FATF Report: US Does Not Pay Enough Attention to Crypto Financial Risk

The Financial Action Task Force (FATF) has reconsidered the United States’ compliance with global anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. According to the report released on March 31, the U.S. is only “largely compliant” with FATF regulations on crypto and digital assets which means financial risk.

The assessment analyzed the level of compliance of the national legislation to recommendations released by FATF, an international regulatory standard body. Recommendation 15, dedicated exclusively to cryptocurrencies, is among the most discussed problems in the report.

Since the last assessment in 2016, the FATF rating of the U.S. on this question has not changed. However, FATF’s own guidelines for cryptocurrencies were amended significantly in October 2019, in what is called the FATF Travel Rule.

This way, the assessment shows the change in methodology, which uses a more attentive scrutiny than before.

US regulation is non-specific, but it works in many ocassions

FATF praised the increased awareness of financial risk regarding crypto presented by U.S. regulators, citinig the creation of several task forces and reports such as the “2018 National Money Laundering Risk Assessment.”

U.S. regulations are also good in covering the different types of Virtual Asset Service Providers (VASP) defined by FATF, which would include entities like exchanges and custodians. However, the report notes that they do not explicitly deal with the specific case of a VASP which is incorporated in the U.S., but has otherwise no business in the country.

Cryptocurrency operators are generally viewed as Money Services Businesses (MSB), a classification which has very high standards of compliance. This way, most MSB’s are required to create effective AML and CTF policies, which FATF considers all in all sufficient.

Moreover, it adds that some businesses may also have to stick to regulations imposed by the Securities and Exchange Commission (SEC), which improves compliance even further. Still, the report criticizes the U.S. for keeping its $3,000 threshold for occasional unidentified transactions. FATF guidance proposes a limit of no more than $1,000.

The agency was not very enthusiastic towards the Internal Revenue Service (IRS) and Financial Crimes Enforcement Network (FinCEN), however. While it states that both ran examinations of different cryptocurrency exchanges, individual exchangers and others, it criticizes the strategy in general.

FATF maintains that the U.S. does not define higher-risk crypto service providers as they are covered by the MSB regime. The report continues:

“Therefore, it is not entirely clear whether the current approach is sufficiently risk focused, especially since only 30% of all registered CVC [convertible virtual currency] providers have been inspected since 2014.”

The general conclusion seems to be that U.S. regulators have failed to single out cryptocurrency service providers while enforcing regulations, but the issues presented are still believed to be minor. Enough for the US to get what amounts to a “B” in FATF’s grading system.