The Crypto Travel Rule or Transfer of Funds Regulation (TFR) for Crypto Assets – European Union (EU)
Cryptocurrency regulations are on the rise all over the world recently. One of the most significant regulatory initiatives in recent years is the Financial Action Task Force (FATF) Travel Rule, which aims to combat money laundering and terrorist financing by imposing strict requirements on virtual asset service providers (VASPs).
Contents
- What legislations frame the Travel Rule?
- What Is the Travel Rule?
- What is the scope of the Travel Rule in the EU?
- When is the Travel Rule not applicable?
- What is the Travel Rule threshold in the EU?
- What information does the Travel Rule require?
- What are the benefits of the Travel Rule regarding AML/CFT efforts?
- What are the challenges in implementing the Travel Rule?
- What are the advantages of Travel Rule Compliance?
What legislation frames the Travel Rule?
The AMLD5 brings cryptocurrency-fiat currency exchanges under the scope of EU anti-money laundering legislation, requiring exchanges and wallet operators to perform similar compliance obligations as financial institutions.
In September 2020, the European Union started to be more proactive with the publication of the Digital Finance Package. The most comprehensive is the proposal for a Regulation on “Markets in Crypto-Assets” (MiCA) that seeks to create a fully harmonized European market for virtual assets by establishing a legal taxonomy of virtual assets and defining rules for issuers and service providers.
In July 2021, the European Commission unveiled an AML action plan that proposed to create an EU-wide AML supervisor, harmonizing the 27 Member States’ AML regimes and extending anti-financial crime obligations to all crypto asset service providers (CASPs).
On 29 June 2022, a provisional agreement by the European Parliament, Council and Commission on the proposed revised Transfer of Funds Regulation (TFR) was reached. This Regulation aims to implement the Financial Action Task Force’s (FATF’s) Recommendation 16 (Travel Rule) - which previously only applied to traditional wire transfers - to virtual asset transfers involving CASPs in Europe. The regulation, therefore, will be applicable to all CASPs operating in countries that are members of the European Union, without the need for transposal to local laws.
On 30 June 2022, an agreement on the MiCA Regulation was also reached.
The difference between the TFR and MiCA is that MiCA builds the legal framework for crypto, including CASPs licensing regimes and definitions, while the TFR brings the crypto Travel Rule into the European Union.
On 20 April 2023, the European Union Parliament voted on its final version of both documents, which came into force in June 2023, with an 18-month grace period before full effect by 30 December 2024 – see previous updates.
Both documents are in line with their respective draft versions, with a few additional points.
The European Union has opted to use the term crypto asset service provider (or CASP) instead of the FATF’s usual naming virtual asset service provider (VASP).
What Is the Travel Rule?
The transfer of funds regulation previously only applied to traditional wire transfers and has been a long-established process for traditional banks and payment institutions. The Travel Rule mandates that financial institutions transmit specific customer information to its counterparty involved in transactions exceeding certain thresholds, aiding in detecting and prosecuting financial crimes, including money laundering. The Financial Action Task Force (FATF) expanded the Travel Rule to include VASPs in 2019.
The FATF's Travel Rule requires VASPs to: “obtain, hold, and transmit required originator and beneficiary information, immediately and securely, when conducting VA transfers.”
What is the scope of the Travel Rule in the EU?
“Crypto-assets service providers” as defined in article 3(1) MiCA:
•“any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis;
•‘crypto-asset service’ means any of the services and activities listed below relating to any crypto-asset:
- the custody and administration of crypto-assets on behalf of third parties;
- the operation of a trading platform for crypto-assets;
- the exchange of crypto-assets for fiat currency that is legal tender;
- the exchange of crypto-assets for other crypto-assets;
- the execution of orders for crypto-assets on behalf of third parties;
- placing of crypto-assets;
- the reception and transmission of orders for crypto-assets on behalf of third parties
- providing advice on crypto-assets”.
The Regulation will apply to “transfers of funds, in any currency, or crypto assets, which are sent or received by a payment service provider, a crypto-asset service provider, or an intermediary service provider (brokers and custodians) established in the European Union”.
When is the Travel Rule not applicable?
It does not apply to person-to-person (P2P) transfers of crypto-assets. A “person-to-person transfer” (peer-to-peer transfer) is defined as “a transaction between natural persons acting, as consumers, for purposes other than trade, business or profession, without the use or involvement” of a CASP. Examples include the use of cryptocurrency trading platforms and self-hosted wallet owners acting on their own behalf - that is, without any CASP assistance.
Neither does it apply when “both the payer and the payee are payment service providers, or both the originator and the beneficiary are crypto-asset service providers acting on their own behalf”. In other words, when the originator and beneficiary are payment services providers or a CASP acting on their own behalf, the Travel Rule does not apply.
What is the Travel Rule threshold in the EU?
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Every crypto asset transaction between two CASPs must comply with the Travel Rule. There is no transfer value exemption (de minimis threshold) for transactions. The revised TFR removed the de minimis threshold, meaning that, once in force, EU CASPs must comply with Travel Rule obligations for every transaction, regardless of its amount. Previously, the threshold was set at 1,000 EUR.
What information does the Travel Rule require?
For all transfers, the originating CASP must communicate the following information with each crypto transfer before or simultaneously with the transfer:
- originator name,
- originator distributed ledger address,
- originator crypto asset account number,
- originator address, which must include the name of the country, official personal document number and customer identification number, or alternatively date and place of birth,
- originator LEI (where applicable, or an equivalent official identifier).
- beneficiary name,
- beneficiary distributed ledger address,
- beneficiary crypto asset account number,
- beneficiary LEI (where applicable, or an equivalent official identifier).
The processing of personal data under this Regulation should take place in full compliance with the General Data Protection Regulations (GDPR). CASPs shall ensure that at all times, the transmission of any personal data on the parties involved in a transfer of funds or a transfer of crypto assets is conducted per the GDPR. CASPs should put appropriate measures in place to protect personal data against accidental loss, alteration, or unauthorized disclosure.
What are the benefits of the Travel Rule regarding AML/CFTefforts?
The rapid growth of cryptocurrency usage has led to regulatory inconsistency in jurisdictions across the world and has created opportunities for money launderers and terrorists to commit financial crimes using virtual assets. The anonymity of blockchain technology is particularly useful for money launderers: while the originator of cryptocurrency transfers provides verified information (name, address, etc.), the beneficiary is able to remain anonymous. The FATF Travel Rule will help AML/CFT efforts by enhancing the audit trail when virtual assets are transferred between entities such as exchanges and wallets. The new information collection rules will mean that financial authorities are better able to detect and prevent money laundering activities involving cryptocurrency and will also help deter criminals by reducing the number of CASPs through which they can move funds.
What are the challenges in implementing the Travel Rule?
The Travel Rule is complicated and involves various aspects like user interfaces, compliance departments, counterparties, and technology.
By requesting beneficiary names, the procedure becomes remarkably akin to traditional banking payments, bridging the divide between conventional financial experiences and digital assets for users.
Bridging the gap between fiat and crypto transfers, the nonuniform approach to the implementation of the Travel Rule in different regions is the bigger challenge.
CASPs are required to exchange transaction details, there is a need for an interoperable communication system such that CASPs can easily receive and send the information required from originators and beneficiaries. This means the entirety of the crypto industry must embrace a collaborative approach to come up with the ideal data and communication standards.
CASPs must comply with the Travel Rule when interacting with European exchanges. There is no way to operate from a jurisdiction where this rule has not yet been adopted. For transfers of digital assets to a European exchange, you cannot position yourself in a jurisdiction that does not enforce the Travel Rule. Compliance with the Travel Rule remains a necessity. CASPs must have a clear understanding of their users and the destinations of their funds.
Information sharing is at the heart of the FATF Travel Rule, but given the relative lack of regulation in the cryptocurrency industry, it represents a significant compliance obligation for many CASPs.
The lack of identifying ownership information necessary to facilitate cryptocurrency transfers means that CASPs and financial institutions must develop AML solutions that allow them to share the necessary data and that comply with existing privacy laws, such as the EU’s General Data Protection Regulation.
In addition to fulfilling those regulatory obligations, CASPs must consider the costs and administrative effort that their TFR solutions will involve and find a way to keep cryptocurrency transactions efficient and cost-effective for customers.
What are the advantages of Travel Rule Compliance?
There are various advantages for CASPs that have or will successfully implement the Travel Rule. A CASP can preserve its competitive advantage, safeguard its market share, and secure sustainable profits over the long term. The CASP demonstrates their seriousness over compliance with new regulations nurturing positive relationships with regulatory bodies by demonstrating a dedication to compliance which is essential for fostering the widespread adoption of cryptocurrencies.
Are you ready? – for the Travel Rule and does the CASP fulfill the requirements of the European Union for the Travel Rule? Or do you have a general interest in obtaining a CASP license in Cyprus? Y. Vasiliou & Co. LLC works together with industry experts regarding AML Compliance and provides the regulatory know-how. We do not only cover the basic services regarding AML Compliance but can also assist with on-going AML Compliance aspects, supported by skilled experts with hands-on mentality. Contact us for more information at info@vasiliou.law .
