Virtual Assets and Regulation: The Real Story?

By Ravi Nayyar

A few weeks ago, a contact of mine forwarded me a question which she was asked by a journalist.

Would you say that effective regulation against laundering money through cryptocurrencies lags behind in most countries, not just emerging markets? If so, why?

Perhaps without intending it, I believe the journo asked a very deep and meaningful question.

As I advised my contact, I can provide a simple answer and a more contemplative answer.

The Simple Answer

Country X has complied with FATF Recommendation 15 by passing certain laws that regulate virtual asset service providers (‘VASPs’) and tuning its AMLCTF regulatory enforcement pyramids in line with the best intelligence, practice and FATF’s Virtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing report. Ergo Country X can be said to have implemented what conventional wisdom may label ‘effective regulation’.

A number of developed countries have at least passed such laws, including Australia, Canada, EU countries that have implemented 5MLD, the USA and Singapore. Some countries are ‘lagging’ by not having passed said laws and/or done said pyramid tuning. (Note that the Library of Congress has some good reports surveying the international regulatory landscape, subject to parts of that literature being outdated).

The More Contemplative Answer

It depends on what one means by ‘effective’ and ‘regulation’.

If we look at the countries with what conventional wisdom deems ‘effective regulation’, well, is AMLCTF regulation effective at stopping financial crime by driving seizures of at least the vast majority of all criminal assets where the acquisition of those assets is facilitated by virtual assets (‘VAs’)?

If we look at non-VA criminality, authorities globally seize peanuts in figurative terms. We know that famous 2011 UNODC estimate in relation to proceeds from drug trafficking and organised crime. What’s the chance that this arguable ineffectiveness does not extend to VA-targeting AMLCTF laws too?

Or do we merely say that regulation is ‘effective’ because we have a particular ‘list of boxes’ (laws) that we make VASPs tick, never mind that the ticking of those boxes likely does not stop a lot of financial crime which is facilitated by those VASPs because either:

• regulators do not engage the VASPs well enough;
• regulators do not check that the boxes are ticked well enough; and/or
• VASPs themselves just do not tick those boxes well enough (for instance, due to internal governance failures).

Reinforcing the first dot point of the above three, one must especially remember that the relationship between the regulator and regulated entities is a critical part of any regulatory context. Regulation is never just about the actual rules that the regulator is enforcing.

Conclusion

As I said to my contact, is the real story that:

• emerging markets may have not passed the aforementioned laws in compliance with FATF Recommendation 15, and thus can be said to lack ‘effective regulation’; or
• those laws — that developed economies, through FATF, push emerging markets to pass — may not actually be fit for purpose in the VA context?

If the latter, what would truly effective VA-targeting AMLCTF laws look like?

Food for thought.