A Minority of Global Jurisdictions Are Moving to Regulate Crypto
As a trading bot software provider, Oxido Solutions B.V. does not need a financial license to operate. However, the same doesn’t apply to many of our international institutional clients. Moreover, our trading bots aren’t accessible everywhere, especially for certain financial instruments like crypto derivatives. Because of these factors, it’s crucial for us to stay updated with global crypto laws and regulations. Countries like Dubai have already established clear crypto regulations, and Europe is also making progress toward a clear legal framework with MICAR.
But did you know that fewer than 30% of global jurisdictions have started regulating crypto? That’s what T Raja Kumar, the President of the Financial Action Task Force (FATF), shared with CoinDesk during an interview in Singapore. Kumar emphasized that this low level of regulation is a clear “call to action.” These insights come from a recent progress report that looked into how various jurisdictions are following the FATF’s guidelines. The report, titled “Status of Implementation of Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity,” highlights the need for countries to better manage the risks associated with crypto, such as money laundering and terrorist financing. It suggests that jurisdictions should license or register virtual asset service providers (VASPs) and review their operations, products, and technologies. While the FATF’s recommendations aren’t compulsory, jurisdictions that don’t follow them might risk global isolation. This could come in the form of lower credibility ratings and potential consequences like being placed on the FATF’s watchlist.
FATF’s Urgent Call to Action
The leader of the global body overseeing money laundering and terrorist financing described the report as “the first such report” that tackles the critical issue of under-regulation allowing “significant loopholes for both criminals and terrorists to exploit.” He emphasized that this situation is “a call to action that we need countries to take this problem seriously.”
Raja Kumar likened virtual assets to water, stating, “I would describe virtual assets as being akin to water, and essentially they will flow to jurisdictions that are less regulated.” He highlighted the swift nature of criminals and terrorists in exploiting these regulatory gaps, warning, “Criminals and terrorists are very quick to spot the opportunity leading to regulatory arbitrage. We just can’t allow this. Every part of the global chain needs to be strong. This is not a trivial matter.”
Purpose of report
The FATF has been consistently encouraging countries to adopt and implement its guidelines. Their report provides a table that classifies each jurisdiction’s level of compliance, ranging from compliant to non-compliant. The key measures for assessment involve creating laws or rules for the registration or licensing of VASPs, actually registering or licensing these entities, conducting oversight inspections, taking action against non-compliant VASPs, or implementing the so-called “travel rule.” This rule mandates that crypto service providers collect and exchange details on transactions exceeding a set limit.
In the case of countries like India, Singapore, Spain, Portugal, Italy, and Malaysia, evaluations of adherence to Recommendation 15 are in progress, hence their N/A (not applicable) rating in the table. Meanwhile, countries like Argentina have completed a risk assessment for VASPs but haven’t met the other seven key criteria. North Korea finds itself on the FATF’s blacklist, and as of February 2023, Russia’s membership has been suspended. Raja Kumar clarified that the FATF isn’t strictly insisting on new laws for compliance; a formal notice from governments might suffice.
Methodology
During a FATF plenary in February 2024, members decided to release a summary detailing how different places are regulating VASPs, leading to this study. This year-long review focused on FATF’s 39 member countries and 20 additional jurisdictions with significant crypto-related activities. The choice of “significant” jurisdictions was determined by whether they hosted VASPs accounting for over 0.25% of the worldwide virtual asset trading volume or had a million or more virtual asset users. Together, these areas represent 97% of the global cryptocurrency activity.
Oxido Solutions’ Take
Oxido Solutions wants to highlight that fiat currency is used 800 times more than crypto for money laundering. This insight comes from recent research by analytics firm Messari. While it’s true that cryptocurrency has its share of illicit uses, it’s evident that traditional money is still the go-to for money laundering. There have been several high-profile incidents where fiat money was used in massive money laundering operations. Take the “Global Laundromat” scandal, where over $20 billion was cleaned through a complex web of shell companies and global banks.
Another notorious case is the “Panama Papers” leak, revealing how offshore accounts and shell companies were used to conceal wealth and dodge taxes, mainly through fiat currency. And we can’t overlook Bernie Madoff, the American financier who orchestrated the biggest Ponzi scheme ever, swindling investors out of more than $65 billion. In these scenarios, the primary vehicle for these fraudulent activities was fiat money, not cryptocurrency.
Nevertheless, we agree that regulation is crucial for a healthy crypto ecosystem. We view the FATF’s report as a positive step that draws global attention to the need for standards in the sector, serving as a valuable resource for both regulators and the private sector.
At Oxido Solutions, which primarily serves institutional clients, we support sensible regulation. It provides a stable framework for hedge funds, family offices, and market makers to operate and leverage our trading bots. However, we are wary of overregulation, which can stifle innovation by making it prohibitively expensive for emerging companies in the crypto space to establish robust compliance departments. This seems to be the direction with MICAR, where heavy regulatory demands could push businesses to relocate to offshore environments with less stringent or costly requirements.
We anticipate that the number of regulated countries will rise sharply soon. Those that don’t keep pace may face global isolation and economic setbacks as international crypto and financial regulatory standards become more widespread. To stay competitive and included in the digital economy, these countries must quickly align with global financial practices. We’ll continue to watch developments in financial laws and regulations with keen interest.
