The UK’s financial regulator has imposed new rules on crypto businesses to collect and verify information on digital asset transfers as part of its anti-money laundering and counter-terrorist financing efforts.
The UK’s Financial Conduct Authority (FCA) has announced that the Travel Rule, a global standard for transparency in digital asset transfers, came into force on September 1, 2023.
The rule requires crypto businesses operating in the UK to collect, verify, and share information about the sender and the beneficiary of any digital asset transfer, as well as the purpose of the payment.
It also allows crypto businesses to withhold or seize funds if the origin or destination of the transfer is deemed suspicious or uncertain.
What is the Travel Rule, and why does it matter?
The Travel Rule was first introduced in 1995 by the US regulators to combat money laundering and terrorist financing via the traditional banking system.
It required banks and other financial institutions to include information such as the sender’s name, address, and account number and the beneficiary of any wire transfer above a certain threshold.
In 2019, the Financial Action Task Force (FATF), an intergovernmental body that sets global standards for anti-money laundering and counter-terrorist financing, extended the Travel Rule to cover virtual assets and virtual asset service providers (VASPs).
The task force recommended that VASPs should obtain and hold information on the sender and the beneficiary of any virtual asset transfer above 1,000 USD/EUR and make it available to authorities upon request.
The FATF also urged VASPs to implement systems that enable them to transmit this information to other VASPs or financial institutions involved in the same transfer.
The UK government updated its money laundering legislation in July 2022 to align with the FATF Travel Rule standards.
How will the Travel Rule affect UK crypto businesses and users?
According to the FCA guidance document, UK crypto businesses must collect and verify information such as:
- The name and account number of the sender
- The name and account number of the beneficiary
- The address, date of birth, or national identity number of the sender and the beneficiary
- The purpose of the payment
UK crypto businesses must also share this information with other crypto businesses or financial institutions involved in the same transfer, either before or at the time of executing the transfer.
These businesses must also store this information for at least five years and make it available to authorities upon request.
If a crypto business receives a transfer with missing or incomplete information, it must consider the risk factors associated with the transfer, such as:
- The countries in which the sender and the beneficiary are located
- The status of the Travel Rule implementation in those countries
- The nature and amount of the transfer
- The type and source of funds involved
Based on these factors, the crypto business must make a risk-based assessment of whether to make the funds available to the beneficiary or not.
If the crypto business decides to withhold or seize the funds, it must report it to the FCA and explain its reasoning.
Similarly, if a crypto business sends a transfer to a jurisdiction that does not have the Travel Rule in place, it must still collect and verify the information as required by the UK law and store it for future reference.
The Travel Rule aims to bring more transparency and accountability to the crypto space, as well as to prevent criminals from using crypto assets for illicit activities.
However, some critics argue that it also poses challenges for privacy, innovation, and interoperability in the crypto industry.
- For instance, some users may be reluctant to share their personal information with multiple parties when making crypto transfers, especially if they are concerned about data breaches or surveillance.
- Some crypto businesses may also face technical difficulties or high costs in implementing systems that can communicate with other platforms across different protocols and standards.
- Some crypto businesses may be excluded from certain markets or regions if they do not comply with local regulations or expectations.
The FCA has acknowledged these challenges and stated that it will continue to monitor and review the impact of the Travel Rule on UK crypto businesses and users.
The FCA has also encouraged UK crypto businesses to engage with industry associations and initiatives working on developing common solutions and best practices for implementing the Travel Rule.