The Financial Action Task Force (“FATF”) has recently issued a Guidance on Digital Identity (the “Guidance”) intended to aid governments, financial institutions, virtual asset service providers and other regulated entities to determine whether a digital identity is appropriate for use in conducting customer due diligence (“CDD”).The Guidance is technology-neutral, and has benefited from a public consultation with the private sector.
The FATF has found that the number of digital transactions is growing by almost 13% a year and by 2022, an estimated 60% of the global Gross Domestic Product will be digitised. As there are currently no comprehensive, internationally-agreed standards for developing digital identity (“ID“), the Guidance aims to examine a number of digital ID assurance frameworks and standards to draw links between the world of digital ID and the developing policies to combat money laundering and terrorist financing.
The term digital ID refers to the use of technology in asserting and proving identity. There are a number of digital ID technologies and systems such as electronic databases used to manage identity evidence and biometrics which are used to identify or authenticate individuals.
The Guidance highlights a number of ways in which the use of digital ID systems for CDD can support financial inclusion. Indeed, the Guidance provides that non-face-to-face customer-identification and transactions that rely on reliable, independent digital ID systems with appropriate risk mitigation measures in place, may present a standard level of risk, and may even be lower-risk than standard face-to-face customer-identification. The FATF recommends a risk-based approach to applying digital ID for customer identification and verification.
In terms of anti-money laundering and combating the financing of terrorism, the FATF holds that there are two main things to consider:
a. whether the digital ID system assurance levels are satisfactory (assessed upon an examination of the digital ID system’s underlying technology, architecture, and governance); and
b. whether the digital ID system is appropriately reliable and independent considering the potential money laundering, terrorist financing, and other illicit financing risks.
Finally, the FATF recommends that governments develop a multi-stakeholder approach in order to realise the opportunities and risks relevant to digital ID and develop appropriate regulations and guidance.
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