The Organisation for Economic Co-Operation and Development (OECD)
The OECD is still at the investigation stage and is trying to understand the space and its potential through reports and workshops. At its most recent forum in Paris it announced itself as the global reference point for public policy on blockchain.
The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental economic organisation which promotes policies that will improve the economic and social well-being of people around the world. It is currently exploring blockchain’s potential benefits in increasing transparency, traceability, and the efficiency of transactions. Key to the OECD’s objectives is ensuring the technology is based on sound policies and regulatory frameworks so as to unleash this potential while addressing the risks of misuse.
OECD Blockchain Policy Forums
The OECD primarily functions as an international forum for discussing harmonised international responses to current challenges. The OECD Blockchain Policy Forum (4-5 September 2018) was the first major international conference to take stock of blockchain’s impacts across the full range of government activities and public priorities. Participants focused on:
- Blockchain’s potential global economic impact;
- Implications on privacy and cybersecurity;
- Using blockchain to enhance inclusiveness;
- Using blockchain to promote green growth and sustainability;
- Using blockchain to strengthen governance and enforcement practices.
Delegates including senior decision-makers from the public and private sectors, experts, academics and other stakeholders, built on the findings from this conference and reconvened at the Second OECD Blockchain Policy Forum on 12-13 September 2019. This was an opportunity to discuss the latest developments in the blockchain space and also:
- address the benefits and risks of blockchain across a broad range of policy areas;
- discuss the emerging policy and regulatory environment, and identify best practices;
- investigate uses in specific policy areas, highlighting the work that the OECD and other international organisations are doing.
Throughout 2018-19, in order to promote continuous discussion, the OECD has held a number of workshops on the topic of blockchain. In May 2018, it held a session on “Digital Financial Assets: Opportunities and Challenges”, which brought together experts from academia, industry, central banks and financial regulators to focus on recent developments and main policy challenges related to the emergence of digital financial assets, including:
- monetary policy and financial systems;
- company business and funding models;
In June 2018, the OECD heard from a range of experts on the impact the use of blockchain may have in disrupting markets and institutions and on competition policy. In essence, where the internet enabled the publishing and digital transfer of information, blockchain technology authenticates the ownership of assets, makes them traceable, and facilitates their digital transfer. It therefore allows direct trading of assets by providing trust in the transaction and reducing uncertainty (through its use of trustworthy self-executing code). Viewed from a competition policy perspective this might create both opportunities to enhance competition and efficiency as well as risks of anticompetitive conduct.
The OECD has also published a number of reports on the various uses of blockchain. In June 2018, it issued the guide, Blockchains Unchained: Blockchain Technology and its use in the Public Sector. The guide aimed to equip public servants with the necessary knowledge to understand what the Blockchain architecture is, the implications it could have on government services, and the opportunities and challenges governments may face as a result.
In January 2019, the OECD published a report on Initial Coin Offerings (ICOs) for SME Financing, analysing the emergence and potential of ICOs as a financing mechanism for start-ups and SMEs, examining the benefits and challenges of this mechanism for small businesses and investors, and discussing the policy implications of ICO activity for the inclusive financing of SMEs and the real economy. The report concludes with advice for policymakers on regulatory considerations. It argues that regulators have a role in creating the conditions necessary to facilitate the development of ICOs in a safe and fair manner, allowing for the benefits of ICO structures to be enjoyed in a viable and sustainable way by SMEs, while protecting SMEs and investors from certain risks. Advice includes:
- Providing more regulatory and supervisory framework applied to ICOs
- A balanced and proportionate approach to the development or application of regulatory and supervisory requirements which do not deprive the ICO mechanism of its speed and cost benefits
- Cooperation at the international level for a coordinated global approach that will prevent regulatory arbitrage and allow ICOs to deliver their potential for the financing of blockchain-based SMEs, while adequately protecting investors.
A year later, in January 2020, the OECD published a report on the tokenisation of assets and potential implications for financial markets. The report:
- examines the benefits of asset tokenisation and the challenges to its wider adoption;
- analyses the potential disruptive effect on trading, liquidity, pricing, clearing and settlement;
- highlights the increased importance of a trusted and credible central authority in a tokenised environment (such as a custodian);
- sheds light to the possible necessity for a tokenised form of central bank digital currency or stablecoin for the payment leg of security settlement on DLT-based trading venues; and
- discusses the policy implications of tokenisation for financial markets.
OECD Blockchain Expert Policy Advisory Board (BEPAB)
In January 2020, the OECD formed an expert group to provide advice on its work on blockchain and other distributed ledger technologies. This will include the development of high-level blockchain policy principles. The BEPAB’s initial focus will be on scoping the issues relevant to an international framework of blockchain policy principles. The expert group held its first meeting in December 2019.
The formation of group reflects the OECD’s expanding programme of work exploring the policy implications of this disruptive technology, working to help governments and other stakeholders to reap its benefits, while mitigating the risks. Forty-five OECD and non-OECD governments are represented on the BEPAB, alongside representatives from the European Commission, the private sector, industry bodies, and civil society groups.
The Financial Action Task Force (FATF)
The Financial Action Task Force (FATF) is an inter-governmental policy making body tasked with setting standards and promoting the effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
As far as blockchain technology is concerned, the FATF is primarily concerned with the risks virtual currencies may pose in financing illicit activities. Having actively monitored this area for a number of years, it has issued a number of recommendations and guidance on a risk-based approach, calling for all countries to take coordinated action to prevent the use of virtual assets for crime and terrorism.
October 2018 Plenary meeting – Amendment to FATF Recommendations
Although the FATF Recommendations set out comprehensive requirements for combating money laundering and terrorist financing, governments and the private sector have asked for greater clarity about exactly which activities the FATF standards apply to in the context of virtual currencies. Following the plenary meeting in Paris (October 2018), the FATF adopted changes to its Recommendations and Glossary that clarify how the Recommendations apply in the case of financial activities involving virtual assets. These changes, (in Recommendation 15):
- add to the Glossary new definitions of “virtual assets” and “virtual asset service providers” (VASPs) – such as exchanges, certain types of wallet providers, and providers of financial services for Initial Coin Offerings (ICOs); and
- make clear that jurisdictions should ensure that virtual asset service providers are subject to anti-money laundering and combating the financing of terrorism (AML/CFT) regulations, for example conducting customer due diligence including ongoing monitoring, record-keeping, and reporting of suspicious transactions. They should be licensed or registered and subject to monitoring to ensure compliance.
FATF uses the term “virtual asset” to refer to digital representations of value that can be digitally traded or transferred and can be used for payment or investment purposes, including digital representations of value that function as a medium of exchange, a unit of account, and/or a store of value. FATF emphasises that virtual assets are distinct from fiat currency (a.k.a. “real money,” or “national currency”), which is the money of a country that is designated as its legal tender.
June 2019 Plenary meeting – Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers
Following the October amendments, the FATF, in February 2019, further elaborated on how these requirements should be applied in relation to virtual assets. Its Interpretive Note to Recommendation 15, clarifies how the FATF standards apply to activities or operations involving virtual assets. It was formally adopted at the June 2019 Plenary meeting as part of the updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. The guidance addresses:
- How virtual assets activities and virtual asset service providers fall within the scope of the FATF Recommendations (Section II);
- How countries and competent authorities should apply the FATF Recommendations in the context of virtual assets or virtual asset service providers (Section III);
- How the FATF Recommendations apply to virtual asset service providers, and other entities (including banks, securities broker-dealers) that engage in or provide virtual asset covered activities.
The Guidance also includes examples of national approaches to regulating and supervising virtual asset activities and virtual asset service providers to prevent their misuse for money laundering and terrorist financing.
The FATF has established a Contact Group to engage industry and monitor industry-led efforts to enhance compliance with the FATF Standards and better safeguard the international financial system from abuse.
It is also monitoring implementation of the new requirements by countries and service providers and will conduct a 12-month review in June 2020.
Effects of the FATF Guidance
In order to promote a global level playing field and mitigate criminals or terrorists’ exploitation of jurisdictions with weak or no supervision, the new June 2019 Guidance apply in the following ways:
Countries need to:
- Understand the money laundering and terrorist financing risks the sector faces
- Licence or register virtual asset service providers
- Supervise the sector, in the same way it supervises other financial institutions
Virtual Asset Service Providers (VASPs) need to:
- Implement the same preventive measures as financial institutions, including customer due diligence, record keeping and reporting of suspicious transactions
- Obtain, hold and security transmit originator and beneficiary information when making transfers (‘Travel Rule’)
It is this last standard, also known as the ‘Travel Rule’, that is proving most challenging to market players. As the FATF has stated, ‘It is up to the sector itself to develop the technology to meet the FATF’s requirements, particularly when it comes to securely collecting and transmitting originator and beneficiary information.’ There are currently heated debates across the globe on the best approach and technological solutions to successfully implement this requirement.
FATF Supervisors’ Forum on supervising virtual assets
In January 2020, the FATF hosted supervisors from around the world in Paris to discuss how to supervise and regulate virtual assets and virtual asset service providers. This meeting was the first opportunity for supervisors to discuss how to implement these new measures since the FATF finalised them in June 2019. The meeting identified a number of areas that require further actions. These will be taken forward at the FATF Plenary and at further meetings of the Supervisors’ Forum, to be held in May 2020.
Participants in this Forum shared their knowledge and experience in virtual assets and VASP supervision. The Forum discussed three main areas:
- The lessons learnt so far from countries that have already established VASP supervisory regimes and are already supervising VASPs. Supervisors provided examples of positive actions that VASPs have taken to comply with their AML/CFT obligations and also discussed common challenges for the VASP sector.
- Common issues when drafting VASP laws and regulations. With the finalisation of the FATF Standards on VASPs in June 2019, all countries must ensure they have an AML/CFT regime for VASPs. Representatives shared their approach to developing an AML/CFT regime for VASPs in their jurisdictions and outlined how they were implementing the FATF’s rules.
- The tools, skills, procedures and technology that supervisors need to effectively supervise VASPs. Participants explored what information sources may be useful, what software and other products can assist, and also what kinds of human resources supervisors may need. The importance of international cooperation was also highlighted, as virtual assets are inherently global products.
This page was last updated on 10 February 2020 to reflect recent developments.