FATF report on regulatory challenges from decentralised finance

The Financial Action Task Force (FATF) has published a targeted report on the regulatory challenges posed by decentralised finance (DeFi). The report highlights the rapid growth of DeFi and its increasing exploitation by illicit actors, including fraudsters, ransomware operators, professional money laundering networks and proliferation financing actors. The report found that approximately 93% of surveyed reporting jurisdictions have not yet implemented the FATF Standards in relation to qualifying DeFi arrangements and that only two jurisdictions have licensed or registered a DeFi arrangement in practice. FATF reiterates that DeFi arrangements fall within scope of the FATF Standard covering virtual assets—Recommendation 15—where a natural or legal person exercises control or sufficient influence over the arrangement.

The report emphasises that effective implementation of the FATF Standards in the DeFi context requires a functional and risk-based approach. It identifies a list of on-chain and off-chain indicators of control and sets out recommendations to help jurisdictions, as well as financial institutions, virtual asset service providers, and DeFi arrangements aimed at protecting the integrity of the financial system, while also preventing and mitigating the criminal abuse of the DeFi ecosystem. It also includes case studies of good practice. The report emphasises that jurisdictions with more significant DeFi activity should allocate more resources to understanding, supervising and developing approaches to mitigate the illicit finance risks associated with DeFi arrangements.

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