Global Financial Regulators Beam Searchlight on DeFi in Amended Regulations

The Financial Action Task Force (FATF), the anti-money laundering global organization, has considered it expedient to modify its legislation to accommodate some creative areas such as Decentralized Finance (DeFi). This development was announced on the draft regulations published on Friday by the global financial agency.

In addition to explaining the details of its draft on the legislation of decentralized exchanges (DEXs), which are the real instruments making the DeFi networks and apps keep functioning, the global body also vaguely discussed non-fungible tokens (NFTs) which are now becoming increasingly popular.

Virtual Asset Providers to be affected by FATF new guidelines

Concerning DeFi exchanges, the FATF disclosed that its regulations might not include underlying apps or tech. However, the regulations will capture the “App,” including operators and providers who will henceforth be regarded as virtual asset service providers (VASPs). This set of operators will be required to meet certain AML conditions in mainstream finance. In essence, this is a way of keeping a tab on DeFi owners, providers, investors, and other stakeholders in the crypto community.

Apart from clarifying some terms related to DeFi, the FATF rules altered some of the terms associated with NFTs by referring to NFTs non-fungible assets as convertible assets. This observation was made by Sian Jones, a crypto analyst, who added that NFTs, which are you can exchange or convert, have always been on the radar. He stated that the AML data-sharing system was construed to help the FATF and its stakeholders to understand the terms used in the crypto community.

While explaining the main points of the new regulations, some analysts noted that the FATF was concerned about NFTs that could be used for money laundering and transfer of illicit finance across borders. These types of assets are what the FATF refers to as “virtual assets.”
However, those analysts said some NFTs that the FATF does not see as virtual assets but are traded in secondary markets, which ease the flow of illicit funds across borders and terrorism financing.

Can the crypto industry be regulated?

In December last year, Iwa Salami of the University of East London examined the possibility of regulating the crypto industry, considering the growing DeFi space. The analyst noted that DeFi lacks accountability mainly because it is hard to hold anybody responsible for any technical or technological fault such as breach of security or privacy, theft of digital assets, and other adverse developments in the crypto space.

The reason is that, unlike mainstream banking, DeFi applications are built on decentralized networks, and they reduce the control of any central authority. There is no central server or Ip controlling others. Each node takes its own decision itself. Added to this is that DeFi is operated worldwide. If a country makes strict regulations against the industry, users may switch to other countries with accommodating policies.

Apart from the issue of accountability, there is no uniformity of stance on the crypto industry. While some countries like the US have strong institutions that can monitor the industry, some do not have. Also, while some countries take a hard stance against cryptocurrencies, others do not.
Meanwhile, the FATF is still trying to understand some AML guidelines and other complex and vague terms used in the crypto community. DeFi and NFTs have become a new task that FATF needs to confront and understand.

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