The text of the final version of FATF guidance for the cryptocurrency industry does not contain clear and narrow restrictions on supervisory functions. Its participants have not received answers, ‘the saga continues’, says former Compound Labs chief legal officer Jake Chervinsky.
FATF published its updated crypto AML guidance today. It’s marginally better than the March draft.
As often happens, industry explained why the draft made no sense, & FATF’s reaction was just to make it more vague. No answers here. The saga continues.
🧵 of threads & writeups:
— Jake Chervinsky (@jchervinsky) October 28, 2021
Chervinsky gathered opinions from colleagues who arrived at similar conclusions.
Director of policy DeFi Education Fund under the handle millercwl is convinced that FATF sees a world in which decentralized and permissionless systems are, at best, suppressed.
1/ 🚨 Long-ish thread on the crypto + DeFi guidance issued by the Financial Action Task Force.
tl:dr, it’s not great.
My initial read is that the FATF sees a world in which permissionless + decentralized systems are—at best—suppressed.https://t.co/JG2c0O9gvz
— Miller (@millercwl) October 28, 2021
In his view, organisations will struggle to admit that DeFi will remove intermediaries in the form of banks and custodians.
FATF proposed two overly broad recommendations:
- limit the launch of public systems;
- expand the regulatory perimeter for providers of virtual assets (VASP).
millercwl saw difficulties in deploying a DeFi protocol. Developers would be effectively forced to launch permissioned systems (with restrictions) due to the need to meet VASP requirements.
Preventing the creation of software that does not fit existing regulatory regimes runs counter to a “technologically neutral” approach. It could also raise questions about constitutionality in the United States, the expert added.
In millercwl’s view, FATF players in the space seek to define DeFi as VASPs with “some degree of control or sufficient influence” over the protocol. Yet the organisation does not define these terms or explain how to apply the recommendations. Additionally, “sufficient influence” is not spelled out in the legal and regulatory frameworks of the countries.
The expert concluded that the guidance deprives developers of clarity on the criteria their projects must meet. They will either have to abandon innovation or accept higher risk.
The lawyer argued that the proposed approach will not work. Public DeFi protocols already exist. The push to play a ‘Whack-a-Mole’ globally to curb the emergence of new such projects would be impractical and undesirable. The expert proposed a new approach that preserves market efficiency and privacy.
Despite the criticism, millercwl believes the consequences of the guidance will likely be limited due to the slow pace at which various jurisdictions approve them.
The chief legal officer of the DeFi platform dYdX and co-chair of the DeFi committee at the Blockchain Association, Marc Boiron, said the FATF recommendations are so poor that, by comparison, the infrastructure plan looks better. He noted that the FATF’s aim is to “shoot” DeFi.
1/ FATF published its recommendations. It’s so bad that it makes the infrastructure bill look reasonable.
TLDR: Only permissioned DeFi is allowed. An intermediary must be inserted to serve as a VASP. The global impact of these recommendations is an attempted kill shot at DeFi.— Marc Boiron (Wannabe Shadowy Super Coder) (@boironattorney) October 28, 2021
Boiron would also like to see the interpretation of “sufficient influence” and “active facilitation,” which carry a sweeping meaning.
FATF leaves few mechanisms for handling virtual assets (VAs) without involvement from VASP. Applied to DeFi, the organisation believes most existing projects—even if they identify as P2P platforms—meet the definition of VASP to some degree, the expert said.
Boiron’s greatest concern was that the recommendations could apply to DAO.
“Is a DAO ‘a controlling party’? Is it only certain participants of a DAO?”, he asked.
9/ Specifically, 「[a]utomating a process that has been designed to provide covered services for a business does not relieve the controlling party of obligations。」 Is a DAO a “controlling party”? Is it only certain participants of a DAO?
— Marc Boiron (Wannabe Shadowy Super Coder) (@boironattorney) October 28, 2021
Boiron also noted that “using smart contracts does not relieve responsibility for complying with VASP’s recommendations.” In other words, a developer must implement controls before deploying smart contracts. That erodes DeFi’s advantages in favour of TradFi.
Chervinsky finishes by noting that FATF provides guidance, but countries are not obliged to follow it. He reminded that the United States still has not implemented the rules issued in 2012 for lawyers, accountants and real estate agents. In 2016, the organisation drew attention to this, but the situation has not changed since.
Reminder: FATF gives guidance, it doesn’t make law. Member countries often go their own way, the US especially.
In 2012, FATF advised new regulations for lawyers, accountants, & real estate agents. In 2016, FATF dinged the US for failing to implement them. Still hasn’t happened.
— Jake Chervinsky (@jchervinsky) October 28, 2021
As noted, the issuer of Tether announced testing of a Notabene digital-identity solution. It will allow VASP to comply with FATF guidelines.
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