The Financial Action Taskforce (FATF) publishes a report on Stablecoins on behalf of the G20. The most important global body in the fight against money laundering currently sees no reason to tighten existing regulation in the face of the rise of Stablecoins. The reason is that centralised Stablecoins are already well regulated, while decentralised Stablecoins have little chance of mass acceptance.
The Financial Action Task Force (FATF) is the supreme global body in the fight against money laundering and terrorist financing. The rules they enact to control money flows are taken up by the G20, the group of the most powerful states, and raised to a global standard.
The FATF has been dealing with cryptocurrencies for several years and has also issued special rules for them, which are currently being implemented by most of the world’s states. However, its position is that cryptocurrencies are too marginal a phenomenon to pose a serious threat of money laundering. Stablecoins pegged to fiat currencies such as the dollar could possibly change this, as volatility is one of the biggest barriers to the mass use of cryptocurrencies. This is why the rise of stablecoins in recent years is causing concern among the G20, which asked the FATF as early as autumn 2019 to examine the danger posed by supposedly stable coins.
The report of the body is now available. The FATF has looked at the most important stablecoins – Tether, USD Coin, Paxos, TrueCoin and Dai – and examined the proposals for future stablecoins such as Libra. On the basis of this research, it has come to the conclusion that the regulations adopted so far are sufficient and that there is no need for further action. This is because centralised stablecoins on the one hand can easily be classified under the FATF regime, while decentralised stablecoins on the other hand do not currently show the potential for mass use.
To this end, the FATF divides stablecoins primarily along a line of intersection: Are they centrally organised – or decentralised? Most of the stablecoins that are in widespread circulation – such as Tether and USDC – are centrally structured. They have an entity that covers the coins with dollars and can have the smart contract, for example to use blacklists. In addition to these issuers, other central parties are also involved: Wallets, which enable the transfer of coins, and exchanges on which they are traded. All these parties are subject to the obligations that the FATF has declared for so-called „VASP“ (Virtual Asset Service Provider).
It is significant that the FATF considers almost anything that attracts users of cryptocurrencies to be a nuisance. For example, the blockchain notes the history of all transactions, but does not record any information about the identity of the sender. This can be determined by central custodians, such as stock exchanges or some wallets. But it is also possible to interact directly with a blockchain by using a non-custodial wallet. What is a wonderful protection of privacy for the users, means that the FATF’s rules do not apply. After all, there is no party with the obligation to determine the identity of the users. In conjunction with tools such as mixers that enhance privacy, or even anonymous cryptocurrencies such as Monero, this poses a residual risk to the FATF. However, it is not yet apparent that Stablecoins are being used more than cryptocurrencies for criminal transactions.
Of course, the publisher of a stable coin is the primary contact for the FATF. However, it also names other regulatory objectives. For the first time, software developers are being held responsible for ensuring that a stable coin takes into account the regulatory ones even before the launch. „The process of creating and developing an asset can probably not be automated. For the so-called stablecoins, the FATF is considering that these developers and organizations are generally considered to be financial institutions or VASPs and therefore subject to FATF standards“. As such, for example, the developers of a stablecoin DAO can be held responsible for ensuring that the „Stablecoin Arrangement“ has mechanisms to prevent money laundering and terrorist financing.
This could also apply to decentralised Stablecoins. With these there is – at least after the start – „no clearly identifiable central organ and in most cases no entity that can enforce appropriate measures. The stablecoin is only operated by software, without any management after the system is published. The FATF ascribes to these stablecoins „a significant money laundering risk“ if there is a mass application that would make it difficult to enforce the FATF standards. However, this is of little concern to the institution. For it recognises „practical and technological limitations which probably mean that such a radically decentralised arrangement will hardly achieve the ease of use, security and stability necessary for widespread application“.
Indeed, the current market situation confirms the FATF’s analysis. The Stablecoins, which are more stable in value from a short-term perspective, are currently in the process of overtaking the native cryptocurrencies. The DAI dollar is a very cleverly constructed decentralised variant. However, these dollar tokens issued by a Decentralised Autonomous Organisation (DAO) are subject to quantitative limits set by the DAO and obviously subject to technical limitations. As a result, there are currently „only“ a good 190 million of these dollars, which is negligible compared to a good 9 billion tether dollars and 1 billion USDC. Also, exchanges and traders seem to trust tether and USDC more to maintain parity with the dollar than a DAO where a bug can throw everything out of balance.
Indeed, as the recent blacklists imposed by Tether and USDC indicate, the FATF may even vigorously welcome the rise of Stablecoins. Stablecoins give cryptocurrencies the chance to reach larger masses of people – but they also adapt more closely to the needs of regulators.