Regulators throughout the world are finally taking the first steps to bring non-regulated digital currencies and their associated blockchains under regulatory control. The rapid growth in this alternative to the traditional financial system has finally brought global regulators to the conclusion that decentralised finance and defi apps need to come under regulatory control.
Paris, July 1989, the Financial Action Task Force or FATF was created as a joint-action intergovernmental task force at a meeting of the G7 nations. The initial remit was to develop global counter measures to money laundering. The remit was expanded in October 2001 to cover terrorist financing, and further expanded in April 2012 to cover the financing of proliferation of weapons of mass destruction.
Last week FATF announced that they have urged global regulators to apply set rules and regulations to directors, shareholders and other individuals that control, own or exert influence on DeFi apps. These rules and regulations are designed to combat terrorist financing and money laundering and should also be applied to those who own, operate and create all decentralised finance.
DeFi apps – are trading apps which allows any user to circumvent centralised exchanges, (such as Kraken, Binance and Coinbase), when engaging in crypto investment trading.
Experts have suggested that Bitcoin has been and can be in the future used as an attractive way for the criminal classes to launder their ill-gotten gains. Due to the lack of regulation, and the security aspects of Bitcoin, makes large transactions in Bitcoin virtually untraceable, especially when converting Bitcoin to cash. Many exchanges and providers of wallets have no anti-money laundering regulations and do not request Customer Information Profiles, or KYC, Know Your Client profiles.
Funding of terrorism is another problem that crypto industry has to live with. Again, experts suggest that terrorist organisations are currently using cryptocurrencies to deal weapons and drugs etc on the black market. There is a website on the dark web which apparently is associated with the transferring of Bitcoins to Islamic terrorists.
The proposals as offered by FATF over the past few years have been delayed as jurisdictions across the globe have struggled to implement oversight on the decentralised finance. One of the big problems has been dealing with organisations that are run by algorithms instead of the usual board of directors who can be subject to oversight committees and investigations.
However, one of the first moves will be to look at some of these decentralised projects where brochures suggest that they are a “Virtual Asset Service Provider”, which under today’s anti-money laundering rules makes them answerable to the relevant authority. Any person who is deemed to have authority or a major influence over the project will be subject to anti-money laundering rules and regulations.
Crypto trading projects or decentralised finance projects has increased by a figure of 500% in this year alone, reaching a staggering figure of USD100 billion. The term “The Crypto Industry is too Big to Ignore” is finally becoming relevant.
Fraud in the cryptocurrency world is rife. In fact, it has been reported that over USD 197 million has been lost to fraudulent scams in this year alone. None of these losses are covered by FDIC, (federal Deposit Insurance Agency). Thus, investors or buyers of cryptocurrencies or investors in DeFi projects are not covered as they are investing in an unregulated market.
FATF can only make recommendations to governments and their regulatory authorities. It is up to the governments concerned to pass the relevant laws that will bring decentralised finance within the purview of their regulators. Otherwise, investors will continue to be scammed, and money laundering and terrorism finance will continue unabated.