From today, the UK will implement new anti-money laundering regulations for cryptocurrency, following guidelines established by the Financial Action Task Force (FATF).
The new regulations may require UK-based crypto asset businesses to withhold certain crypto transfers. If a virtual asset service provider (VASP) receives an inbound payment from a country that has not adopted the new rules, the VASP must conduct a risk assessment to determine whether to make the assets available to the recipient. This rule also applies to transfers made by UK account holders to locations outside the UK.
In August, the FCA outlined its expectations for UK firms regarding compliance and what it considers reasonable actions for firms ahead of other nations. Key expectations include:
– Take all reasonable steps and exercise due diligence to comply with the Travel Rule.
– Firms are responsible for compliance with the Travel Rule, even when working with third-party suppliers.
– Fully comply with the Travel Rule when sending or receiving cryptoasset transfers to firms located in the UK or any jurisdiction that has enacted the rule.
– Regularly review the implementation status of the Travel Rule in other jurisdictions and adjust business processes as necessary.
When sending a cryptoasset transfer to a jurisdiction without the Travel Rule:
– Businesses must make reasonable efforts to determine if the receiving firm can collect the required information.
– If the receiving firm cannot obtain the necessary information, the UK crypto asset business must still gather and verify the information as required by the Money Laundering Regulations (MLRs) and store that information prior to processing the transfer.
When receiving a crypto asset transfer from a jurisdiction that lacks the Travel Rule:
– If the transfer has incomplete or missing information, UK crypto asset businesses must consider the operational jurisdictions and the status of the Travel Rule there.
– These considerations should factor into the risk assessment regarding whether to make the crypto assets available to the beneficiary.
While the crypto industry has largely welcomed increased oversight, many stakeholders are apprehensive that the Travel Rule adds another layer to the existing complicated regulatory framework. A lack of standardization is a significant concern, with many jurisdictions either progressing slowly toward implementation or planning to forego enforcing the Travel Rule altogether.
In June 2023, FATF reported that only 75% of jurisdictions are either partially compliant or not compliant with its requirements. Among the 151 jurisdictions that responded to the 2023 Survey, over half had yet to take any action toward implementing the Travel Rule. FATF emphasized the growing risks posed by virtual assets and service providers without proper regulation, creating exploitable loopholes for criminals.
Aja Heise, senior compliance officer at XBTO, noted: “The FCA’s introduction of the Travel Rule in the UK is a commendable step toward tackling money laundering, but it complicates an already intricate web of regulatory requirements. Questions remain about the effectiveness of this rule across different jurisdictions, particularly considering the technological and development challenges institutions face to ensure compliance.”
Heise stressed the necessity for global regulatory alignment and clarity to help institutions gain a consistent understanding of compliance expectations, enabling them to manage digital asset investments confidently. Education, funding, technological infrastructure, and ecosystem growth must accompany regulation to drive institutional acceptance of digital assets.
On the rule’s implementation, Meiran Shtibel, associate general counsel at Fireblocks, commented: “Starting September 1st, UK VASPs will need to comply with the Travel Rule, which presents significant compliance challenges, particularly regarding the ‘Sunrise Issue.’ This situation occurs when one VASP operates in a jurisdiction where the Travel Rule is enforced while the counterparty operates in a location where it is not. UK VASPs must comply with Travel Rule criteria even when interacting with counterparts in jurisdictions with pending enforcement.”
Despite some ambiguity in the initial guidance from the FCA, which has recently published a consultation for additional clarity, it offers more flexibility than the guidance from FATF. This guidance restricts VASPs from transferring virtual assets outside their customer base without necessary compliance measures in place. Compliance entails resource investment, with the crypto-native concept of pseudo-anonymity facing significant challenges ahead. However, it represents a vital step that could enhance legitimacy in the digital asset sector and nurture mass adoption.
Jordan Wain, UK public policy lead at Chainalysis, remarked: “The implementation of the Travel Rule remains complex, as companies will have to navigate identifying relevant transactions, collecting the pertinent Travel Rule information, and determining how to delay, reject, or block transfers that do not satisfy the required criteria.”
This aspect highlights the crucial role of third-party providers in facilitating compliance at each stage of the transaction process. Industry voices are calling for further support and collaboration from authorities to promote a balanced and cooperative approach to implementation.