Overview of Financial Action Task Force (FATF)
Is decentralised finance regulated under the Financial Action Task Force (FATF)?
Decentralised finance ("DeFi") applications may fall under the scope of the FATF's definition of a Virtual Asset Service Provider (VASP) according to the FATF's latest statement (October 2021). FATF advises countries to take an expansive approach towards VASP's.
last revised on 28 October 2021
A DeFi application (i.e. the software program) is not a VASP under the FATF standards, as the Standards do not apply to underlying software or technology (see paragraph 82 below). However, creators, owners and operators or some other persons who maintain control or sufficient influence in the DeFi arrangements, even if those arrangements seem decentralized, may fall under the FATF definition of a VASP where they are providing or actively facilitating VASP services. This is the case, even if other parties play a role in the service or portions of the process are automated. Owners/operators can often be distinguished by their relationship to the activities being undertaken. For example, there may be control or sufficient influence over assets or over aspects of the service’s protocol, and the existence of an ongoing business relationship between themselves and users, even if this is exercised through a smart contract or in some cases voting protocols. Countries may wish to consider other factors as well, such as whether any party profits from the service or has the ability to set or change parameters to identify the owner/operator of a DeFi arrangement. These are not the only characteristics that may make the owner/operator a VASP, but they are illustrative. Depending on its operation, there may also be additional VASPs that interact with a DeFi arrangement.
If they meet the definition of VASPs, owners/operators should undertake ML/TF risk assessments prior to the launch or use of the software or platform and take appropriate measures to manage and mitigate these risks in an ongoing and forward-looking manner.