to combat money laundering.
    • In 2001, its mandate was expanded to include terrorism financing.
    • It has also started dealing with virtual currencies.
  • It sets international standards that aim to prevent these illegal activities and the harm they cause to society.
  • It is a “policy-making body” which works to generate the political will to bring about national legislative and regulatory reforms in money laundering.
  • It monitors progress in implementing its recommendations through "peer reviews" ("mutual evaluations") of member countries.
  • The FATF Secretariat is located in Paris.

Objectives of FATF

  • FATF sets standards and promotes effective implementation of:
    • a. legal, regulatory and operational measures for combating money laundering.
    • b. The FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.

Members of FATF

  • The FATF currently comprises 38 member jurisdictions and two regional organisations, representing most major financial centres in all parts of the globe.
  • India became an Observer at FATF in 2006. In 2010, India was taken in as the 34th country member of FATF.

What are FATF 'Grey List' and 'Black List'?

  • FATF has 2 types of lists:
    • Black List:
      • Countries knowns as Non-Cooperative Countries or Territories (NCCTs) are put in the blacklist.
      • These countries support terror funding and money laundering activities.
      • The FATF revises the blacklist regularly, adding or deleting entries.
    • Grey List:
      • Countries that are considered safe haven for supporting terror funding and money laundering are put in the FATF grey list.
      • This inclusion serves as a warning to the country that it may enter the blacklist.
  • Consequences of being in FATF Grey List:
    • Economic sanctions from IMF, World Bank, ADB
    • Problem in getting loans from IMF, World Bank, ADB and other countries
    • Reduction in international trade
    • International boycott

Significance of the FATF

  • The FATF Recommendations provide a comprehensive framework of measures to help countries tackle illicit financial flows.
  • These include a robust framework of laws, regulations and operational measures to ensure national authorities can take effective action to detect and disrupt financial flows that fuel crime and terrorism, and punish those responsible for illegal activity.
  • The cornerstone of the FATF Recommendations is the risk-based approach which emphasizes the need for countries to identify and understand the money laundering and terrorist financing risks they are exposed to. 
  • This ensures they can prioritise their resources to mitigate risks in the highest risk areas.
  • The FATF continuously monitors new and evolving threats to the financial system and regularly updates and refines its Recommendations so that countries have up-to-date tools to go after criminals.
  • To help countries implement its Standards, the FATF also creates guidance and best practice papers on range of issues.

News Summary

  • The Financial Action Task Force (FATF) has found that many countries are yet to fully implement its requirements aimed at preventing misuse of virtual assets and virtual asset service providers (VASPs).
  • The FATF plenary in February 2023 agreed on a road map to strengthen the implementation of its standards on virtual assets and VASPs. Recently, it carried out a survey on the current levels of implementation.
  • The study found that India has already conducted a risk assessment covering virtual assets and VASPs.
  • The FATF is yet to evaluate and rate India’s performance with respect to the revised standards on virtual assets and VASPs.
  • The countries which have explicitly prohibited the use of virtual assets and VASPs are China, Egypt and Saudi Arabia, while it is in progress in Seychelles and Indonesia.
  • The FATF said as virtual assets were inherently international and borderless, any failure to regulate VASPs in one jurisdiction could have serious global implications.
  • The FATF added that terrorist groups, including ISIL, Al Qaeda and their affiliates, as well as ethnically or racially motivated terrorist entities, are also known to be increasingly using virtual assets to raise and move funds globally.

Q1. When was the FATF established?

The Financial Action Task Force (FATF) was established in 1989 by the G7 to examine and develop measures to combat money laundering.

Q2. What is Money Laundering?

Money laundering is the process of illegally concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source.