Who is the Wolfsberg Group?
Wolfsberg Group digital assets guidance is reshaping how Financial Institutions assess ML/TF risk. The Wolfsberg Group (the Group) is an alliance of 13 global banks formed in 2000 to develop anti-money laundering and counter-terrorist financing guidelines. Its members collaborate on creating industry standards and best practices for Financial Institutions (FIs) to prevent financial crimes. The Group also works with international regulators to promote global compliance. The Group has recently come out with a paper spelling out FAQs on Digital Assets (the Paper).
Wolfsberg Group Digital Assets: A New Era of Finance
Digital assets have emerged as a transformative force in the financial landscape. These cryptographically secured digital representations of value or rights can be traded, exchanged, and used for various purposes, including payments and investments.
Digital assets use cryptography to secure representations of value or rights, often relying on distributed ledger technology. Users can transfer, trade, or exchange these assets for payment or investment purposes. Examples of digital assets include virtual assets, virtual currencies, non-fungible tokens (NFTs) of value, payment tokens and digital securities. Virtual assets and virtual currencies are subcategories of digital assets. Some also refer to virtual currencies as cryptocurrencies or convertible virtual currencies. In the Singapore context, MAS defines these as “Digital Payment Tokens”.
Scope of Digital Assets in the Paper
The scope of digital assets in the Paper includes virtual assets such as stablecoins, certain NFTs of value, central bank digital currencies (CBDCs), and digital securities, among others. However, the scope excludes electronic money forms like prepaid cards and other tokenised instruments, unless they fall into the categories described earlier. The Group considers CBDCs digital assets, regardless of their issuance by central banks or whether they use Distributed Ledger Technology (DLT). This is because they present growing risks related to money laundering and terrorist financing (ML/TF).
According to the Paper, NFTs that retain value over time due to collectability or tradability are also considered digital assets. However, the Paper excludes NFTs that do not hold value, such as those used solely for event access or limited virtual goods. The Group sees NFTs of value as a potential ML/TF risk, similar to other digital assets. FIs should thoroughly assess these assets before accepting them, or funds derived from their sale. Furthermore, the Paper also classifies stored-value fungible digital assets as digital assets, even where these are not DLT-based or issued by central banks.
In summary, digital assets encompass a broad range of digital representations, from virtual currencies to NFTs of value. All carry potential financial risks, particularly related to ML/TF.
Architecture of Digital Assets
Digital assets are typically built on DLT. Layer 1 (L1) protocols form the base network, where developers create native tokens. Networks can use these tokens for value storage, transactions, and incentivising network security. Layer 2 (L2) protocols, such as rollups and bridges, enhance scalability by processing transactions independently from the L1 network. This improves speed and throughput without compromising security. Tokenisation refers to creating digital representations of assets on a blockchain, which can include both physical and digital assets. L2 protocols can sometimes present distinct challenges for applying ML/TF transaction monitoring controls. This is due to the additional degree of separation from the L1 blockchain.
Smart contracts are automated protocols that execute transactions without third-party involvement. They play a significant role in facilitating digital asset transactions. These technologies contribute to the ongoing evolution and complexity of the digital asset landscape. That said, digital assets and their underlying technologies, coupled with the anonymity some platforms offer, create opportunities for ML/TF activities.
Digital Assets as a Product or Service
There is a broad range of products, services, and delivery channels involving digital assets. This includes the role of custodians (entities that safeguard digital assets or private keys on behalf of customers) and the potential risks associated with peer-to-peer transactions.
Some Types of Digital Assets
A) Stablecoins
A stablecoin is a digital asset that maintains a stable value, usually pegged to fiat currency or a basket of assets.. It can be used for payments or as a store of value.
There are other stablecoin types, which may be backed by commodities or digital assets, and sometimes use algorithms to stabilise their value1.
The Group highlights that fiat-backed stablecoins generally present lower ML/TF risks. “Other stablecoins” may carry higher risk, due to inconsistent regulations and reserve requirements.
B) Anonymity-Enhanced Cryptocurrency
An Anonymity-Enhanced Cryptocurrency (AEC), or privacy coin, ensures transactions are untraceable and cannot be linked on the blockchain, protecting users’ anonymity. This lack of transparency increases risks related to ML/TF. Developers build some AECs with privacy features, while others gain privacy through added protocols.
AECs use techniques like zero-knowledge technology, stealth addresses, ring signatures and mixers to maintain privacy.
A privacy enhancer is a protocol or software that improves user anonymity and financial privacy. Developers can implement it as native tokens, hard forks, soft forks, or extension blocks. These enhancers also apply to NFTs adding to ML/TF risks.
A mixer conceals transaction origins by pooling and redistributing digital assets across multiple wallets or chains. While similar to AECs in privacy concerns, mixers are separate services that users sometimes employ to obscure the source of crypto-funds.
Both AECs and mixers pose significant ML/TF risks due to their ability to facilitate anonymous transactions and hinder regulatory scrutiny.
C) Security Tokens
Issuers create and custody a native security token on a distributed ledger, and it meets the legal definition of security or financial instrument under local securities law.
Industry Stakeholders
As per the Paper, digital asset industry participants play an essential role in appropriate ML/TF risk management. The Group proposes 2 main categories of digital asset participants:
- Digital Asset Service Providers (DASPs): Entities that facilitate the exchange, transfer, or custody of digital assets. This includes platforms for exchanging fiat and digital currencies, custodians, and brokers. The Paper divides DASPs into centralised (CeFi) and decentralised (DeFi) categories, based on governance. A central entity manages CeFi, while DeFi operates through smart contracts and algorithms without central control.
- Digital Asset Supply Chain Operators (DASCOs): These include entities involved in creating and developing digital asset services, such as miners, non-custodial wallet providers, and developers of protocols for DASPs. DASCOs typically present lower ML/TF risks than DASPs due to their limited scope of activities.
Nonetheless, bad actors can exploit both DASPs and DASCOs for ML/TF purposes. For instance, bad actors can use DASPs to launder illicit proceeds through the exchange of cryptocurrencies. DASCOs, meanwhile, can develop tools and infrastructure that facilitate anonymous transactions.
Investors in DASPs and DASCOs play a significant role. Governance tokens in decentralised systems may equate to ownership stakes, influencing operations and protocols. The Paper emphasises the need for FIs to recognise when they establish a customer relationship with DASPs and DASCOs, particularly when providing services like liquidity or correspondent banking.
An FI establishes a customer relationship with DASPs and DASCOs when it provides access to fiat products, fiat liquidity, or traditional financial services.
Wolfsberg Group Digital Assets: Conclusion
Generally, conventional assets pose a lower ML/TF risk compared to digital assets, but the Wolfsberg Group digital assets guidance shows why aligning definitions matters for effective risk management. However, aligning definitions and understanding these classifications is essential for effective risk management, as the digital asset landscape evolves. Firms must implement robust controls and maintain compliance with global standards, based on the size and complexity of their business.. While ML/TF risks associated with digital assets remain a concern, the benefits they offer in financial inclusion, efficiency, and innovation make their integration into the modern financial system increasingly hard to ignore.
What does this mean for you?
Adherence to evolving regulatory standards is essential for preserving your business’ compliance and reputational integrity.
Our experienced Singapore team at Curia Regis can help with your queries relating to Wolfsberg Group digital assets guidance and Digital Assets more broadly. We offer complete support in compliance, specifically tailored to your business model and complexity. We’ll help you understand and fulfil your obligations to MAS, in line with global standards as these become more comprehensive.
Want to learn more? Contact us here or email us at admin@curiaregis.com or follow our LinkedIn page at for the latest regulatory updates.
- The collapse of the Luna token was caused by its link to Terra, an algorithmically-driven stablecoin. ↩︎
