The head of the Financial Action Task Force (FATF), T Raja Kumar, has called on G7 nations to take a more proactive approach to regulating the crypto industry. Kumar made the call in a letter published ahead of the G7’s 2023 Summit, where the group will discuss the regulation of cryptocurrencies and the overall industry. Kumar said that the “lawless crypto space” continues to allow illicit financial transactions to occur around the world, and he urged countries to take a concerted global approach to ensure that no “safe haven” can exist in the financial system for such transactions.

FATF working on new program to help countries tackle illicit financial flows

The FATF has updated its global standards on combating money laundering, terrorism financing and proliferation financing, known as the Recommendations, to include crypto-assets and related financial activity. However, Kumar said that countries have made “relatively poor” progress in implementing these new standards as part of the Recommendations. Only 27% of countries were compliant with the updated standards that include crypto in 2019, while the remaining majority of 73% are completely or partially non-compliant and have yet to begin work on supervising the crypto industry. Kumar said that the non-compliant 73% includes some G20 countries and that this situation must be urgently addressed.

To tackle illicit financial flows that become digital, the FATF intends to roll out a new program that will include the so-called “travel rule” to help countries adapt. The travel rule will mandate virtual asset service providers like exchanges to pass along information to one another and supervisory bodies for crypto transactions that cross a certain threshold.

FATF recommends two areas for countries to focus on in regulating cryptocurrencies

Kumar said the FATF recommends that countries should immediately start working on two areas to ensure cryptocurrencies cannot be used for illicit financial transactions. The first area is ensuring transparency of beneficial ownership, which is crucial in fighting money laundering, corruption, tax evasion and sanctions evasion. Criminals abuse the lack of transparency in ownership laws to hide their financial activity through complex corporate structures, and countries must implement the FATF’s updated recommendations to close these loopholes. The second area countries need to focus on is recovering the proceeds of crimes. Kumar wrote that asset recovery helps strengthen trust in law enforcement, as it helps victims directly and is an effective method of stopping economic crimes. However, countries have barely done any work on asset recovery, and only a small fraction of the global illicit financial flows are ever recovered.

Kumar’s letter highlights the need for countries to take a more proactive approach to regulating the crypto industry to combat illicit financial flows. The FATF’s new program, including the travel rule, will help countries adapt to digital financial flows, but it is up to individual countries to implement the FATF’s updated recommendations to ensure transparency of beneficial ownership and to recover the proceeds of crimes.

Regulation

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