Kiffmeister’s #Fintech Daily Digest (03/21/2021)*

The Financial Action Task Force (FATF) has DeFi in its sights

The Financial Action Task Force (FATF) looks to be going after decentralized finance (DeFi) applications in their recent draft guidance. When it comes to DeFi platforms, the FATF said its standards may not apply to the underlying software or technology, but entities involved with the decentralized application (DApp) such as owners or operators may now be considered virtual asset service providers (VASPs). Virtual asset (VA) escrow services, including services involving smart contract technology, brokerage services, order-book exchange services, advanced trading services, and custody providers will all considered VASPs.   

Here’s how paragraphs 47 and 49 define VASPs:

(47) A “virtual asset service provider” (VASP) is any natural or legal person who… conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

  1. Exchange between virtual assets and fiat currencies;
  2. Exchange between one or more forms of virtual assets;
  3. Transfer of virtual assets;
  4. Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
  5. Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset. 

(48) The definition of VASP should be read broadly. Countries should take a functional approach and apply the following concepts underlying the definition to determine whether an entity is undertaking the functions of a VASP. Countries should not apply their definition based on the nomenclature or terminology which the entity adopts to describe itself or the technology it employs for its activities. As set out above, the definitions do not depend on the technology employed by the service provider. The obligations in the FATF Standards stem from the underlying financial services offered without regard to an entity’s operational model, technological tools, ledger design, or any other operating feature. 


(79) The determination of whether a service provider meets the definition of a VASP should take into account the lifecycle of products and services. Launching a service that will provide VASP services, for instance, does not relieve a provider of VASP obligations, even if those functions will proceed automatically in the future, especially but not exclusively if the provider will continue to collect fees or realize profits, regardless of whether the profits are direct gains or indirect. The use of an automated process such as a smart contract to carry out VASP functions does not relieve the controlling party of responsibility for VASP obligations. For purposes of determining VASP status, launching a self-propelling infrastructure to offer VASP services is the same as offering them, and similarly commissioning others to build the elements of an infrastructure, is the same as building them. 

And if you’re a shareholder of DeFi protocol, it looks like you might be a VASP, and, if so, you’re responsible for setting up anti-money laundering controls!

(57) A DApp itself (i.e. the software program) is not a VASP under the FATF standards, as the Standards do not apply to underlying software or technology. However, entities involved with the DApp may be VASPs under the FATF definition. For example, the owner/operator(s) of the DApp likely fall under the definition of a VASP, as they are conducting the exchange or transfer of VAs as a business on behalf of a customer. The owner/operator is likely to be a VASP, even if other parties play a role in the service or portions of the process are automated. Likewise, a person that conducts business development for a DApp may be a VASP when they engage as a business in facilitating or conducting the activities previously described on behalf of another natural or legal person. The decentralization of any individual element of operations does not eliminate VASP coverage if the elements of any part of the VASP definition remain in place.

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.