The Crypto Travel Rule came into effect in the United Kingdom on September 1st, 2023. This event was a result of a series of regulatory actions, starting on July 22nd, 2021 when the HM Treasury published a consultation seeking views on amendments to the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017.
It took up to mid-October that year to conclude the consultation, and by July 2022, the United Kingdom had published the amended regulations.
As part of the new regulations, UK authorities rolled out the FATF Travel Rule, a key requirement for virtual asset service providers (VASPs). The introduction was followed up with a public consultation on Travel Rule guidance, which concluded on August 25th, 2023.
In between, the FCA had also clearly set out expectations on the nature of compliance that UK VASPs were required to follow.
The Financial Conduct Authority was transparent and articulate about its motivation to implement the Crypto Travel Rule in the country. In a tweet dated August 17th, 2023, the FCA said:
“The Travel Rule is designed to bring greater transparency to crypto asset transfers, making it harder for criminals to use crypto for illegal activity.”
In brief, the Travel Rule requires UK-based VASPs to “collect, verify and share information” on crypto transfers.
For inbound payments from an overseas jurisdiction that has not implemented the Travel Rule yet, the VASPs were asked to conduct a risk-based assessment to ascertain whether the beneficiary qualifies to receive the transfer. The same should apply to outbound transfers.
Implementation of the Crypto Travel Rule in the United Kingdom had global precedents, as countries like the United States, Germany, Japan, Singapore, Switzerland, Canada, South Africa, Netherlands, etc., have already adopted it.
Singapore, for instance, implemented the Travel Rule as early as January 28th, 2020. In Canada, it came into effect on June 1st, 2021. South Korea and Estonia implemented the travel rule on March 15th and 25th, respectively. Japan and Hong Kong enforced the same since June 1st, 2023.
More countries began implementing the Travel Rule after the FATF called out countries to adopt it urgently, after its March 2022 survey found only 29 of 98 jurisdictions had enforced it.
The UK Crypto Travel Rule compliance requirements apply to UK-based crypto asset businesses, abbreviated as CBs. The regulations define these businesses as crypto asset exchange providers or custodian wallet providers.
Crypto asset exchange implies entities that facilitate the exchange of the crypto assets or arrange for it. On the other hand, the job of a custodian wallet provider is to offer services of holding crypto assets and cryptographic keys for its customers or make arrangements towards the same.
When it comes to CBs collecting, verifying, and sharing the relevant information, the quantum of information to be dealt with depends on the transfer amount. If the crypto asset transfer is worth below 1,000 pounds sterlings, the information includes the name and account number of the originator and the beneficiary.
If the transfer is worth above 1,000 pounds sterlings, the quantum of information to be collected increases. If the sender or originator of funds is a firm, the CBs would have to ask for:
(i) Customer Identification Number
(ii) Address of the firm.
And when the sender is an individual, the CBs would have to collect the following:
(i) Birth certificate number
(ii) Passport number / National identity card number
(iii) Date and place of birth
To be compliant with the regulations, the UK-based CBs would have to conduct rigorous due diligence. It is the firm's responsibility to become compliant with the Travel Rule, even if the firm is leveraging the services of a third party. The implementation of the rule has to be regularly supervised.
The UK's adoption of the Crypto Travel Rule has significant implications for cryptocurrency exchanges and wallet providers, altering how they operate and interact within the global market. It mandates a new level of compliance, directly affecting various aspects of their business.
UK-based cryptocurrency exchanges and wallet providers now face additional duties due to the Travel Rule. They must establish systems like Veriscope or hire third-party services to collect, verify, and share transaction data. This means more work and investment in resources.
VASPs need to manage the added workload efficiently and cost-effectively. They must develop systems that can securely and swiftly handle data collection and transmission.
A key aspect is managing the transaction threshold, which is set at 100 pounds. Due to the high volatility in the crypto market, determining whether a transaction meets this threshold can be challenging.
With varying implementations of the Travel Rule globally, UK crypto firms must make strategic decisions on how to interact with jurisdictions that haven't adopted similar regulations.
The Financial Conduct Authority (FCA) provides clear instructions for handling transfers to and from jurisdictions without the Travel Rule. UK firms are required to attempt to gather necessary information for outbound transfers and conduct risk assessments for inbound transfers from non-compliant jurisdictions.
Lastly, these companies need to keep up with the changes in the Travel Rule and adapt accordingly as global regulations surrounding cryptocurrencies continue to evolve.
Staying within the broad framework of FATF, different countries have tried different ways to optimize crypto travel rules in their country.
The United States, for instance, has a threshold of US$3,000. The European Union is yet to activate a threshold as the grace period is ongoing at present, with an enforcement date target of December 30th, 2024. Then, there are countries like Estonia that have already enforced the Travel Rule but have not kept any transaction threshold yet.
There are also differences in terms of how self-hosted wallets are approached across jurisdictions.
In the United Kingdom, the requirement is that of collecting information from the VASP’s customers, whereas, in Singapore and Germany, the requirement goes a notch higher for identity verification of the unhosted wallet owner. In Switzerland, the requirements ask to establish proof of ownership over and above the identity verification needs.
With more and more countries implementing the FATF Travel Rule in their jurisdiction, new similarities and differences will emerge.
While evolution and amendments would be a reality throughout the lifetime of the regulation, the authorities would always have to be mindful of the core purpose of the Crypto Travel Rule, which is to advance the anti-money laundering mechanism and put a stop to financial crime.
To achieve this objective, the VASPs need to ensure that suspicious transactions are promptly detected, and effective screening is carried out.
Fraudulent actors often exploit the pseudonymity of blockchain technology, which only requires knowing the wallet address of the beneficiary and the private cryptographic key of the sender.
While implementing the Travel Rule is a difficult requirement for crypto businesses to fulfill, it is for the benefit of the industry and its players that the Crypto Travel Rule UK implementation is dealt with utmost sincerity.
No, there is no minimum threshold. VASPs must collect basic information for all transactions. However, for transactions over £1,000, VASPs need to collect more detailed information compared to transactions below this value.
The Crypto Travel Rule came into effect in the United Kingdom on September 1st, 2023.
The UK-based crypto businesses must rigorously collect, verify, and share transaction data to comply with the Crypto Travel Rule. This includes detailed information on parties involved in transactions over £1,000.
It requires them to establish systems for efficient transaction data collection and management, impacting how they handle transactions and interact with global markets.
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