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Starting on September 1, 2023, the United Kingdom is introducing the ‘Crypto Travel Rule,’ which mandates cryptocurrency businesses to collect, verify, and share specific information about cryptocurrency transfers. This rule is a response to global efforts against money laundering and terrorist financing, as promoted by the Financial Action Task Force (FATF).
FATF, recognized as the global standard for anti-money laundering and counter-terrorist financing, recommended this rule (FATF Recommendation #16) for Virtual Asset Service Providers (VASPs). It requires VASPs to exchange information about the identities of both senders and recipients in cryptocurrency transactions exceeding $1,000.
The Travel Rule aims to enhance transparency in cryptocurrency transfers, making it harder for criminals to use cryptocurrencies for illicit purposes. It aligns with FATF’s recommendations and follows amendments to UK Money Laundering Regulations in July 2022 (specifically, Part 7A of the 2017 Regulations). Under these new regulations, UK-based crypto businesses must withhold certain transfers, especially if the sender or recipient is in a country without similar rules. These measures are part of broader efforts to bolster the regulatory framework for cryptocurrency transactions in the UK.
In August 2023, the FCA set out its expectations on how UK firms should comply and what it “reasonably expects” of firms ahead of other countries.
The FCA’s expectations for UK Firms include:
• Take all reasonable steps and exercise all due diligence to comply with the Travel Rule.
• Firms remain responsible for achieving compliance with the Travel Rule, even when using third-party suppliers.
• Fully comply with the Travel Rule when sending or receiving a cryptocurrency transfer to a firm that is in the UK, or any jurisdiction that has implemented the Travel Rule.
• Regularly review the implementation status of the Travel Rule in other jurisdictions and adapt business processes as appropriate.
When sending a cryptocurrency transfer to a jurisdiction without the Travel Rule:
• Take all reasonable steps to establish whether the firm can receive the required information.
• If the firm cannot receive the necessary information, the UK cryptocurrency business must still collect and verify the information as required by the Money Laundering Regulations (MLRs) and should store that information before making the cryptocurrency transfer.
When receiving a cryptocurrency transfer from a jurisdiction without the Travel Rule:
• If the cryptocurrency transfer has missing or incomplete information, UK cryptocurrency businesses must consider the countries in which the firm operates and the status of the Travel Rule in those countries.
• The UK cryptocurrency business should take these factors into account when making a risk-based assessment of whether to make the cryptocurrency available to the beneficiary.
The cryptocurrency industry has generally favored increased oversight, but concerns exist among stakeholders that the introduction of the Travel Rule is adding complexity to an already intricate landscape of cryptocurrency regulations. One significant concern is the lack of consistency in regulatory approaches, aggravated by a substantial number of jurisdictions making limited progress or showing no intention to enforce the Travel Rule. This poses a considerable challenge for businesses aiming to comply with these regulations.
In a June 2023 assessment, the Financial Action Task Force (FATF) revealed that only 75% of jurisdictions were partially compliant or entirely non-compliant with FATF’s requirements. Among the 151 jurisdictions surveyed by FATF in 2023, more than half had taken no steps toward implementing the Travel Rule. FATF expressed deep concern, highlighting that this situation is particularly worrisome because the risks associated with Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) are increasing, and the absence of adequate regulations creates significant vulnerabilities that criminals could exploit.
What does this mean for you?
In light of these developments, it’s crucial to be prepared for potential compromises to your privacy when participating in the cryptocurrency market. Anonymity may no longer be guaranteed.
You’ll also need to familiarize yourself with the identities of both the senders and recipients of your cryptocurrency transactions. Given the ongoing challenges with implementing the Travel Rule, its uncertain how compliance system inefficiencies might affect your user experience.
During this initial phase of regulatory changes, there might be occasions where you’re unable to complete transactions. This could hinge on the compliance status of both your chosen Virtual Asset Service Provider (VASP) and your transaction counterpart. Therefore, keeping abreast of compliance requirements and your VASP’s status will be vital for navigating this evolving regulatory landscape.