In late October, the Financial Action Task Force on Money Laundering (FATF) finalized and published guidelines for the cryptocurrency industry, which in particular set standards for the DeFi and NFT segments.
Especially for Cryplogger, Andrey Tugarin, Managing Partner of GMT Legal, and Eduard Davydov, Partner at NOA Circle, analyzed the most significant changes in the leadership that could potentially pose a risk for the founders and developers of DeFi and NFT projects.
Risks for NFT projects
The updated version contains more specific and complete definitions of virtual assets (VA) and virtual asset service providers (VASP). It also explains cases in which NFTs may fall under the definition of an IA.
When are NFTs recognized as virtual assets? Non-fungible tokens that are used as collectibles and not as payment or investment instruments are not considered virtual assets (clause 53 of the Guidelines).
“The FATF points out that it is important to consider the nature of NFTs and their function in practice, rather than the marketing terms used. Therefore, NFTs can fall under the definition of virtual assets if they are used or can be used for payment or investment purposes, ”said Andrei Tugarin.
In this case, all the provisions of the manual regarding customer verification, AML / CFT– Compliance will apply to companies that service NFT’s turnover, the lawyer explained.
The new FATF guidance suggests that individual countries can strengthen local NFT legal regulation.
The expert advised projects in this segment to develop a concept for using NFTs, taking into account their possible classification as investment or payment tokens.
Risks for DeFi projects
The agency has identified the circumstances under which DeFi projects fall under the definition of VASP.
When a DeFi project is recognized by a VASP. First of all, the FATF notes that the DeFi application as software is not a VASP. However, the creators of such software, its owners, operators or other persons who control or exert sufficient influence on a DeFi project may fall under the definition of a VASP, even if such a project seems to be decentralized or parts of its processes are automated (clause 67 of the Guidelines).
“If the owners or controllers of a DeFi project meet the definition of a VASP, then they should conduct an AML / CFT risk assessment prior to launching or using the software or platform and take appropriate measures to manage and mitigate these risks on an ongoing basis,” said the managing partner of GMT Legal Andrey Tugarin.
Determination of the owners or controlling persons of the DeFi project. The FATF makes recommendations as to who should be considered the creator (developer) of a DeFi project, given its relationship to the activities being performed.
The determining factors may include:
- control or sufficient influence over the assets of the DeFi project;
- the presence of an ongoing business relationship between the person and users, including in the form of a smart contract or voting protocols;
- the person receiving profits from the services provided by the DeFi project;
- the ability to set or change parameters to identify the operator of the DeFi project.
According to NOA Circle partner Eduard Davydov, DeFi projects often call themselves decentralized, although in fact they have a representative who has control or sufficient influence. In such cases, the VASP definition should be applied without regard to self-description.
“The guidelines may not apply to DeFi software, but dapps and DEX operators may be virtual asset providers (VASPs) and must comply with anti-money laundering requirements,” the expert said.
Self-identification of the company as a DeFi project. Marketing terms or self-identification as a DeFi project are not definitive. In clause 68 of the FATF Guidelines, it is noted that DeFi projects quite often call themselves decentralized, although in fact they have a specific controlling person with sufficient influence over the activities of the project.
“In this regard, states should apply the VASP definition without taking into account the self-identification of the service as a DeFi project,” said Andrei Tugarin.
Holders of DeFi project management tokens. Not everyone involved in the control of a DeFi project is required to comply with AML / CFT requirements. In cases where a person can purchase VASP governance tokens, the VASP itself must retain responsibility for fulfilling the AML / CFT obligations.
“The individual holder of the management token in this case does not bear such responsibility if he does not exercise direct control or does not sufficiently influence the activities of the VASP,” the lawyer explained.
The impossibility of determining the owners or controlling persons of a DeFi project. If it was not possible to identify the person who controls or exerts sufficient influence on the DeFi project, then the VASP requirements do not apply to him. States should monitor the emergence of such projects and the associated risks, including through interaction with representatives of the DeFi community.
“Countries can develop certain measures in relation to such projects and consider an option requiring an already regulated VASP (for example, a licensed cryptocurrency exchange) to participate in activities related to the DeFi project,” the expert clarified.
According to Tugarin, the main risk for DeFi projects will be obligations to identify their ultimate beneficiaries:
“More often than not, even if the project itself is decentralized, its creators are well known or easy to find. They are the ones who will have to comply with the rules of the leadership. “
Conclusion
The guidance encourages national regulators to make greater use of the VASP definition and in fact requires registration or licensing of almost every digital asset activity.
“It is for these purposes that FATF brings NFT and DeFi projects out of the shadows. Their developers should be ready to strengthen the regulation of the digital assets sphere by the organization, ”said Andrey Tugarin, Managing Partner of GMT Legal.
NOA Circle Partner Eduard Davydov drew attention to the potential risk of restrictions for software developers and owners:
“In this case, the FATF proposes to“ reach out ”to those who can be reached. Popular crypto wallets that provide access to dapps and DEX may fall under such definitions, and accordingly, they will at least be required to implement AML / KYC procedures for users. “
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In late October, the Financial Action Task Force on Money Laundering (FATF) finalized and published guidelines for the cryptocurrency industry, which in particular set standards for the DeFi and NFT segments.
Especially for Cryplogger, Andrey Tugarin, Managing Partner of GMT Legal, and Eduard Davydov, Partner at NOA Circle, analyzed the most significant changes in the leadership that could potentially pose a risk for the founders and developers of DeFi and NFT projects.
Risks for NFT projects
The updated version contains more specific and complete definitions of virtual assets (VA) and virtual asset service providers (VASP). It also explains cases in which NFTs may fall under the definition of an IA.
When are NFTs recognized as virtual assets? Non-fungible tokens that are used as collectibles and not as payment or investment instruments are not considered virtual assets (clause 53 of the Guidelines).
“The FATF points out that it is important to consider the nature of NFTs and their function in practice, rather than the marketing terms used. Therefore, NFTs can fall under the definition of virtual assets if they are used or can be used for payment or investment purposes, ”said Andrei Tugarin.
In this case, all the provisions of the manual regarding customer verification, AML / CFT– Compliance will apply to companies that service NFT’s turnover, the lawyer explained.
The new FATF guidance suggests that individual countries can strengthen local NFT legal regulation.
The expert advised projects in this segment to develop a concept for using NFTs, taking into account their possible classification as investment or payment tokens.
Risks for DeFi projects
The agency has identified the circumstances under which DeFi projects fall under the definition of VASP.
When a DeFi project is recognized by a VASP. First of all, the FATF notes that the DeFi application as software is not a VASP. However, the creators of such software, its owners, operators or other persons who control or exert sufficient influence on a DeFi project may fall under the definition of a VASP, even if such a project seems to be decentralized or parts of its processes are automated (clause 67 of the Guidelines).
“If the owners or controllers of a DeFi project meet the definition of a VASP, then they should conduct an AML / CFT risk assessment prior to launching or using the software or platform and take appropriate measures to manage and mitigate these risks on an ongoing basis,” said the managing partner of GMT Legal Andrey Tugarin.
Determination of the owners or controlling persons of the DeFi project. The FATF makes recommendations as to who should be considered the creator (developer) of a DeFi project, given its relationship to the activities being performed.
The determining factors may include:
- control or sufficient influence over the assets of the DeFi project;
- the presence of an ongoing business relationship between the person and users, including in the form of a smart contract or voting protocols;
- the person receiving profits from the services provided by the DeFi project;
- the ability to set or change parameters to identify the operator of the DeFi project.
According to NOA Circle partner Eduard Davydov, DeFi projects often call themselves decentralized, although in fact they have a representative who has control or sufficient influence. In such cases, the VASP definition should be applied without regard to self-description.
“The guidelines may not apply to DeFi software, but dapps and DEX operators may be virtual asset providers (VASPs) and must comply with anti-money laundering requirements,” the expert said.
Self-identification of the company as a DeFi project. Marketing terms or self-identification as a DeFi project are not definitive. In clause 68 of the FATF Guidelines, it is noted that DeFi projects quite often call themselves decentralized, although in fact they have a specific controlling person with sufficient influence over the activities of the project.
“In this regard, states should apply the VASP definition without taking into account the self-identification of the service as a DeFi project,” said Andrei Tugarin.
Holders of DeFi project management tokens. Not everyone involved in the control of a DeFi project is required to comply with AML / CFT requirements. In cases where a person can purchase VASP governance tokens, the VASP itself must retain responsibility for fulfilling the AML / CFT obligations.
“The individual holder of the management token in this case does not bear such responsibility if he does not exercise direct control or does not sufficiently influence the activities of the VASP,” the lawyer explained.
The impossibility of determining the owners or controlling persons of a DeFi project. If it was not possible to identify the person who controls or exerts sufficient influence on the DeFi project, then the VASP requirements do not apply to him. States should monitor the emergence of such projects and the associated risks, including through interaction with representatives of the DeFi community.
“Countries can develop certain measures in relation to such projects and consider an option requiring an already regulated VASP (for example, a licensed cryptocurrency exchange) to participate in activities related to the DeFi project,” the expert clarified.
According to Tugarin, the main risk for DeFi projects will be obligations to identify their ultimate beneficiaries:
“More often than not, even if the project itself is decentralized, its creators are well known or easy to find. They are the ones who will have to comply with the rules of the leadership. “
Conclusion
The guidance encourages national regulators to make greater use of the VASP definition and in fact requires registration or licensing of almost every digital asset activity.
“It is for these purposes that FATF brings NFT and DeFi projects out of the shadows. Their developers should be ready to strengthen the regulation of the digital assets sphere by the organization, ”said Andrey Tugarin, Managing Partner of GMT Legal.
NOA Circle Partner Eduard Davydov drew attention to the potential risk of restrictions for software developers and owners:
“In this case, the FATF proposes to“ reach out ”to those who can be reached. Popular crypto wallets that provide access to dapps and DEX may fall under such definitions, and accordingly, they will at least be required to implement AML / KYC procedures for users. “
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