Global Financial System Regulators – the Financial Action Task Force – Issue Draft Guidance on Digital Identity

The Financial Action Task Force (FATF), comprising of 37 member jurisdictions and a couple of regional organisations, representing most main monetary centres in all components of the globe – has issued its draft steerage on digital id (digital ID) for public session. The worldwide organisation is growing steerage to make clear how digital ID methods can be utilized for buyer due diligence (CDD). The paper intends to assist governments, monetary establishments and different related entities apply a risk-based strategy to the use of digital ID for CDD.

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“The suggestions doubtlessly have a large affect. It binds VASPs to current KYC and AML guidelines. The ‘Journey Rule’ may additionally require VASPs to incorporate particulars in crypto transactions, corresponding to correct originator and beneficiary data on transfers and associated messages.  Expertise is just not the situation, most VASPs have already got an answer that works on main chains. What’s unlucky is that regulators push centralized management options for decentralized expertise, acknowledged Daniel Haudenschild, CEO of SIBEX.

“It’s also attention-grabbing to notice that the advice was enforce as one in every of the final motions of the earlier FATF presidency, the United States.  Many have criticized that the steps had been a transfer to decelerate crypto adoption to permit US monetary providers to catch up. Shortly after the decision, the presidency of the FATF has switched, this time to China.  Although it’s seldom advice is reversed, it’s to be seen how the suggestions will likely be carried out,” added Haudenschild.

The steerage is meant to “…deal with rising safety and transparency points as the course of of economic transactions turn out to be extra digital.” It’s focused towards governments, regulated entities and different stakeholders with the stupendous mission of imposing anti-money laundering (AML) and counter financing terrorism (CFT) rules.

The steerage does hone in on the indisputable fact that distributed ledger expertise (DLT) can be utilized to advertise progress inside digital ID networks, whereas additionally outlining the essential function that digital id performs in cost methods which might, for instance, be leveraged to establish stakeholders in crypto transactions. 

The FATF’s steerage notes that regulated establishments, corresponding to cryptocurrency exchanges (which they name Digital Asset Service Suppliers aka ‘VASPs’) seem to “…take an knowledgeable risk-based strategy to rely on digital ID methods for Buyer Due Diligence.”

Richard Williams, Data Safety Supervisor at Resolve.Care, commented:

“FATF’s official steerage on digital id demonstrates the rising acceptance of digital funds. It additionally exhibits a realization that the use of digital funds will solely enhance exponentially and that processes have to be systemized. From our perspective, the safety provided by blockchain expertise exemplifies the digital ID assurance frameworks and requirements that FATF outlines. Blockchain-based digital funds and the methods surrounding them present the reliability and immutability, whereas considerably decreasing the prices and the danger of fraud, amongst different advantages, that FATF recommends.”

Dave Hodgson, Director and Co-Founding father of NEM Ventures, commented: 

“The FATF pointers are properly supposed, nonetheless in my opinion, they’re just like their earlier steerage in that they danger putting burdens on these firms and buyers who’re already largely abiding by the regulation. AML approaches that focus on verifying id on exchanges are excluding the giant quantity of worth switch that doesn’t contain regulated establishments, corresponding to DEXs or P2P transactions. Identity options that exist already in the area, corresponding to Sphere, Shyft and Geens, are gaining vital traction with exchanges who largely have AML processes in place. The FATF’s strategy is akin to central banking rules, which ignores the indisputable fact that a lot of nefarious funds occur in bodily FIAT exterior establishments’ management and line of sight. Whereas this steerage is a useful step for mainstream credibility and the total mass adoption of crypto, it’s unlikely to fulfill the goals that FATF is making an attempt to deal with.”

Corentin Denoeud, CEO and Co-founder of Blockchain Studio, commented: 

“The looks of regulation and steerage round decentralized finance will assist blockchain expertise no finish in its transition to turning into mainstream. Guidance corresponding to it will present much-needed assurance for firms and push them to make use of the expertise.”

“Many giant firms round the world are aware of blockchain’s potential and advantages for DeFi, however battle with the safety compliance and finance management obstacles raised by the expertise.”

“Blockchain is immutable and permits the tracing of economic operations however doesn’t enable the tracing of the actual individual or entity behind a transaction. The extra we work on Digital Identity and hyperlinks between actual id and digital id, the extra DeFi will likely be usable. This needs to be addressed by focusing on safety and requirements.”

“It’s attention-grabbing to see that regulation will foster the creation of expertise requirements and ID requirements going ahead.”

Fortunately, the FATF is additional asking personal sector stakeholders earlier than finalising the steerage and say they welcome extra views from related events on the areas of focus beneath, along with particular proposals to the textual content of the steerage. They primarily search views from banks, digital asset service suppliers and different regulated entities, but additionally welcome views from authorities. Whereas submitting your response, please point out the title of your organisation, the nature of your online business (monetary establishment or designated non-financial enterprise and career, digital ID service supplier, certification or assurance physique, trade group, others), and your contact particulars. You could insert any particular drafting proposals instantly in the hooked up textual content of the draft steerage in tracked adjustments. The contact data you present will likely be used for the goal of this public session solely. The FATF won’t share this data with third events with out your consent. 

Areas of focus

  1. Are there any particular cash laundering / terrorist financing dangers, that come up from the use of digital id methods for CDD, apart from these already talked about in Part IV of the steerage?
    In that case, how can they be addressed and by whom? Are there particular alternatives for combatting cash laundering / terrorist financing that aren’t already talked about in the steerage?
  2. What’s the function of digital ID methods in ongoing due diligence or transaction monitoring?
    a. What data do you seize beneath authentication at onboarding and through authorisation for account entry? Who captures this information?
    b. Is the authentication information you seize related to ongoing anti-money laundering and counter-terrorist financing due diligence and/or transaction monitoring? If sure, how?
  3. How can digital ID methods help monetary inclusion?
    a. How can digital ID methods with completely different assurance ranges for id proofing/enrolment and/or authentication be used to implement tiered CDD, permitting shoppers a variety of account functionalities relying on the extent of CDD carried out, and notably in conditions of decrease danger? Please present any sensible examples.
    b. Have you ever adopted decrease assurance ranges for id proofing to help monetary inclusion? What extra measures do you apply to mitigate dangers? Please present any sensible examples.
    c. How can progressive CDD through digital ID methods help monetary inclusion (i.e. establishing higher confidence in a buyer’s id over time)?
  4. Does the use of digital ID methods for CDD elevate distinct points for implementing the FATF record-keeping necessities?
    a. What information do you retain once you use digital ID methods for CDD?
    b. What are the challenges in assembly record-keeping necessities once you use digital ID methods for CDD?
    c. When you preserve completely different information when utilizing digital ID methods for onboarding, does this affect different anti-money laundering and counter-terrorist financing measures (for instance ongoing due diligence or transaction monitoring)?

Please present your response to [email protected] with topic line “Feedback of Richard Kastelein on the draft Digital ID Guidance”, by 29 November 2019 (18:00 UTC). 

The Financial Action Task Force (FATF) is an inter-governmental physique established in 1989 by the Ministers of its Member jurisdictions.  The goals of the FATF are to set requirements and promote efficient implementation of authorized, regulatory and operational measures for combating cash laundering, terrorist financing and different associated threats to the integrity of the worldwide monetary system.  The FATF is, due to this fact, a “policy-making physique” which works to generate the obligatory political will to result in nationwide legislative and regulatory reforms in these areas.

About Richard Kastelein

Founder and writer of trade publication Blockchain Information (EST 2015), a accomplice at ICO providers collective Token.Company ($750m+ and 90+ ICOs and STOs), director of schooling firm Blockchain Companions (Oracle Associate) – Vancouver native Richard Kastelein is an award-winning writer, innovation govt and entrepreneur. He sits on the advisory boards of some two dozen Blockchain startups and has written over 1500 articles on Blockchain expertise and startups at Blockchain Information and has additionally revealed pioneering articles on ICOs in Harvard Enterprise Evaluate and Venturebeat. Irish Tech Information put him in the high 10 Token Architects in Europe.

Kastelein has an Advert Honorem – Honorary Ph.D. and is Chair Professor of Blockchain at China’s first Blockchain College in Nanchang at the Jiangxi Forward Institute of Software program and Expertise. In 2018 he was invited to and attended College of Oxford’s Saïd Enterprise Faculty for Enterprise Automation four.zero programme.  Over a half a decade expertise judging and rewarding some 1000+ innovation initiatives as an EU knowledgeable for the European Fee’s SME Instrument programme as a startup assessor and as a startup decide for the UK authorities’s Innovate UK division.

Kastelein has spoken (keynotes & panels) on Blockchain expertise in Amsterdam, Antwerp, Barcelona, Beijing, Brussels, Bucharest, Dubai, Eindhoven, Gdansk, Groningen, the Hague, Helsinki, London (5x), Manchester, Minsk, Nairobi, Nanchang, Prague, San Mateo, San Francisco, Santa Clara (2x), Shanghai, Singapore (3x), Tel Aviv, Utrecht, Venice, Visakhapatnam, Zwolle and Zurich.

He’s a Canadian (Dutch/Irish/English/Métis) whose writing profession has ranged from the Canadian Native Press (Arctic) to the Caribbean & Europe. He is written often for Harvard Enterprise Evaluate, Wired, Venturebeat, The Guardian and Virgin.com, and his work and concepts have been translated into Dutch, Greek, Polish, German and French. A journalist by commerce, an entrepreneur and adventurer at coronary heart, Kastelein’s skilled profession has ranged from political publishing to TV expertise, boatbuilding to judging startups, skippering yachts to advertising and extra as he is travelled for almost 30 years as a Canadian expatriate residing round the world. In his 20s, he sailed round the world on small yachts and wrote a collection of journey articles referred to as, ‘The Hitchhiker’s Information to the Seas’ travelling by hitching rides on yachts (1989) in main journey and yachting publications. He at present lives in Groningen, Netherlands the place he is elevating three teenage daughters together with his spouse and crusing accomplice, Wieke Beenen.

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