FATF Warns: 70% of World's Crypto Unregulated, Risks Soar

Key Takeaway

• Less than 30% of global jurisdictions have begun regulating crypto as of June 2023, signaling a regulatory gap FATF aims to close.
• FATF's report highlights the risk of money laundering and terrorist financing in unregulated crypto markets, urging for global compliance.
• Notable examples include North Korea's theft and laundering of virtual assets for WMDs, emphasizing the urgency for international regulatory action.

Global Crypto Regulation Lagging

As of June 2023, fewer than 30% of jurisdictions worldwide have begun regulating the cryptocurrency sector, according to Financial Action Task Force (FATF) President T. Raja Kumar. This revelation, shared in an interview from Singapore with CoinDesk, underscores a significant gap in the global approach to managing the risks associated with virtual assets. The FATF's progress report, titled "Status of Implementation of Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity," highlights the slow adoption of measures aimed at curbing money laundering and terrorist financing through cryptocurrencies. The report emphasizes the need for jurisdictions to license or register virtual asset service providers (VASPs) and scrutinize their operations.

The Call to Action

Raja Kumar's comments signal a robust call to action for countries to address the regulatory vacuum that allows criminals and terrorists to exploit virtual assets. Describing virtual assets as akin to water that flows to the least regulated jurisdictions, Kumar points out the ease with which illicit actors engage in regulatory arbitrage. The FATF's report serves as a constructive effort to raise global awareness about the standards required to mitigate the risks posed by the borderless nature of virtual assets. The report also cites specific instances of misuse, including North Korea's alleged theft and laundering of virtual assets to fund weapons of mass destruction and the use of cryptocurrencies in ransomware demands by terrorists.

Jurisdictional Compliance and Challenges

The FATF's recommendations, while not mandatory, carry significant weight, with non-compliance potentially leading to global isolation for jurisdictions. The report assesses compliance across various criteria, including the licensing of VASPs, supervisory inspections, and the implementation of the controversial "travel rule." Notably, jurisdictions like India, Singapore, and several European countries are still undergoing assessment, while others, like Argentina, have made limited progress. North Korea remains blacklisted, and Russia's membership was suspended in February 2023. Despite these challenges, some jurisdictions, such as South Africa, are making strides in licensing crypto platforms, indicating a growing recognition of the need for regulation.

Management Quotes

• T. Raja Kumar, FATF President:

  "That low level of attention warrants 'call to action.'" "I would describe virtual assets as being akin to water, and essentially they will flow to jurisdictions that are less regulated. Criminals and terrorists are very quick to spot the opportunity leading to regulatory arbitrage. We just can't allow this. Every part of the global chain needs to be strong. This is not a trivial matter."