Understanding the Crypto Travel Rule
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Before diving deeper into Travel Rule, consider taking a look at our Crypto and Travel Rule Vocabulary
If you're not interested in the background information, please read through How does Travel Rule affect me as a Coinmotion customer?
What Is Travel Rule and Why Is It Important?
Travel Rule is an framework for the cryptocurrency industry, aiming to combat money laundering and illicit activities. Mandated by the Financial Action Task Force (FATF), this rule requires virtual asset service providers (VASPs) such as cryptocurrency exchanges, and custodial services to identify and share information about both the sender and the recipient of cryptocurrency transfers.
National and regional legislators implement the Travel Rule into applicable legislation based on FATF's recommendations. In the European Union, the Travel Rule is implemented through a payment data regulation that becomes applicable on December 30, 2024. You can learn more about the topic on the FATF's website.
Background on the Crypto Travel Rule
The Financial Action Task Force, a leading global authority on anti-money laundering (AML), included virtual assets and VASPs in its guidelines in 2019. Known as Recommendation 16, or the "Travel Rule," it's part of FATF's 40 Recommendations designed to enhance the transparency of financial transactions and mitigate risks related to money laundering and terrorist financing.
Following its 2016 adoption and 2021 update, the Crypto Travel Rule requires businesses managing crypto transactions to share key transaction details in a similar way as financial institutions do in the traditional finance industry to meet compliance demands.
Benefits of Travel Rule to the consumer
- Enhanced Security: The Travel Rule aims to combat money laundering and illicit activities, which indirectly protects consumers by reducing the risk of being involved in fraudulent transactions or schemes.
- Increased Transparency: By mandating the sharing of transaction details, the Travel Rule enhances transparency in financial systems. This can help consumers trust the legitimacy of platforms and transactions.
- Improved Trust in Platforms: Platforms complying with the Travel Rule are more likely to be reputable and trustworthy. Consumers can feel more secure transacting with providers that adhere to international regulatory standards.
- Protection Against Fraud: More stringent AML measures help reduce financial crimes, ultimately protecting consumers from potential fraud and scams related to virtual assets.
- Legal Assurance: With VASPs adhering to the Travel Rule, consumers have the assurance that their transactions comply with international laws, potentially avoiding legal complications.
- Facilitation of International Transactions: The standardized approach in the Travel Rule can make cross-border transactions smoother and more accepted across different jurisdictions, benefiting consumers who transact internationally.
FATF Travel Rule Requirements
With the implementation of the Travel Rule, the key obligations for the VASP/CASPs include ensuring that crypto-asset transfers include, in summary, the following information about the originator and the beneficiary:
- Names of the originator and the beneficiary
- Blockchain address or crypto-asset account number of the originator and the beneficiary
- Address, country, official personal document number, and customer number of the originator, or alternatively, the originator’s date and place of birth
- Provided the necessary field exists in the message format and the originator has given this identifier to their crypto service provider, the originator’s current legal entity identifier (LEI) or, if unavailable, any other equivalent official identifier of the originator and the beneficiary
Before sending this information, the CASP must verify the accuracy of this information. The collected information must be transmitted to the receiving institution along with the transfer of funds.
In addition, CASP/VASPs must maintain records of the information collected and transmitted for a specified period of time, and implement compliance policies to adhere to the Travel Rule requirements, including risk-based measures to identify and mitigate risks.Application to Crypto Assets
For crypto assets, any transaction between VASP/CASPs necessitates the sharing of customer information. VASPs are required to screen counterparties and conduct due diligence.
Transfers from self-hosted wallets have a threshold of 1,000€. When this level is met, Travel Rule information must be shared between the sending and receiving parties. Transactions below this amount may still warrant scrutiny if there are any suspicions of illegal activities.
Trust Framework and Risk-Based Approach
Maintaining trust between VASPs is crucial. Originator VASPs must verify the legitimacy and compliance of their counterparties. FATF guidelines recommend a rigorous due diligence process, mirroring those used in traditional correspondent banking relationships, to assess risks effectively.
FATF provides guidance for verifying the trustworthiness of counterparties, including assessing their regulatory compliance, KYC/AML processes, and ownership background.