Going somewhere with those crypto assets?

It’s time to get up to speed with FATF’s ‘travel rule’

Given the past two years, you might assume ‘travel rules’ are COVID rather than crypto related.  But the latest updates to the existing Financial Action Task Force (FATF) regulations tell a different story. Here’s what you need to know.

What is the travel rule?

The so-called Travel Rule is an update to the existing FATF Recommendation 16, which concerns cross-border and domestic wire transfers.

  • Under Recommendation 16’s Travel Rule, the originators and beneficiaries of all transfers of digital funds must exchange identifying information.
  • The rule will apply to all Virtual Asset Service Providers, (VASPs) financial institutions and obliged entities.
  • And in addition, the originators and beneficiaries involved in a transfer must be able to guarantee the accuracy of the information they send to the other.

The Travel Rule requires VASPS to obtain, hold, and transmit required originator and beneficiary information to identify and report suspicious transactions, monitor the availability of information, take freezing actions, and prohibit transactions with designated persons and entities.

Where does it apply?

The rule applies in any and every:

  • exchange between virtual assets and fiat currencies
  • exchange between one or more forms of virtual assets
  • transfer of virtual assets
  • safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets
  • participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

What is required?

This depends on who you are.  For example:

Originating VASP (Obtain, Hold and Submit)

  • Originator name
  • Physical address
  • National identity number, customer identification number or other unique identity number
  • Date of birth and place of birth

Beneficiaries VASP (Obtain, Hold)

  • Beneficiary name
  • Account number or virtual wallet number (where this is necessary to process the transaction)

Key challenges

As ever, the devil is in the detail – and in the interpretation and application of that detail.  The key challenges firms face include:

  • different interpretations of the FATF recommendations by national regulators (example: FATF guidance threshold $1,000 versus FinCen $3,000)
  • regulation being implemented globally in a staggered fashion, creating challenges for cross-border transactions, as not all countries may have issued regulation
  • the risk of regulatory arbitrage: if the regulation is too restrictive, then trading may be redirected to another jurisdiction
  • striking the right balance between the FATF AML guidance and personal data protection/privacy concerns
  • a lack of an in-built technical architecture to collect and transmit the required KYC information internally, including the challenge of reliably being able to identify whether a destination crypto-asset address belongs to another VASP and the real time secure transmission of data

All of this means it it is highly unlikely that we see a ‘one-size fits all’ approach but rather multiple solutions, where inter-operability will be vital to ensure coverage of the VASP community.

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Meet the expert

I specialise in helping FinTech and Virtual Asset Service Providers execute and assure financial crime compliance objectives