In October 2019, Mongolia was placed on the list (by the International Organization for Financial Action Task Force (FATF)) of countries having strategic deficiencies in their regimes to combat money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction. 1 year later in October 2020, it was successfully removed from the list.
In the process of delisting, number 15 of the 40 technical and professional recommendations issued by the FATF addressed the issue of "monitoring, regulating and registering virtual asset service providers, and providing a legal framework for this type of relations."1 In this context, countries are undertaken to assess the risks of money laundering, financing of terrorism and proliferation of weapons of mass destruction in connection with new technology-based products and services, more specifically virtual assets, and to establish a legal framework. Accordingly, the Parliament of Mongolia has adopted a "Law on Virtual Asset Service Providers" on December 17, 2021, and the law came into force on February 25, 2022. Upon entry into force of the law, the legal environment for the Financial Regulatory Commission of Mongolia /hereinafter referred to as the "FRC" or as referred to herein/ to register Virtual Asset Service Providers that meet the requirements under the law and the regulations issued in accordance with it, and to conduct risk-based inspections of their activities are established.
There are several cryptocurrency trading websites and one ATM in Mongolia, and the related services are neither recognized or accepted as payment services in Mongolia nor are under the supervision and regulation of any organizations such as the Bank of Mongolia and the Financial Regulatory Commission. In particular users trade bitcoins and other cryptocurrencies on an exchange basis only as per their discretion through websites. In other words, the auction is based on trading principles, market principles or the law of supply and demand, and the reactions of traders. Lately there has been an increase of raising capital from the domestic market through IEO and ICO. For instance, the number of tokens in the domestic market has increased from 4 to 41 in the last quarter of 2021 (Lemon Press, 2021) creating substantial risks in the market.
Therefore, in connection with the urgency to establish the legal framework without delay and to ensure the implementation of the law, the FRC has adopted the "Procedure for Registration of Virtual Asset Service Providers" and the "Procedure for Operation of Virtual Asset Service Providers" on April 6, 2022, and the "Procedure for Remote and On-Site Inspection on Virtual Asset Service Providers" and the "Procedure for Restriction on, Suspension and Deregistration of Virtual Asset Service Providers" on May 25, 2022. Hereupon, the pre-conditions for improvement of the legal environment of virtual asset service providers, elaborate determination of particular relations, protection of consumer rights, implementation of the FATF recommendations and enforcement of the law have been put in place. Specifically, the "Procedure for Registration of Virtual Asset Service Providers" regulates the registration and refusal to register as a virtual asset service provider, and the "Procedure for Operation of Virtual Asset Service Providers" regulates the relations with respect to determination of the requirements for proper governance, operations, equity capital, and reporting requirements (FRC, 2022).
From June 25, 2022 or 4 months after coming into effect of the Law on Virtual Asset Service Providers, the Financial Regulatory Commission has started registering virtual asset service providers.On the other hand, the exchanges that started operations before the implementation of the law, must be registered by September 25, 2022. In connection with the start of registration of virtual asset service providers by the FRC, regulations under the above procedures are outlined in this article.
Virtual asset services:
- The following activities are regulated as virtual asset service which are related to virtual assets conducted on behalf of individuals, legal entities and parties to agreements upon their subscription or conducted for them:
- Exchange between virtual assets and fiat currencies;
- Exchange between one or more other forms of convertible virtual assets;
- Transfer of virtual assets (to transfer, on behalf of others, virtual assets from one virtual asset address or account to another)
- Safekeeping and/or administration of virtual assets or their related instruments; and
- Participation in and provision of financial services related to public offering and/or sale of a virtual asset.
For the virtual asset services specified in paragraphs (a) and (b), the Mongolbank (the Central bank of Mongolia), while for the services specified in paragraphs (c), (d), and (e), the FRC shall supervise, regulate and ensure the fulfillment of obligations of the service providers. Registration fee is tentatively set between MNT 40,000 (app USD 14) and MNT 80,000 (app USD 28).
Virtual asset service providers:
- For-profit legal entities registered in Mongolia to provide one or more of the services specified above.
Requirements for virtual asset service providers:
- The activities of the service provider shall be the above-mentioned virtual asset services.
- The service provider shall use commonly used technologies worldwide that are accepted by Mongolbank and the FRC.
- Information on the service provider and other persons related to its activities shall be definite.
- The service provider shall have structure, organization and specialized workforce to carry out its activity(s).
- The service provider shall have internal control system and data storage system.
- The service provider shall have a structure and automatic control system to implement the requirements specified in the Law on Combating Money Laundering and Terrorism Financing and the Law on Combating Proliferation of Weapons of Mass Destruction and Terrorism.
- Source of equity of the service provider shall be legitimate.
- Other requirements set by laws and the Mongolbank or the FRC.
1. "The FATF Recommendations" 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.