The Crypto Travel Rule came into effect in Hong Kong on June 1st, 2023. This was the final step of many regulatory actions that Hong Kong saw in the previous months, known as the enforcement of FATF Recommendation 16, or the Crypto Travel Rule.
Before this, on December 7th, 2022, the Hong Kong Legislative Council approved the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022. This change aimed to include virtual asset service providers (VASPs) under rules for customer checks and record-keeping.
Then, on February 20th, 2023, the Securities and Futures Commission put out a paper for discussion on proposed rules for VASPs. They received 152 pieces of feedback on it.
After looking at all the feedback, the commission made and shared detailed guidelines on anti-money laundering (AML) and counter-terrorist financing (CTF) for VASPs with SFC licenses. Finally, the Crypto Travel Rule began in Hong Kong on June 1st, 2023.
To implement the Crypto Travel Rule, Hong Kong adopted a risk-based strategy, focusing on both institutional and customer risk. This approach involved assessing technological solutions that financial institutions (FIs) could use to ensure their virtual asset (VA) transfers complied with the Travel Rule.
According to the implementation guidelines, FIs in Hong Kong can choose any technological solution to collect and submit the necessary information for VA transfers. However, the chosen solution must enable the FI to adhere to the Travel Rule requirements. In this context, an FI could function as an ordering institution, an intermediary, or a beneficiary institution.
For compliance with the FATF Travel Rule in Hong Kong, two primary conditions must be met:
Furthermore, when selecting a technological solution for VA Travel Rule compliance, FIs must consider several factors. These include the solution's interoperability, its capacity to process information for a high volume of VA transfers, and its effectiveness in enabling FIs to implement controls for scrutinizing VA transfers.
Additionally, the solution should be capable of performing due diligence and securely retaining the required information. This comprehensive approach ensures both the safety and regulatory compliance of VA transfers under the Hong Kong Crypto Travel Rule.
Shyft Veriscope stands out as an ideal Travel Rule solution in line with Hong Kong's Travel Rule compliance requirements. Built to perform thorough checks and ensure information safety, it addresses key aspects of the Hong Kong Crypto Travel Rule.
Shyft Veriscope simplifies identifying parties in VA transfers and facilitates the quick and secure sharing of necessary details. Its compatibility with various systems makes it suitable for all financial institutions. This efficiency and versatility make Shyft Veriscope a smart choice for complying with the FATF Travel Rule in Hong Kong.
While Financial Institutions may adopt qualified technological solutions to help them, all the related stakeholders need to know the specifics that make a VA transfer Travel Rule compliant.
According to the provisions, the originator VASPs of a VA transfer would have to obtain, record, and transmit the required information to the beneficiary VASP in the following manner.
The SFC mandates that Travel Rule compliance be performed pre-transaction since, in virtual asset transactions, the settlement is immediate and irreversible.
Any sort of VASP, including exchanges and wallets, would have to make increased efforts to make their process Travel Rule compliant.
The VASPs must verify the customers’ wallet ownership when transacting with self-hosted wallets. This implies they need to establish a mechanism for confirming their customer's ownership or control of the wallet address, which can be achieved, for instance, through a message signing test.
Additionally, the VASPs are required to conduct more intense monitoring of VA transfers with self-hosted wallets. They must impose transaction limits wherever necessary, possibly including setting appropriate limits on the amount of VA transfers with self-hosted wallets.
When it comes to Hong Kong’s implementation of the Travel Rule, it has many similarities and dissimilarities with its global counterparts.
For example, Hong Kong’s threshold model aligns with Singapore, Indonesia, and the UK, where a broader scope of Travel Rule obligations is triggered when transactions exceed a certain limit. In contrast, countries like the US, Philippines, and Canada only enforce Travel Rule when a transaction surpasses a threshold. Yet, there are places like Malaysia, Estonia, and the European Union where no such threshold exists.
The approach to self-hosted wallets also varies significantly across jurisdictions. The United States and Canada, for instance, have not set specific guidelines. On the other hand, countries like Lichtenstein and Estonia have adopted enhanced due diligence measures. The UK and Gibraltar are moving towards gathering more information.
Hong Kong, which requires verification of information for self-hosted wallets, shares this standard with countries like Germany, Singapore, Switzerland, the European Union, and Hong Kong itself.
The implementation of the FATF Travel Rule in Hong Kong aligns with global trends in the crypto space, marking a shift towards increased clarity and transparency. Mirroring this trend, Japan also implemented the Travel Rule on June 1st, 2023, followed by Portugal on July 15th, 2023, and the United Kingdom on September 1st, 2023.
As a result, VASPs will need to intensify their compliance efforts, and more solutions are expected to emerge within the country to assist financial institutions and VASPs in adhering to these regulations. With over 80 crypto firms from mainland China and other countries showing interest in setting up operations in Hong Kong, the effective implementation of the Crypto Travel Rule is poised to significantly bolster the country’s crypto economy.
The threshold is set at HKD 8,000 or US$1,000. For transactions above this threshold, detailed information like the originator's address or ID number is required.
For transactions below HKD 8,000 or US$1,000, only the name and account number of the originator and beneficiary are needed.
The Crypto Travel Rule was implemented in Hong Kong on June 1st, 2023.
VASPs must ensure thorough customer checks and record-keeping, verify wallet ownership for self-hosted wallets, conduct intensified monitoring of VA transfers, and impose necessary transaction limits.
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VASPs need a Travel Rule Solution to comply with the FATF Travel Rule. Have you zeroed in on it yet? Check out Veriscope, the only frictionless crypto Travel Rule compliance solution.
Visit our website to read more, and contact our team for a discussion.
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