Château de la Muette, Paris, home of both the OECD and the FATF
Château de la Muette, Paris, home of both the OECD and the FATF. Patrick Janicek/Flickr

As per recent actions, the Financial Action Task Force (FATF) is trying to prepare financial institutions for the upcoming international expansion of digital identification systems.

Last Thursday, FATF presented their 77 page draft guidance on the topic of digital identity, which is aimed at regulated entities, governments and additional stakeholders who want to act in implementing counter financing terrorism (CFT) and anti-money laundering (AML) procedures.

FATF, which is a global organization in-between governments, focuses on issues that will become more and more important e.g. security and transparency of digital financial transactions.

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FATF lists, on their website, various questions as part of their “areas of focus” and asks for feedback from private stakeholders until November 29.

Some of the included areas are:

  • Support of financial admittance
  • Transaction monitoring help
  • What risks may digital ID bring to AML/CFT application
  • The effect  on enforcing FATF’s record-keeping requirements

The published guidance especially includes distributed ledger technology (DLT) which can help in the advancement of digital ID networks.

As part of the guidance, FATF requests from regulators to “develop clear guidelines or regulations allowing the appropriate, risk-based use of reliable, independent digital ID systems by entities regulated for AML/CFT purposes”.

At the same time FATF recommends that cryptocurrency exchanges and other regulated institutions or virtual asset service providers (VASPs) should “take an informed risk-based approach to relying on digital ID systems for Customer Due Diligence”.

Other digital ID-related issues listed in the guidance are their independence and dependability, and their possible usage towards achieving customer due diligence.

We should consider this draft guidance as another step in FATF’s strategy against terrorist finance risks and money laundering. Since the popularity of stablecoins grows fast in many international systems, these risks become bigger and bigger.

Nevertheless, the significance of digital identity in payment systems is underlined heavily as it will be used to recognize stakeholders in transactions of stablecoins.

This is not the first blockchain-related push from FATF. This year they also posted their guidance on VASPs and crypto exchanges, where they encourage governments to enforce tough KYC protocols for the transfer of digital assets.

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