The Financial Action Task Force, also known as FATF, is turning its attention to the huge popularity of NFTs right now. The regulator is making small adjustments to its terms that point in the direction of non-fungible tokens.
The FATF has published a blotter from its guidance guide, where it explains its approach to the risks posed by cryptocurrencies, and digital assets for users, consumers and investors. This document outlines FATF standards on anti-money laundering (AML) and combating the financing of terrorism through virtual assets (VA) and virtual asset service providers (VASP).
The guidance, which was published in 2019, is subject to modification from mid-2020, as set out in its 12-month review report, to update several terms and definitions related to its 6 main areas. According to the draft document, the FATF guidance is also looking at what decentralized finance is (DeFi) and non-fungible tokens (NFT), pointing in the direction of these sectors of the crypto space.
DeFi, which allows users to make transactions of any size without intermediaries, and therefore privately and anonymously, is in the sights of regulators due to the way it works. While NFTs are sparking interest due to the rapid growth of these spaces today, which already host some 550 million in trading volume per month and about 10 million per day according to data from DappRadar.
Non-fungible tokens or NFTs are now the new sensation in the crypto world. Since the middle of last year, a new frenzy for this kind of digital assets has awakened in society. Its qualities attracted several creators who saw a unique potential to launch all kinds of collectibles; from the Cryptopunks and CryptoKitties, the first successful NFT collectibles. Then, its utility gained greater popularity until it captured the attention of artists, musicians, celebrities, television networks and restaurants, auction houses, and many other companies, which have launched all kinds of tokenized products on blockchain.
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New FATF definitions
In the draft guidance, the FATF notes that it does not intend to regulate individual users who do not act as a VASP; though it does recognize that such users may be subject to compliance obligations under the sanctions or enforcement framework. Similarly, the FATF notes that it does not intend to capture or regulate closed-loop item types that are non-transferable, non-exchangeable and non-fungible, such as NFTs, but that like individual users, such tokens could be subject to compliance and enforcement obligations.
So far, the FATF has not published a clear definition of what NFTs are, or how these tokens fit into current regulations. However, it is already beginning to mention them in its draft.
Sian Jones, senior partner at XReg Consulting, notes that NFTs, as assets convertible and exchangeable for crypto or fiat, have always been within the scope of the FATF. Also, blockchain forensics firm, ciphertra by, indicates that in the eyes of the FATF, NFTs can be used as digital assets that facilitate money laundering, so regulation is quite likely.
“Some non-fungible tokens (NFTs) that do not initially appear to constitute AV may in fact be AV due to secondary markets that enable the transfer or exchange of value or facilitate money laundering.”
Applicable to DeFi owners and companies
Regarding VAs and VASPs, the FATF notes that the intention is to capture all types of specific financial activities and functions, such as transfers, exchanges, custody, administration, issuance, among others, of fungible digital assets, whether from crypto to crypto, or from crypto to fiat. In the case of DeFi, the agency clarifies that the software with which the protocols operate cannot be regulated under its regulations, but the owners or companies that provide or offer these services can.
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