T Skevington and M Bacina
FATF reports on 'so called stablecoins'
The Financial Action Task Force (FATF), the global anti-money laundering (AML) and counter-terrorist financing (CTF) regulator, has released a report on stablecoins. The report comes in response to the G20's request in October 2019 that the FATF consider the AML and CTF issues concerning stablecoins.
Despite acknowledging at the outset that:
stablecoins have the potential to spur financial innovation and efficiency and improve financial inclusion
The report (somewhat passively aggressively) refers to stablecoins as "so-called stablecoins" throughout, supposedly on the basis that:
FATF considers that the term “stablecoin” is not a clear legal or technical category, but is primarily a marketing term used by promoters of such coins. In order to avoid unintentionally endorsing their claims, this report therefore refers to them as "so-called stablecoins"
The report does not differ in any material way from previous FATF analysis of virtual assets, in that it identifies "anonymity, global reach and layering" as the key money laundering and terrorism financing risks applicable to stablecoins.
However, the FATF emphasises that the perceived potential for much greater adoption of stablecoins than of pre-existing virtual assets leads to heightened risk. On that basis, the FATF states:
stablecoins are a type of either virtual or financial asset, they are covered by the revised FATF Standards
To understand how the revised FATF Standards apply to "so-called stablecoins", and whether the revised FATF Standards are sufficient to mitigate ML/TF risks, the FATF assessed the five largest existing so-called stablecoins (Tether, USD Coin, Paxos, TrueCoin, Dai) and two proposed so-called stablecoins (Libra, Gram). Despite acknowledging that there are clear, and often wide differences between these projects, the FATF said:
Any entities within a so-called stablecoin system will have AML/CFT obligations under the revised FATF Standards
So far, the report has received a mixed reception. General Counsel at block.one Lee Schneider was emphatic in his criticism of the report, which he suggests:
1. Fails to provide a definition of stablecoins, the very subject of its so-called report;
2. Fails to mention much less discuss any stablecoin designs, making the so-called report devoid of analysis or explanation;
3. Fails to cite or even reference the growing literature on stablecoins, leaving the reader to believe that virtually no one has said anything on the topic before its so-called report;
4. Nevertheless concludes that the entirety of the undefined mass is subject to FATF requirements under one of several categories with no guidance on when a category applies.
Much of this criticism appears entirely justified, given the report fails to include even one reference to blockchain, or how an immutable and distributed ledger can have significant benefits for fraud prevention in a stablecoin system (or in a digital currency system). The entire digital currency industry has been seeking clear guidance and bright line rules to be able to adopt and drive innovation, and it is frustrating to see paper wasted on a report which ultimately leaves the uninformed reader no better informed about the technology or risk, and the informed reader similar bereft of understanding how these systems can operate with ML/TF laws designed for centralised and legacy infrastructure and systems.
As for what happens next, the report identifies that the FATF will conduct a further 12-month review of the FATF Standards by June 2021, publish red flag indicators and case studies by October 2021 & consider whether further updates to the FATF Standards are necessary.
A copy of the report is below: