On-shore VASP in Micronesia

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

Likely Implicit Application of Common Law Principles: Due to historical ties and influence, the FSM's legal system often draws from U.S. common law principles. Therefore, if a court or regulator in the FSM were to assess whether a crypto token constitutes a security, it would most likely implicitly apply a functional test very similar to the U.S. Howey Test.

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.

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.

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.

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.

Identification and Verification:

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.

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.

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.

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.

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.