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Decentralized finance or DeFi space exploded According to data from DeBank, in the past year, the total value of DeFi was approximately US$90 billion. The DeFi ecosystem includes projects such as Maker, Aave, Compound, and Uniswap, and new projects are emerging rapidly. DeFi is a broad concept used to describe the emerging financial sector built with decentralized technology tools. It is characterized by openness, unlicensed, separation from each other and no single point of failure.
The scope of DeFi is very wide. The exact degree of various technologies and governance functions and their integration determine the degree of dispersion of a particular DeFi project, or it is not DeFi at all. DeFi currently includes services such as lending, derivative products, margin trading, payment, asset management, and irreplaceable tokens, and it will expand and diversify in the future.
related: Is 2020 the “Year of DeFi”? What can the industry expect in 2021?Expert answers
The fast-growing DeFi market has not caught the attention of the authorities-the Financial Action Task Force (FATF) is one of them. The Financial Action Special Organization is an intergovernmental decision-making body that supervises and formulates international standards for anti-money laundering and anti-terrorist financing rules through recommendations to the government. March, special organization release The draft revised guidelines for the risk-based approach of virtual assets and virtual asset service providers or VASPs has been soliciting opinions from stakeholders until late April. The final revised guidelines will be released in June.
FATF first introduced virtual assets and VASP in its vocabulary in 2018, and clearly clarified that FATF standards and recommendations apply to them. In June 2019, FATF release Further guidance on risk-based virtual assets and VASP methods can help the competent authority to deal with virtual asset activities and VASP. In addition, it also helps private participants engaged in virtual asset activities to understand their compliance obligations with respect to AML/CTF.
The upcoming guidelines will focus on six aspects: 1) Clarify the definition of virtual assets and VASP; 2) Stable currency; 3) Peer-to-peer transaction risks and potential risk mitigation measures; 4) VASP licensing and registration; 5) Implementation of travel rules ; 6) Principles of information sharing and cooperation between VASP supervisors.
related: With mass adoption approaching, stablecoins have brought new difficulties for regulators
As the FATF’s recommendations require AML/CTF regulation, licensing or registration of all VASPs, and are subject to surveillance or supervision, some of the more controversial issues involve the expansion of the definition of VASP. They will also be subject to travel rules. Therefore, it is essential that all participants in activities related to virtual assets must know whether they fall within the scope of the VASP definition.
related: FATF AML Regulations: Can the cryptocurrency industry adapt to travel rules?
DApp and VASP
VASP is defined as any natural or legal person that performs certain activities or operations on behalf of or on behalf of others (ie, intermediaries), including the exchange or transfer of virtual assets between virtual assets and legal tender or between virtual assets.
FATF recognizes that VASP activities (exchange or transfer of virtual assets) can also be carried out through decentralized exchange. These are software programs of decentralized or distributed applications or DApps that run on a peer-to-peer network of computers running blockchain protocols. DFA itself is not considered a VASP because FATF insists that DApp does not try to regulate the technology and its standards are technically neutral.
However, FATF clearly stated that it has a broad vision of virtual assets and VASP definitions, and most existing arrangements involve some participants, which can be regarded as VASPs during the development or start-up phase of the project. The draft guidelines stipulate that DApps usually have a “central party” that creates and launches assets, sets parameters, holds management keys, or collects fees, and entities related to DApps may qualify as VASPs.
Which DeFi participants may be potential new VASPs?
Similarly, owners/operators are also mentioned in its 2019 FATF guidelines, but this time, they not only may Belong to the VASP definition, but they May fall Because they carry out VASP activities on behalf of their clients as enterprises. This will apply even if other parties can play roles or the process is automated. In addition, anyone involved in DApps business development activities can serve as a VASP, as long as they engage in VASP activities as an enterprise and on behalf of other people (ie, intermediaries).
In addition, the draft guidance also stipulates that anyone who directs the creation, development or launch of software to provide VASP services for profit may also be VASP. Even if the platform becomes fully automated and the provider no longer participates, the provider that initiates the service will still be subject to VASP regulations in the future. This is especially true when the provider can continue to benefit directly or indirectly by charging or otherwise realizing profits. This may apply to those developers who may benefit from the increase in token prices, and the FATF specifically pointed out that the party who profited from the use of virtual assets could be VASP. It is not clear how to deal with the holders of governance tokens, as FATF explained that the decision-making entity that controls the terms of financial services provided may also be VASP.
FATF clearly knows that starting the infrastructure is equivalent to providing its services, and entrusting others to build it is equivalent to actually building it. The entire life cycle of a product or service is related, and the decentralization of any individual operating element will not affect its qualification as a VASP, nor will it relieve the VASP from its obligations. FATF also vaguely stated that even if the transaction is not involved, certain matching or search services may meet the requirements of VASP, although it points out that a pure matching service platform that does not provide VASP services will not be VASP.
If VASP is required to conduct extensive “know your customer” and “anti-money laundering” checks on the initiator and beneficiaries of the transaction, one of the meanings captured by the VASP definition is the application of travel rules. Such requirements imposed on DeFi participants have attracted a lot of attention, the most important of which are privacy and data protection issues.
in conclusion
Compared with traditional centralized financial services, DeFi currently has no or very few regulations. It is increasingly clear that some form of DeFi compliance is inevitable. However, the draft FATF guidelines raise some questions. According to current recommendations, even if the time or merit in the DeFi project is limited, various parties believe that the central party, relevant entities or providers may face the high compliance burden of VASP.
If there is no further clear description of exactly who and when will be captured in the VASP definition, it may prompt countries to adopt a wide range of supervision and over-regulate. It is not clear how to even apply the VASP obligation to DeFi in practice or how to implement it in DeFi protocols, autonomous software and unmanaged wallets.
DeFi is a new financial paradigm, which is characterized by openness, unauthorized and non-interaction. This multidimensional and dynamic development phenomenon is undergoing an experimental stage. It may be premature to impose strict regulatory compliance obligations on the emerging DeFi ecosystem that were originally intended for centralized organizational structures. Reducing risk is as important as avoiding pushing DeFi innovation underground, because it will have the opposite effect and may bring about blur rather than transparency, and uncertainty rather than clarity.
Although FATF’s guidelines are not legally binding, they can be followed. Countries that fail to do this may be included in the so-called FATF “grey list” jurisdictions, and these areas will be under increased surveillance, or they will be “blacklisted” in high-risk jurisdictions and require action. Stakeholders have provided feedback, and now it’s the FATF’s turn to issue the final guide, which may determine the next chapter of DeFi.
The views, thoughts and opinions expressed here are only the author’s own, and do not necessarily reflect or represent the views and opinions of Cointelegraph, Warsaw University of Technology or its affiliates.
This article is for general reference only and is not intended and should not be regarded as legal advice.
Agata Ferreira He is an assistant professor at Warsaw University of Technology and a visiting professor at many other academic institutions. She researches law in four different jurisdictions under common law and civil law systems. Agata has practiced in the UK financial industry for more than ten years in a leading law firm and an investment bank. She is a member of the expert panel of the European Blockchain Observatory and Forum, and a member of the European Blockchain Advisory Committee.
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