In order to curb cases of money laundering and terrorism financing, international financial regulators have been working on a travel rule that will apply to cryptocurrency operators. The rule is designed to enforce anti-money laundering (AML) regulations by requiring virtual asset service providers (VASPs) to collect and transfer customer information when they send digital currencies between exchanges. Effective just this year, the travel rule will impact all virtual assets operators.
What is the travel rule?
The travel rule is a regulation under the Bank Secrecy Act (BSA) that requires financial institutions to pass on customer information related to wire transfers and other forms of funds transmission when a transaction occurs of more than $3,000. Financial institutions do this by exchanging specific data elements with each other including the name, account number, and address, of the originator and the beneficiary.
In the case of cryptocurrency transactions, the travel rule similarly requires VASPs to collect and transmit “originator and beneficiary information” for transactions involving cryptocurrencies. Cryptocurrency transactions can be anonymous, and as a result, have been increasingly used by criminals to launder money and fund illicit activities. The travel rule will put a stop to such activities by ensuring that all transactions are traceable.
Why is the travel rule important?
The travel rule is important in the cryptocurrency industry because the sector has grown exponentially in recent years and has been a safe harbor for money laundering and other criminal activities. According to the Financial Action Task Force (FATF), the amount of money laundered through cryptocurrencies has increased tenfold since 2014 and currently amounts to over $10 billion annually.
The travel rule will help weed out cryptocurrency exchanges that allow illicit activities such as money laundering by ensuring that they collect and share customer information with counterparties. The rule will also give regulators more power to track illicit financial activities and impose sanctions on entities that violate anti-money laundering and counter-terrorism financing regulations.
How will the travel rule impact cryptocurrency operators?
Cryptocurrency operators will have to establish strong AML/KYC processes and invest in technology that will enable them to collect and send customer information to counterparties. They will also need to ensure that they have the infrastructure in place to handle all the data required.
The implementation of the travel rule will also introduce a level of standardization in the cryptocurrency industry that was previously non-existent. Cryptocurrency operators will have to follow the same procedures and protocols as traditional financial institutions when it comes to sending transaction data.
Overall, the travel rule will increase the cost of doing business for cryptocurrency operators as they will have to invest in technology and human capital. However, the cost is justified when considering the benefits that come with a more transparent and regulated cryptocurrency industry.
What are some challenges in implementing the travel rule?
One potential challenge in implementing the travel rule is the lack of interoperability between different cryptocurrency operators. This means that different operators may use different data formats, which could make it difficult to exchange the information required under the rule.
Another challenge is achieving compliance with the rule in a decentralized environment. Some cryptocurrencies operate on a decentralized blockchain which means that there is no central authority that can comply with the travel rule. Work is currently being done on developing solutions that can address this challenge.
Final thoughts
The travel rule is a significant step towards a more transparent and regulated cryptocurrency industry. It will enable regulators to track illicit financial activities and prevent criminals from using digital currencies to launder money and fund illicit activities. While the implementation of the rule may pose some challenges, the benefits in terms of increased transparency and accountability are worth the effort. Cryptocurrency operators must take the necessary steps to ensure that they are compliant, which may involve investing in new technology and establishing strong AML/KYC processes. Overall, the travel rule is a positive development for the industry and will contribute to its long-term growth and mainstream adoption.
The European Parliament has approved a regulation on information accompanying the transfer of crypto funds, known as the Travel Rule. The new measures are part of the EU’s anti-money laundering package, and aim to ensure that the transfer of crypto assets can be tracked to reduce the risk of money laundering and terrorist financing. The regulation will require crypto-asset service providers to verify the origin of funds in all transactions, regardless of the value, and provide the relevant authorities with information about the originator and beneficiary of the transfer.
Crypto operators will need to transfer certain information about the identity of the executor, including the address of their wallet on the blockchain, when a user makes a transaction using a wallet held at an exchange. The receiving exchange is then required to verify that all of the required information is correct, and determine the origin of the funds to assess whether restrictive measures and/or other anti-money laundering and/or anti-terrorism measures can be applied.
The new rules also apply to marketplaces for non-fungible tokens, but only if such tokens qualify as crypto assets under the MiCA regulation. An important innovation concerns unhosted wallets, where wallets whose private keys are held by the owners themselves, when interacting with wallets hosted by a crypto operator. When a customer of the crypto operator receives an amount of crypto assets from an unhosted wallet, the crypto operator is required to obtain information about the identity of the executor. If the amount transferred is €1,000 or more, the operator must verify the actual identity of the person controlling the wallet.
The adoption of this regulation imposes important obligations on crypto operators, which will complement those set out in the MiCA Regulation adopted at the same time by the European Parliament. The two regulations will thus complement each other to define the broadest possible set of rules for the activities of crypto operators. Specifically, MiCA will create a registry of operators that do not comply with European regulations, and with whom European operators will not be allowed to interact.
