Regulation of cryptocurrency circulation

28.02.2018 12:22

With regard to the urgency of circulation and regulation of cryptocurrency, the State Financial Monitoring Service of Ukraine, as a national financial intelligence unit, informs about the following.

The SFMS’s position on mining, virtual currencies, payment products and services based on virtual currencies (hereinafter - PPSVC), as well as on the identification of PPSVC participants reflects the current position of the Financial Action Task Force on Fighting Money Laundering (FATF) on the issues outlined.

In turn, FATF view of these issues is available in the complementary Guidances issued during 2013-2015 that are posted on the official FATF website:

1) “Guidance for a Risk-Based Approach to Prepaid Cards, Mobile Payments and Internet-Based Payment Services” of 26.06.2013 - Section “Home/ Publications/FATF Recommendations/Guidance for a Risk-Based Approach to Prepaid Cards, Mobile Payments and Internet-Based Payment Services” (http://www.fatf-gafi.org/publications/fatfrecommendations/documents/rba-npps-2013.html);

2) FATF Report: “Virtual Currencies: Key Definitions and Potential AML/CFT Risks” of 27.06.2014 - Section “Home/Publications/Methods and TrendsVirtual Currencies: Key Definitions and Potential AML/CFT Risks” (http://www.fatf-gafi.org/publications/methodsandtrends/documents/virtual-currency-definitions-aml-cft-risk.html);

3) “Guidance for a Risk-Based Approach to Virtual Currencies” of 26.06.2015 - Section “Home/Publications/Guidance for a Risk-Based Approach to Virtual Currencies”

(http://www.fatgafi.org/publications/fatfgeneral/documents/guidance-rba-virtual-currencies.html).

For today, FATF records a growing interest to the development of alternative, more effective methods for verifying and confirming the correctness of transactions in the virtual currency network that refer to the “proof-of-stake” systems (a system in which new coins are not generated at the expense of the use of computing resources (mining), and due to the length of storage of elder coins).

In order to prevent confusion in the interpretation of various types of cryptocurrency, only the terms “virtual currency” and “electronic money” are used in the abovementioned FATF documents.

Virtual currency is a digital representation of value that can be digitally traded and functions as:

(1) a medium of exchange; and/or

(2) a unit of account; and/or

(3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction.

It is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency (peer-to-peer (or P2P)).

E-money is a digital representation of fiat currency (“real currency,” “real money,” or “national currency” - coins and paper money of a country that is designated as its legal tender). E-money is a digital transfer mechanism for fiat currency.

In turn, the abovementioned FATF documents do not consider the issues of regulating of virtual currency and PPSVC beyond the AML/CFT area, including the issues related to the application and compliance with tax legislation in the area of PPSVC circulation.

Position of FATF and of SFMS respectively on the identification of PPSVC participants is that the main regulatory attention in the process of identifying and taking due diligence measures to the client’s identity as well as to the risk-based monitoring of client’s financial transactions should be concentrated on the centres that provide possible access to the regulated financial system by holders of convertible virtual currencies.

These centres (“points” where the activities related to virtual currencies cross the regulated financial system of using fiat currency) include:

1) An exchanger (also sometimes called a virtual currency exchange) - a person or entity engaged as a business in the exchange of virtual currency for real currency, funds, or other forms of virtual currency and also precious metals, and vice versa, for a fee (commission);

2) A wallet provider - an entity that provides a virtual currency wallet (i.e., a means (software application or other mechanism/medium) for holding, storing and transferring virtual currency).

3) Any other entities that are intermediaries between the regulated financial system and cryptocurrencies.

In accordance with FATF Recommendations, the SFMS is in the position that the abovementioned entities are obliged to follow the requirements determined by the Law of Ukraine “On Prevention and Counteraction to Legalization (Laundering) of the Proceeds from Crime, Terrorist Financing and Financing the Proliferation of Weapons of Mass Destruction”.

The following by these entities of obligations in the area of financial monitoring will ensure the implementation of due diligence measures, conducting of obligatory and internal financial monitoring, implementation by the SFMS of measures for the collection, processing and analysis of information on financial transactions and in case of a suspicion of money laundering, or financing of terrorism, or committing a socially dangerous act will provide an opportunity to prepare and submit case referrals to law enforcement authorities empowered to make decisions pursuant to the Criminal Procedural Code of Ukraine.

The SFMS in accordance with its powers on a regular basis implement the collection, processing and analysis of information on financial transactions subject to financial monitoring, other financial transactions or information that may be related to the suspicion of legalization (laundering) of the proceeds from crime, terrorist financing, and financing of the proliferation of weapons of mass destruction.

As a result of such analysis, a dossier for conducting financial investigations is formed. Each dossier is analyzed for identifying the grounds to believe that a financial transaction may be related to legalization (laundering) of the proceeds from crime, financing of terrorism and financing of the proliferation of weapons of mass destruction, or related to the commission of another act, defined by the Criminal Code of Ukraine.

If there are sufficient grounds to believe that a financial transaction or a totality of related financial transactions may be associated with legalization (laundering) of the proceeds from crime, or financing of terrorism or financing of the proliferation of weapons of mass destruction, the SFMS submits case referrals (additional case referrals) to law enforcement authorities, empowered to make decisions in accordance with the Criminal Procedure Code of Ukraine, as well as to intelligence authorities of Ukraine for carrying out operative and investigative activities and receives information from them on the progress of their consideration.

Therewith, if there are sufficient grounds to suspect that a financial transaction or a client relate to a socially dangerous act defined by the Criminal Code of Ukraine as a crime that does not relate to legalization (laundering) of the proceeds from crime or terrorist financing, the SFMS submits information to the relevant law enforcement or intelligence authority of Ukraine in the form of case referrals or additional case referrals.

Moreover, in 2017, the SFMS, together with state financial monitoring entities, as well as state authorities, including law enforcement authorities, prepared the following typological studies “Risks of cash use” and “Risks of terrorism and separatism” (posted on the SFMS web-site in Section “Typologies/ Recommendations for Detection of Money Laundering Schemes”), which describe the schemes and methods of using, in particular, cryptocurrency as a tool for money laundering and terrorist financing.

In addition, we would like to inform that currently the regulators are discussing the issues on the legal status of cryptocurrency. Accordingly, after adjusting of final decisions and taking into account the provisions of FATF Recommendations and European Directives, it is planned to prepare amendments to the national legislation on state regulation and supervision of cryptocurrencies in general, as well as particularly in the AML/CFT area.

Press service of the SFMS

presa@sdfm.gov.ua