Stablecoins

The FATF Report to G20 on so-called Stablecoins comments

 1. So-called stablecoins have the potential to spur financial innovation and efficiency and improve financial inclusion. While so-called stablecoins have so far only been adopted on a small-scale, new proposals have the potential to be mass-adopted on a global scale, particularly where they are sponsored by large technology, telecommunications or financial firms. In the same way as any other large scale value transfer system, this propensity for mass-adoption makes them more vulnerable to be used by criminals and terrorists to launder their proceeds of crime and finance their terrorist activities, thus significantly increasing their risk of criminal abuse for money laundering and terrorist financing (ML/TF) purposes. 

2. The Financial Action Task Force (FATF) sets international standards to combat money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction. The FATF Standards place specific anti-money laundering and countering the financing of terrorism (AML/CFT) obligations on intermediaries between individuals and the financial system, such as financial institutions. To mitigate the ML/TF risks of virtual assets, the FATF revised its Standards in June 2019 to require virtual asset service providers (VASPs) to implement the full range of preventive measures against ML/TF. 

3. In October 2019, the G20 asked the FATF to consider the AML/CFT issues relating to so-called stablecoins, particularly “global stablecoins” (i.e. those with potential for mass-adoption). This report sets out the FATF’s analysis of the AML/CFT issues relating to so-called stablecoins. Complementary reports from the Financial Stability Board (FSB), the International Monetary Fund (IMF) consider other implications of so-called stablecoins, including their financial stability and macroeconomic implications. 

4. The FATF has found that so-called stablecoins share many of the same potential ML/TF risks as some virtual assets, in virtue of their potential for anonymity, global reach and layering of illicit funds. Depending on how they are designed, they may allow anonymous peer-to-peer transactions via unhosted wallets. These features present ML/TF vulnerabilities, which are heightened if there is mass-adoption. 

5. When reviewing current and potential projects, so-called stablecoins appear better placed to achieve mass-adoption than many virtual assets, if they do in fact remain stable in value, are easier to use and are under sponsorship of large firms that seek to integrate them into mass telecommunication platforms.

6. The revised FATF Standards clearly did apply to so-called stablecoins. Under the revised FATF Standards, a so-called stablecoin will either be considered to be a virtual asset or a traditional financial asset depending on its exact nature. A range of the entities involved in any so-called stablecoin arrangement will have AML/CFT obligations under the revised FATF Standards. Which entities will have AML/CFT obligations will depend on the design of the so-called stablecoin, particularly theUnder the revised FATF Standards, a so-called stablecoin will either be considered to be a virtual asset or a traditional financial asset depending on its exact nature. A range of the entities involved in any so-called stablecoin arrangement will have AML/CFT obligations under the revised FATF Standards. Which entities will have AML/CFT obligations will depend on the design of the so-called stablecoin, particularly the extent to which the functions of the so-called stablecoin are centralised or decentralised, and what activities the entity undertakes. 

7. In a centralised arrangement, one entity governs the arrangement, and may operate the stabilisation and transfer mechanism, and act as the user interface (e.g. by offering custodial wallet and exchange and transfer services). In a decentralised arrangement, there may not be a central entity governing the system, and the stabilisation and transfer functions and user interface may be distributed amongst a range of different entities or be done through software. This is a continuum and a so- called stablecoin may sit anywhere along this spectrum. For example, a stablecoin arrangement may operate the stabilisation centrally, but the user interface may be distributed amongst other VASPs. 

8. Importantly, central developers and governance bodies of so-called stablecoins will have AML/CFT obligations under the revised FATF Standards, where they are carrying out the activities of a financial institution or VASP, in addition to the AML/CFT obligations of other entities with AML/CFT obligations, e.g. wallet providers. The central governance bodies of so-called stablecoins are in a unique position to undertake ML/TF risk mitigation, as they determine the functions of the so-called stablecoin, who can access the arrangement and whether AML/CFT preventive measures are built into the arrangement. For example, they could ensure that the access to the transfer system is only possible through AML/CFT-compliant regulated VASPs. Not all so-called stablecoins may have a readily identified central body however. 

9. Based on current known models, the FATF consider that so-called stablecoins with potential for mass-adoption will be centralised to some extent, with an identifiable central developer or governance body. The FATF considers that these developers and governance bodies will be, in general, financial institutions (e.g., as a business involved in the ‘issuing and managing means of payment’) or a VASP (e.g., as a business involved in the ‘participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset’) under the revised FATF Standards. This is an important control to mitigate the ML/TF risks poses by such so-called stablecoins. Furthermore, there will be a range of other entities with AML/CFT obligations even in a centralised arrangement, including customer-facing exchanges and transfer services and custodial wallet providers. 

10. While decentralised so-called stablecoins without such an identifiable central body, prima facie, may carry greater ML/TF risks due to their diffuse operation, the FATF considers that their potential for mass-adoption is lower than centralised arrangements and, therefore, their associated ML/TF risks are smaller (although still present). However, even in a decentralised structure, there could also be a range of entities with AML/CFT obligations, including customer-facing exchanges and transfer services and custodial wallet providers. Importantly, there are functions that may mean an entity has AML/CFT obligations prior to the launch of a decentralised so- called stablecoin, as the process necessary to bring a product to launch is unlikely to be able to be fully decentralised. 

11. The FATF considers that the preventive measures required of intermediaries under the revised FATF Standards have worked to mitigate the ML/TF risks posed by so-called stablecoins currently in existence. Accordingly, the FATF does not consider that the revised FATF Standards need amendment at this point in time. Nonetheless, the FATF recognises that this is a rapidly evolving area that must be closely monitored and that jurisdictions must be effectively implementing the revised Standards. 

12. In particular, it is important that ML/TF risks of so-called stablecoins, particularly those with potential for mass-adoption and increased anonymity, are analysed in an ongoing and forward-looking manner and are mitigated before such arrangements are launched. As so-called stablecoins could quickly become available globally, with their functions decentralised across multiple jurisdictions, international co-operation between jurisdictions is critical to ensure ML/TF risks are appropriately addressed. 

13. The FATF has also identified potential risks which may require further action, including; so-called stablecoins located in jurisdictions with weak or non-existent AML/CFT frameworks (which would not properly implement AML/CFT preventive measures) and so-called stablecoins with decentralised governance structures (which may not include an intermediary that could apply AML/CFT measures) and anonymous peer-to-peer transactions via unhosted wallets (which would not be conducted through a regulated intermediary). 

14. Accordingly, the FATF proposes four actions:

• The FATF calls on all jurisdictions to implement the revised FATF Standards on virtual assets and VASPS as a matter of priority.

• The FATF will review the implementation and impact of the revised Standards by June 2021 consider whether further updates are necessary. This will include monitoring the risks posed by virtual assets, the virtual asset market, and proposals for arrangements with potential for mass-adoption that may facilitate anonymous peer-to-peer transactions. 

• The FATF will provide guidance for jurisdictions on so-called stablecoins and virtual assets, as part of a broader update of its Guidance. This will set out in more detail how AML/CFT controls apply to so-called stablecoins, including the tools available to jurisdictions to address the ML/TF risks posed by anonymous peer-to-peer transactions via unhosted wallets. 

• The FATF will enhance the international framework for VASP supervisors to co-operate and share information and strengthen their capabilities, in order to develop a global network of supervisors to oversee these activities.