Material Influencers Or Controllers Of DeFi Applications May Be Subject To Obligations Of A Virtual Asset Service Provider Says The FATF – Government, Public Sector

Persons with “sufficient influence or control” over a
DeFi application potentially should be responsible for the
anti-money laundering (“AML”) and controlling the
financing of terrorisms (“CFT”) obligations of a virtual
asset service provider (“VASP” e.g., in the United
States, a money service business or a state money transmitter),
said the Financial Action Task Force in a report issued on October
28, 2021.

According to the FATF, while a DeFi application is not itself a
VASP, “creators, owners and operators, or some other persons
who maintain control or sufficient influence in the DeFi
arrangements, even if those arrangements seem decentralized, may
fall under the FATF definition of a VASP where they are providing
or actively facilitating VASP services.” This is the case,
even where “…other parties play a role in the service or
portions of the process are automated.”

The FATF noted in its report that “[i]t seems quite common
for DeFi arrangements to call themselves decentralized when they
actually include a person with control or sufficient influence, and
jurisdictions should apply the VASP definition without respect to
self-description.”

Importantly, continued the FATF, where persons can purchase
governance tokens of a VASP, the VASP not the persons purchasing
the governance tokens, should have the AML/CFT obligations of the
VASP, unless the holder exercises control or sufficient
influence.

In its report, the FATF, generally discusses what is a VASP,
what are the AML/CFT obligations of VASPs, and how should VASPs be
supervised by national regulators. Among other matters, FATF
suggests that:

• the “travel rule” (e.g., the obligation of initiating
  and receiving financial institutions to obtain, transmit and/or
  retain certain information regarding the originator and beneficiary
  of funds’ transfers) should apply to all transactions involving
  virtual assets sent by a VASP to another VASP or financial
  institution, and also to non-regulated persons (although less
  information should be required of the transmitting VASP in such
  transfers);




• self-regulatory organizations should not be responsible for the
  supervision of VASPs. SROs should solely assist national regulators
  in facilitating contact, information-sharing and outreach to their
  VASP members, says the FATF. (Curiously, in its report, however,
  the FATF acknowledges the role of the Japan Virtual Currency
  Exchange Association in monitoring AML/CFT compliance and
  implementing a travel rule by its members.); and




• national regulators should not mandate the universal
  termination or restriction of relationships with a particular
  sector (e.g., require financial institutions to terminate
  relationships with all VASPs “regardless of the different risk
  among them”). Instead, each VASP should be assessed based on
  its own risk.

The FATF is an independent inter-governmental body that develops
and promotes policies to protect the global financial systems from
money laundering, terrorist financing and the financing of weapons
of mass destruction. The FATF does not draft laws or regulations in
any jurisdiction.

Although many proponents of DeFi applications argue against the
application of traditional regulatory requirements to this sector,
it appears that the FATF does not necessarily share this
sentiment.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.