IOTA Foundation's Response to FATF’s AML/CFT Standards
TL;DR:
The IOTA Foundation supports the Financial Action Task Force’s proposed AML/CFT revisions, advocating for proportionate risk-based regulations, reduced over-compliance, and simplified compliance for startups. We highlight digital identity’s role in secure transactions and propose industry-driven solutions like tokenized KYC for DeFi to balance compliance and privacy while fostering financial inclusion.
The IOTA Foundation recently provided feedback on the Financial Action Task Force’s (FATF) proposed revisions to anti-money laundering (AML) and combating the financing of terrorism (CFT) standards. As a key player in digital innovation and compliance, we support these updates, which promote a more balanced approach to risk management while fostering financial inclusion.
Supporting Proportionate Risk-Based Regulation
One of the small yet significant proposed changes is replacing the term “commensurate” with “proportionate” when discussing risk management measures. We support this shift, as it enhances clarity in regulatory expectations, aligns with financial inclusion efforts, and ensures that risk-based approaches are better suited for emerging technologies, such as virtual asset service providers (VASPs).
Addressing Overcompliance and Practical Risk Mitigation
FATF’s proposed updates on the supervisory review of risk mitigation measures are a crucial step in reducing over-compliance. This change allows financial institutions and Designated non-financial Businesses and Professions (DNFBPs) to adopt risk-mitigation strategies more effectively, ensuring that compliance measures align with actual risk levels. For example, small-scale financial activities could undergo simplified due diligence. This practical approach can help create a more inclusive financial ecosystem without compromising regulatory integrity.
Encouraging Simplified Compliance Measures
We fully support FATF’s push for simplified compliance measures in lower-risk scenarios. By reducing barriers to entry, these measures enable startups to develop new business models without unnecessary regulatory hurdles, ultimately fostering growth and competition in the financial sector.
Identity in Non-Face-to-Face Interactions
As financial services continue their digital transformation, it’s essential to recognize that non-face-to-face interactions are not inherently high-risk. The advancement of digital identity solutions has significantly enhanced security in remote transactions. FATF’s proposal to acknowledge this reality is a positive step forward, as it allows for greater accessibility to financial services while maintaining robust AML/CFT safeguards.
Balancing Regulatory Compliance and Privacy in DeFi
To address AML risks in transactions involving self-hosted wallets and decentralized finance, FATF should explore industry-specific solutions that balance compliance with user privacy. One potential approach is the use of tokenized Know Your Customer (KYC) proofs. A notable example is the IOTA Foundation’s KYC solution developed within the European Blockchain Regulatory Sandbox. This framework provides a scalable, secure, and privacy-preserving method for regulatory compliance in DeFi transactions, ensuring user protection while enabling responsible industry growth.
The IOTA Foundation remains committed to contributing to regulatory discussions that shape a secure, inclusive, and innovative financial ecosystem. For further engagement, we invite FATF and industry stakeholders to connect with us at [email protected] to explore these topics in greater detail.
