ADAN gives its opinion on the recommendations of the Financial Action Task Force

On 21 June 2019, the Financial Action Task Force (FATF) issued recommendations on digital assets to the group’s member states. The purpose of these recommendations is to implement measures to combat money laundering and terrorist financing. France, a founding member of the FATF, has the task of transposing these recommendations into its national law.

ADAN wishes to support the Public Authorities in the effective implementation of these recommendations. We present in this document the association’s recommendations on the modalities of this transposition.

1. The procedures for transposing the Recommendations constitute a challenge for competitiveness and sovereignty for France and Europe.

The digital assets sector is growing rapidly and the most emblematic companies in this nascent sector are already located outside Europe (Bakkt, Binance, Bitfinex, Bitmain, Bitmex, Block.One, Coinbase, Circle, Fidelity, Kraken…). There is therefore a strong competitive challenge to develop European champions, attract foreign players and make up for an already significant but not irretrievable backlog.

Too strict a framework, which would prevent or slow down the emergence of new players in Europe by making them uncompetitive, would be likely to accentuate this gap and block any efforts to develop a local economy in the sector. In light of these issues, it is essential that any additional measures taken in France be designed to enable French and European players to position themselves in the long term as a major player in the digital assets market.

It should be noted that a fragmented framework would have the same braking effect and we can already regret the disparities between the laws of the different countries that have transposed the 5th Directive, which will significantly slow down the development of European giants. It is crucial, in the framework of the enactment of future rules, that Member States call on the EU to legislate in such a way that local regimes are uniform. Consideration should also be given very quickly to the need to provide for “passportable” licences (similar to MiFiD licences) allowing a VASP localised in one EU country to open up services in other countries on the basis of the licence obtained in the country of origin.

2. We very much welcome the development of effective and unified anti-money laundering and anti-terrorist financing rules applied to the digital asset sector.

The particularities of the digital asset sector lead us to recommend a specific and proportionate approach. The approach taken by the FATF on this point is largely positive and responds to many of the fears expressed by the players in the sector. 

In particular, we welcome the reaffirmation of the principle that a system operating without an oversight body (decentralised exchanges or “non-custodian” portfolios) is inherently excluded from the oversight measures provided for in the Recommendations.

3. France has already pre-transposed the vast majority of the Group’s requirements and is one of the best performers among the member countries.

The comparative study carried out by ADAN shows that France is in the vanguard and that, by adopting the specific provisions for providers of digital assets in the DirectivePACTE law, it has anticipated most of the obligations: 48 of the 50 measures detailed in the recommendations are thus fully (38) or partially (10) in force.

Compared to other FATF member countries as well, France is also better off. A quick study of the countries bordering France on the implementation of policies AML-TF makes it possible to establish the following state of affairs.

4. 4. The French regime of the “LesVASP ” has just entered into force (decree of 28 November 2019).

It provides a coherent and proportionate framework for the actors. In this respect, we believe that a substantial modification of this regime would be detrimental to France’s message of support for the sector, but also to the legal clarity that this regime brings to the players. Any additional measures should therefore be in line with the work carried out to build up this regime.

5. We recommend the utmost caution on the transposition of two particular Recommendations:

The possible extension of the AML-TF mandatory application of the rules to new actors

It has been established that most of the money laundering risks associated with digital assets are located at the entry points (“gatekeepers“) of the blockchain. These gatekeepers must therefore be particularly monitored and the Recommendations are intended to be applied in full to them. On the other hand, players who act directly on digital assets without dealing with cash should not be subject to obligations that are detrimental to their business model, even though the actual result of this framework would be weak or even non-existent in terms of AML-TF.

The transposition of the “Travel Rule

The implementation of this recommendation, which obliges them VASP to collect information on the originators of digital asset transfers or their beneficiaries and to pass this information on to othersVASP, is in our view premature for the following reasons:

  • On the technical side, first of all, the solutions are not ready. The transmission of information between VASP them requires a secure, accessible and open communication channel as well as an information standard – all of which must also respect the FATF implementation principles, including technological neutrality and fairness between the different actors.

    To be effective, this information transmission should therefore be implemented after the establishment and independent audit of common standards on the following elements: data format, security of the information channel, constraints linked to the transmission of personal data, etc.

    In practice, the existing solutions do not meet these requirements and are therefore not satisfactory as they stand to meet the FATF criteria.

    In support of this development, it should be noted that even in countries where this Travel Rule has been fully transposed (United States, Switzerland), they VASP do not apply it for reasons of technical feasibility.

    • Secondly, in terms of data security, we believe it is dangerous to oblige players to automatically transmit highly sensitive information such as the surnames, first names and date of birth of active digital owners to people VASP who may not be subject to the same rules or who are much less strictly regulated than in France, or who are established in jurisdictions that may have an economic or strategic interest in exploiting this data.

      At the very least, this automatic transmission of information should only be implemented for the benefit of institutions that meet certain strict criteria – still to be defined.
    • Finally, in terms of the competitiveness of France and Europe, it must be stressed once again that immediate transposition of this obligation would have major consequences on the competitiveness of the companies that would be subject to it. 

As a conclusion to these elements, we recommend a delay before the implementation of this “Travel Rule”. At the most, this transposition should only impose on the companies which should implement it an obligation of means, without any obligation to verify the data received, in particular concerning the beneficiaries (see the US FinCen rules which apply this principle) and by clearly excluding all transfers which are not between VASP (transfer to a non-hosted wallet).

6. Proposals by ADAN for the implementation of the recommendations
  • Maintain essentially the current regime which responds to the FATF Recommendations and, in particular, do not extend the scope of mandatory registration.

  • Reassess at a later date (in 2020 or 2021) the appropriateness of extending the obligations on actors.

  • If, however, a decision were to be taken to transpose Recommendation No 16 (“Travel Rule“) quickly, this would have to be done by addressing the concerns listed in point 5 and, more generally, on a “best effort” basis.

  • Engage in a dialogue with the relevant Directorates General in the European Union to ensure that the measures transposing the FATF Recommendations that will in all likelihood be included in the next MLA Directive (or Regulation) are consistent with the positions taken by France on the subject and vice versa.

ADAN is naturally at the disposal of the Public Authorities to accompany them further on this issue.