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- The Travel Rule (which comes into effect in the UK from 1 September 2023) requires UK-based cryptocurrency businesses to collect, verify and share certain transaction information regarding cryptocurrency transfers. The rule will help combat money laundering and other financial crimes by requiring cryptocurrency businesses to detect suspicious transactions and implement effective screening.
- UK-based cryptocurrency businesses will need to comply with the travel rules before transfers between cryptocurrency businesses will be allowed,A trusted source” “.
- The anonymity of crypto assets is the fundamental appeal of the technology. In many cases, this only requires the beneficiary’s wallet address and the originator’s private cryptographic key, which could make the Travel Rule an inherently difficult requirement for crypto assets businesses to meet.
background
Travel Rule Requirements for Crypto Assets on September 1, 20231 Now in force in the UK, the Travel Rule requires cryptocurrency businesses (CBs) to collect, verify and share information relating to certain cryptocurrency transfers.
The FCA says the Travel Rule is designed to “increase transparency in crypto asset transfers” and help crypto asset businesses “detect suspicious transactions and carry out effective sanctions screening.” The Financial Action Task Force (FATF) has called on other jurisdictions to quickly implement the Travel Rule, but not all jurisdictions have acted quickly. As a result, the application of the Travel Rule will vary from jurisdiction to jurisdiction.
In this article, we explain (1) what the cryptocurrency travel rule is, (2) what steps need to be taken to comply, and (3) the challenges CBs face in effectively implementing the Travel Rule.
What are the Travel Rules?
The Travel Rule's history dates back to wire transfers as an anti-money laundering tool, with the goal of ensuring that authorities have enough information to investigate the legitimacy of a transfer and the identity of the recipient.
The CB travel rules, implemented in accordance with the updated FAFT recommendations, are set out in new Part 7A of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (“MLR().
Who do the travel rules apply to?
The Travel Rule is stated in the MLR as “Cryptocurrency exchange or custodian wallet provider.”Therefore, US, Asian or other non-UK CBs do not fall within the scope of these requirements.
A cryptoasset exchange is broadly defined to include any entity that engages in or arranges for the exchange of cryptoassets. A custodian wallet provider is an entity that offers the service of storing cryptoassets or cryptokeys on behalf of customers. Custodian wallet providers do not include non-custodian wallets (wallets in which the custodian is not involved in the transfer of assets because the asset owners interact directly with the payment system).
What steps are required for compliance?
Similar to the wire transfer travel rule, the information required from parties to a cryptocurrency transfer will depend on the value of the transfer and whether all CBs involved in the transfer have operations in the U.K. UK-based CBs will need to collect information when a cryptocurrency-to-cryptocurrency business transfer takes place, where relevant.
- Under 1,000 euros Very little The threshold is just “basic information” about the name and account numbers of the sender (i.e., sender) and recipient (i.e., receiver).
- upon Very little Thresholds, “basic details” of sender and beneficiary, and the following information:
- If the caller is a legal entity, the customer identification number or the caller's registered office address.
- If the sender is an individual,2 Customer identification number, address, birth certificate number/passport number/national identity card number, or date and place of birth.
- upon Very little Basic information applicable to UK-based CBs only, but additional information must be provided (within 3 working days) to Beneficial CBs upon request. Where multiple related transactions from one originator in aggregate exceed the threshold: Very little The threshold is considered exceeded.
What challenges will crypto businesses face in complying with the Travel Rule?
Challenges that cryptocurrency businesses may face in complying with the Travel Rule include:
- The complexities arising from preventing crypto-to-crypto business transfers prior to ensuring full compliance with the Travel Rule, and that information must be provided by the originator’s CB as a “A trusted source“It has nothing to do with the person whose identity is being verified.”
- Compliance costs for CBs who need to create internal systems that can transmit and collect data securely and quickly to facilitate customer transactions.
- Volatility in the cryptocurrency market (e.g. Bitcoin price fluctuations) can complicate whether a transaction meets the requirements. Very little The threshold is €1,000.HK Treasury's consultation document states that CBs should use “reasonable and justifiable” methods to calculate the value of transactions, but the absence of legislation on volume calculations may indicate a willingness to accept a pragmatic approach to this assessment.
- Although the UK has adopted the Travel Rule and the FATF has strongly encouraged other countries to follow suit, the disparity between jurisdictions that have enacted the Travel Rule and those that have not may create practical issues for CBs, who will need to make significant internal policy decisions about how to treat transactions involving jurisdictions that have not yet enacted the Travel Rule.
What guidance has the FCA provided on complying with the Travel Rules?
The FCA has issued a set of expectations for CBs subject to the Travel Rule, including:
- Please take all reasonable steps and exercise due caution to comply with travel regulations.
- Businesses are responsible for achieving compliance with the Travel Rule, even when using third-party suppliers.
- If you are sending or receiving crypto assets to a business in the UK or a jurisdiction that has implemented the Travel Rule, please comply fully with the Travel Rule.
- We will regularly review the implementation of the Travel Rule in other jurisdictions and adjust our business processes as necessary.
Sending crypto to jurisdictions without travel rules
- Take all reasonable steps to ensure that the company receives the required information.
- If a firm is unable to receive the required information, UK cryptocurrency businesses will still need to collect and verify information in accordance with the requirements of the MLR and preserve that information before making any transfer of cryptocurrency.
Receiving cryptocurrency transfers from jurisdictions without travel rules
- Where information about cryptocurrency transfers is missing or incomplete, UK cryptocurrency businesses will need to consider the countries in which they operate and the status of travel rules in those countries.
- UK cryptocurrency businesses will need to consider these factors when making a risk-based assessment of whether to offer cryptocurrency to beneficiaries.
If you have any further questions or are a CB looking for guidance on the Travel Rules, please get in touch. Musonda Kapotwe or Kayle Wyn Evans.
1 “Crypto Asset” means a cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically using a form of distributed ledger technology.
2 There is no requirement to collect information about transactions with “unhosted wallets” (individuals who host their own cryptocurrency wallets for sending and receiving payments). Instead, the Travel Rule requires UK-based CBs to assess the risk level of a transaction (with respect to money laundering, terrorist financing, and proliferation financing) based on factors such as (1) the purpose, nature, and duration of the relationship with the customer, (2) the purpose and value of the payment, and (3) the frequency of the customer's transactions.
