Crypto-funded debit card in Micronesia

Anti-Money Laundering and Terrorist Financing Act 2017 (Title 27 of the FSM Code): This act establishes the general framework for combating money laundering and terrorist financing, including obligations for financial institutions and designated non-financial businesses and professions (DNFBPs). While it may not explicitly mention "virtual assets" or "VASPs" as distinct regulated entities, the FSM, as an APG member, is expected to apply these requirements to VASPs in line with FATF Recommendation 15 (now Recommendation 16 in the context of the FATF's June 2019 Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers).

Legal Basis: The FSM enacted the Anti-Money Laundering and Counter-Terrorist Financing Act 2011 (as amended 2020). The 2020 amendments were specifically introduced to address FATF Recommendations on VAs and VASPs, including the Travel Rule obligations. This amendment requires VASPs to register, be licensed, and comply with AML/CFT obligations.

Exchange between virtual assets and fiat currencies.

Identification and Verification:

For natural persons: Obtaining and verifying identity using reliable, independent source documents, data, or information (e.g., government-issued ID, passport, driver's license).

Evidence fact fm.aml.for-legal-persons-obtaining-and not found (may have been renamed).

Beneficial Ownership: Identifying and verifying the identity of the beneficial owner(s) of the customer, and taking reasonable measures to understand the ownership and control structure of legal persons and arrangements.

Purpose and Intended Nature of Business Relationship: Understanding the purpose and intended nature of the business relationship or transaction.

Ongoing Monitoring: Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions are consistent with the VASP's knowledge of the customer, their business, and risk profile.

Risk-Based Approach: Applying a risk-based approach to CDD, meaning enhanced CDD (EDD) measures must be applied to higher-risk customers (e.g., Politically Exposed Persons - PEPs, customers from high-risk jurisdictions, complex or unusually large transactions, or where the customer's identity verification poses higher risk) and simplified CDD (SCDD) may be applied to lower-risk customers.

Reporting any transaction (or attempted transaction) that gives rise to a reasonable suspicion that it may be related to money laundering, terrorist financing, or other criminal activity.

The obligation to report exists regardless of the amount or type of assets involved (fiat or virtual).

No Tipping-Off: Prohibitions against informing the customer or any third party that an STR has been filed or that an investigation is being conducted.

Customer Identification Records: All records obtained through CDD measures (e.g., copies of identification documents, verification data).

Transaction Records: Records of all transactions, including amounts, types of virtual assets, sending and receiving addresses/accounts, timestamps, and any other relevant transaction data.

Business Correspondence: All relevant business correspondence, including records of analysis performed.

Financial Intelligence Unit (FIU) of the Federated States of Micronesia (FSM FIU)

Role: The FSM FIU is the central national agency responsible for receiving, analyzing, and disseminating suspicious transaction reports and other financial intelligence. It provides guidance and oversight regarding AML/CFT compliance.

For cross-border transfers: The Travel Rule information must be collected and transmitted for transactions equivalent to USD 1,000 or more.

For domestic transfers: The Travel Rule information must be collected and transmitted for transactions equivalent to USD 3,000 or more.

Source: APG Enhanced Follow-Up Report (July 2022), page 23.

Lack of a Dedicated Regulatory Framework: The FSM currently lacks a comprehensive legal and regulatory framework specifically addressing virtual assets (VAs) and virtual asset service providers (VASPs).

No Registered or Licensed VASPs: As of the latest assessments, there are no known or registered VASPs operating within the FSM that would fall under a regulatory scope (if one existed).

Limited Capacity and Awareness: International assessments indicate that the FSM's financial authorities are still developing their understanding and capacity to monitor and regulate the virtual asset sector.

No specific legislation: The FSM had not yet enacted specific legislation or regulations to address virtual assets or virtual asset service providers (VASPs).

Lack of understanding and capacity: The report highlighted a lack of understanding by supervisory authorities regarding the risks associated with virtual assets and a need to develop supervisory capacity in this area.

Recommendations: The APG recommended that FSM develop a comprehensive legal and regulatory framework for VAs and VASPs, including registration, licensing, and AML/CFT obligations, and ensure appropriate supervision and enforcement capabilities.

No specific classification: Stablecoins are not explicitly classified as e-money, payment tokens, or securities under any specific FSM legislation.

Potential for classification by analogy:

Existing financial institution licensing: Any entity wishing to operate in a manner that resembles banking, money transmission, or other regulated financial services (e.g., taking deposits, transmitting funds on behalf of others) would be subject to the existing licensing requirements under the FSM Banking Act (Title 30 of the FSM National Code). Obtaining a banking license is a complex and capital-intensive process designed for traditional financial institutions.

FSM National Code, Title 30: Banking. This title sets out the regulatory framework for banks and other financial institutions.

General principles: If an entity were to issue a stablecoin that in any way resembled a deposit-taking activity, it would likely fall under the FSM Banking Act and be subject to the reserve requirements for licensed financial institutions. However, this would entail meeting the full requirements of a traditional bank.

No specific stablecoin issuer license: There is no distinct licensing regime for stablecoin issuers in the FSM.

No specific reserve requirements: Given the absence of specific stablecoin regulation, there are no statutory reserve requirements for stablecoin issuers in the FSM.

Undefined/Indirect: The FSM currently lacks a comprehensive and explicit regulatory framework specifically for cryptocurrencies and virtual assets. The approach can be characterized as largely undefined or operating in a "grey area."

Partial/Indirect Application: While there's no dedicated crypto law, existing anti-money laundering (AML) and combating the financing of terrorism (CFT) legislation and regulatory bodies would likely apply to virtual asset activities, especially for entities operating within the FSM or facilitating transactions involving FSM residents. This aligns with global standards set by the Financial Action Task Force (FATF), which requires countries to regulate Virtual Asset Service Providers (VASPs).

No Publicly Available Examples: There are no publicly available enforcement examples or legal cases specifically related to cryptocurrency securities violations in the Federated States of Micronesia. This lack of enforcement data underscores the absence of a clear regulatory framework in this area.

No Specific Crypto Requirements: There are no specific registration or exemption requirements published by the FSM for token issuers.

Application of General Securities Law (if applicable): If a token were classified as a security under existing FSM law, then the issuer would theoretically be subject to any existing general securities registration and disclosure requirements. Given the nascent nature of crypto regulation in the FSM, it is highly improbable that existing securities laws would be practically adaptable to digital asset offerings without explicit guidance or amendments. Issuers would likely find themselves in a regulatory vacuum or an unworkable compliance scenario.

Application of General Securities Trading Law (if applicable): If a token were deemed a security, secondary trading would technically be subject to general rules for securities exchanges, broker-dealers, and market conduct. However, these rules are not designed for decentralized or global crypto trading platforms, making practical application extremely difficult without tailored legislation.

The classification of cryptocurrency tokens as securities.