The Financial Action Task Force (FATF) is an intergovernmental organization focused on coordinating action to combat international money laundering and terrorist financing. Back in 2020, the FATF modified one of their recommendations – referred to as the travel rule – which had widespread implications for the world of cryptocurrency. In this article, we cover what the travel rule is and what you need to know about it.
What is the travel rule in crypto?
The travel rule refers to FATF’s recommendation 16. This recommendation obliges banks and payment companies to store information that “travels” between payers and recipients and make it available to authorities. The recommendation originally only applied to wire transfers, but has been modified to cover virtual assets as well. The rule requires banks to share customer information with any virtual asset provider (VASP) involved in trading or transmitting virtual currencies if the transactions go over a certain threshold of 1,000 EUR/USD.
This means that wallet providers and exchanges in the affected countries are required to share data about their customers with one another. It also means that personal data may need to be embedded into transactions on public blockchains, which is a huge change from the traditionally anonymous nature of cryptocurrency transactions. VASPs must stick to international rules and ensure that they are preventing illicit activity as much as possible by handling the data with care and not underestimating the need for privacy and due diligence.
FAFT Recommendation 16
Recommendation 16 was originally developed in an attempt to prevent terrorists and criminals from having unrestricted access to wire transfers for moving their funds. This was later extended to cover virtual asset transfers, as well. Recommendation 16 was created by FAFT, which is an intergovernmental organization that aims to combat money laundering and terrorism financing.
With this recommendation, FAFT hopes to make the information on originators and recipients of wire transfers/virtual payments immediately available to law enforcement, financial intelligence units, and financial institutions whenever needed. This is done to block terrorist financing, prevent payments to sanctioned individuals/entities, support the reporting of suspicious activities, and prevent the laundering of crypto assets.
Crypto Travel Rule Requirements
As mentioned earlier, the Travel Rule requires information on the originators and recipients of VASP payments to be made immediately available to law enforcement, financial intelligence units, and financial institutions. But what information is required? When you send cryptocurrencies, the following requirements will apply:
Date of birth and place of birth
National identity number, customer identification number or another unique identification number
Crypto Travel Rule in Different Countries
The Travel Rule applies to banks and crypto companies located in FATF-member countries, for example, the US, UK, Switzerland, Singapore, and more. In this section, we cover the specific implementation of the travel rule in a variety of countries.
In 2021, the HM Treasury released an amendment so that part of the consultation focuses on transfers of crypto assets. Full Travel Rule data transfer requirements apply to all VASP-to-VASP transfers over £1,000. Transfers below £1,000 will require the collection of less PII.
The original Travel Rule was imported from the US’s Bank Secrecy Act, though it was rarely enforced prior to the modification. In 2020, FinCEN refocused on the regulation by proposing several new rules for crypto payments that further complicate compliance. This applied to virtual currencies and explicitly applied the Travel Rule to US exchanges, trading desks, ATMs and custody providers.
In 2019, the Swiss Financial Market Supervisory Authority introduced Travel Rule guidance for the crypto industry. In Switzerland, VASPS must comply with the Travel Rule for transactions above $1,000. Swiss VASPs should not conduct transactions with unhosted wallets unless the sender can verify that they are the owner of the wallet. Transfers to or from an external wallet belonging to a third party are only possible if the supervised institution has first verified the identity of the third party, established the identity of the beneficial owner and proven the third party’s ownership of the external wallet.
In 2020, South Africa began requiring crypto service providers to register with South Africa’s Financial Intelligence Centre in order to become an “accountable institution.” South Africa brought crypto asset service providers in line with AML/CFT legislative requirements, which means reporting cash transactions of ZAR 25,000 (currently roughly USD 1,697) and over.
Does the travel rule apply to crypto?
Yes. Though recommendation 16 was originally developed specifically for wire transfers, this was later extended to cover virtual asset transfers as well.
How do you comply with the travel rule?
You won’t need to do anything yourself. Rather, the virtual asset service providers (VASPs) you choose should comply with the rule. The way you contribute to this is by completing the verification process for the VASP, which usually is a prerequisite for using their services anyway.
What information is required by the travel rule?
As part of FATF Recommendation 16, virtual asset transfers must provide information such as the name, account number, and physical address of the creators and beneficiaries. You can check the requirements in the table in the ‘Crypto Travel Rule Requirements’ section above.
The Travel Rule is a vitally important part of crypto regulation that helps maintain the safety and compliance of cryptocurrency platforms. The rule attempts to ensure that the world of virtual assets doesn’t contribute to nefarious activities such as terrorist financing and money laundering. For cryptocurrency platforms such as hi, this rule is necessary for the protection of the platform and its customers.