G20 & Crypto Assets: How to Effectively Balance Innovation and Regulation

Contributed by Carolina Lessa, Director of Government Affairs at RELX Group

Responsible financial innovation.

That is the clear message coming out of the 2018 G20 Summit. How can governments find the balance between driving financial innovation and their commitment to preventing and fighting financial crime?

This year’s G20 Summit might have been, to some extent, overshadowed by geopolitics, but two issues stood out:

• An urgent need for a global, risk-based regulatory framework for virtual assets; and,
• The rising concern on the risks posed by money laundering and terrorism financing.

In Argentina, the world leaders reiterated the possible benefits of the use of technology as a currency and its potential to transform sectors by improving efficiency and costs of financial services, for example. But there are also emerging risks with the potential anonymity and global reach allowed by the use of virtual currencies. While these risks can no longer be overlooked by regulators, the delicate task is how to regulate without killing innovation.

Meaning Behind “Effective Implementation”

The G20 represents 90 percent of global economic output, 66 percent of the world population, 75 percent of international trade, and 80 percent of global investments[i]. There is no doubt that these countries are role models, but what is unique and makes this forum so impactful are the mechanisms to monitor the progress on their commitments.

This year, for the first time, the G20 final declaration included the commitment to promote regulation on virtual assets in line with the standards of the global financial watchdog, Financial Action Task Force (FATF). Complying with FATF guidance is meaningful, because as a global standard setter, FATF has visibility into different regulatory approaches and has input from industry to better understand risks and mitigations.

Above that, FATF’s “mutual assessment reports”[ii] are essential for accountability, which can potentially blacklist non-cooperative countries. Banks use a country’s FATF compliance level as a risk indicator when rating clients and transactions. Through these assessments, FATF’s 40 Recommendations are effective mechanisms for promoting policy implementation.

What is next?

2019 is an important year. Japan, home to the largest crypto currency sector in the world, will be the host of the G20 Summit, while FATF will not only be celebrating their 30^th birthday, but will also update their Guidance for a Risk-Based Approach for Virtual Currencies, as well as extending it to virtual assets.

We closely monitor how regulators will help differentiate virtual assets for legitimate use and financial crime, and how providers of virtual assets services will comply with regulation and how traditional financial actors will adapt their AML/CFT frameworks for virtual assets activities.

For the financial services industry, we believe that effective compliance tools coupled with training will be essential. From a governments standpoint, the G20 will continue to be an important instrument. However, what we see year after year are  world leaders prioritizing the fight against financial crime, but then falling short on implementation.

We expect to see more from the G20 nations. That’s why we call for these 20 countries to effectively implement the recommendations made in Buenos Aires this year.

Leading by example goes beyond simply committing to principles. The world will be watching for the effective implementation of these standards.

[i]2018 G20 Argentina – https://www.g20.org/en

[ii]“The FATF conducts peer reviews of each member on an ongoing basis to assess levels of implementation of the FATF Recommendations, providing an in-depth description and analysis of each country’s system for preventing criminal abuse of the financial system.” – http://www.fatf-gafi.org/publications/mutualevaluations/?hf=10&b=0&s=desc(fatf_releasedate)