The UK has rolled out the ‘Travel Rule’, requiring crypto asset businesses to adhere to enhanced transparency standards. In today’s Weekend Read, industry experts weigh in on the implications and challenges the legislation presents to the crypto industry.
The Travel Rule aims to fortify anti-money laundering (AML) and counter-terrorist financing (CTF) efforts by mandating the collection and sharing of information regarding crypto asset transfers.
It originated from the UN agency Financial Action Task Force in June 2019, prompting the UK’s Financial Conduct Authority (FCA) to pass legislation for its enforcement.
Several other countries, including the US, Germany, Japan, Singapore, Switzerland, Portugal, Canada, South Africa, the Netherlands and Estonia, have also embraced the Travel Rule.
Since 1 September 2023, crypto asset businesses in the UK are required to collect, verify and share information about crypto asset transfers. For example:
When sending a cryptoasset transfer to a jurisdiction without the Travel Rule:
- Take all reasonable steps to establish whether the firm can receive the required information.
- If the firm cannot receive the necessary information, the UK crypto asset business must still collect and verify the information as required by the Money Laundering Regulations (MLRs) and should store that information before making the crypto asset transfer.
When receiving a cryptoasset transfer from a jurisdiction without the Travel Rule:
- If the crypto asset transfer has missing or incomplete information, UK crypto asset businesses must consider the countries in which the firm operates and the status of the Travel Rule in those countries.
- The UK crypto asset business should take these factors into account when making a risk-based assessment of whether to make the crypto assets available to the beneficiary.
As the Travel Rule sets in motion in the UK, the global financial technology landscape is grappling with its implications.
Globally aligned compliance
One perspective offered by Richard Gardner, CEO of technology provider Modulus, sheds light on the challenges presented by a multifaceted regulatory environment. Gardner points out that the rule’s implementation is complicated by differing requirements across jurisdictions.
He highlights the contrasting examples of Canada, which mandates an address, and the UK, which does not. Gardner believes that technology holds the key to resolving these issues, offering solutions to the practical implementation of the rule in various contexts.
“It’s absolutely true that the global implementation of the Travel Rule has been shoddy at best,” said Gardner. “That’s what happens when you have a patchwork of regulators, complete with differing resources and institutional ambitions, aiming to implement a single directive.
“There’s certainly a challenge when Canada requires an address, for instance, while the UK does not. There are challenges when the UK’s timetable begins now, but the EU has punted into the next calendar year. Those are challenges that we should’ve all been working out.”
Tailored measures and the ‘Sunrise Issue’
Meiran Shtibel, associate general counsel at Fireblocks, a platform that protects digital assets in transit, echoes the sentiment of evolving complexities across jurisdictions.
She also sheds light on the ‘Sunrise Issue’ where one virtual asset service provider (VASP) complies with the Travel Rule, while a counterpart VASP operates in a jurisdiction without enforcement.
“Essentially, VASPs in the UK must comply with Travel Rule requirements when dealing with counterparts in locations where enforcement is pending. To state the obvious, compliance means investing resources. However, whilst pseudo-anonymity is a crypto-native ideal, this is a significant step that could benefit the digital assets sector by legitimising it and paving the road to mass adoption.”
Balancing compliance complexity
Aja Heise, senior compliance officer at XBTO, a platform for digital assets and tailored investment solutions, has applauded the UK’s proactive approach in combating money laundering, yet also emphasised the potential complexity arising from the ever-increasing array of regulatory requirements.
“The FCA’s implementation of the Travel Rule in the UK, while an admirable step forward to help tackle money laundering, is another example of the increasingly complex web of different regulatory requirements institutions are being asked to follow,” says Heise. “There are also serious questions about whether the FATF rule will work in practice between jurisdictions and be adopted globally, especially given the technology and development requirements posed to institutions to comply with the requirements.
For Heise, better regulatory alignment and clarity is needed globally, so institutions have a consistent understanding of what is expected of them, and they have the confidence to move their digital assets investments with confidence.
“It’s also important to note that regulation alone, while important to get right, will not be enough to drive forward the institutional adoption of digital assets, if there are no investments in education, funding, technology infrastructure, ecosystem growth and development alongside it,” Heise aded.
Striking a balance
Jordan Wain, UK public policy lead at blockchain data platform Chainalysis, says identifying relevant transactions, gathering accurate Travel Rule information, and implementing mechanisms to address non-compliant transfers demand collaboration and third-party assistance.
“At Chainalysis we support what the extension of the Travel Rule means for addressing economic crime and creating trusted transaction flows in the UK. We look forward to seeing more countries make the necessary changes to introduce these requirements.
“Implementation, however, remains challenging as companies will need to get to grips with identifying relevant transactions, collecting relevant Travel Rule information, and creating a means to delay, reject or block transfers that do not meet the required criteria.
“Third-party providers, therefore, will undoubtedly have a significant role to play in helping companies with compliance at each stage of the transaction flow. We join other industry voices in asking for further support, and for authorities to show the same spirit of proportionality and collaboration as shown when first considering what implementation might look like in practice.”
Through its white-label cryptocurrency exchange solution, Modulus equips operators with the tools necessary to adhere to the Travel Rule. This approach reflects the company’s commitment to ongoing adaptation, recognsiing that the cryptocurrency industry is far from a static realm.
“For the next decade, operating a cryptocurrency exchange will consist of unexpected twists and turns; it will be chock full of regulatory knuckleballs,” says Gardner. “However, that risk also comes with increased opportunity. Many operators will not be able to meet the regulatory burden. You can, and you can succeed where others have failed, if you seek the right guidance.”
“Since 2018, we’ve been preparing for regulations like what has become known as the ‘Travel Rules.’ We’ve been following these developments every step of the way, and we’ve made sure that operators know what’s coming before it arrives.”
In alignment with the need for technological solutions, Sumsub, a verification platform, has launched a six-month free trial of its Travel Rule compliance solution.
Sumsub’s solution enables both senders and recipients of virtual assets transfers to exchange accurate identifying information and convey the data to authorities when required.
Jacob Sever, co-founder and chief innovation officer at Sumsub, stresses the importance of compliance in fostering trust and transparency within the crypto industry.
“Addressing the compliance challenges posed by the Travel Rule requires a collective effort from everyone in the crypto industry – be it regulators, crypto businesses, users themselves and verification platforms such as Sumsub,” he says.
“Compliance with legislation like the Travel Rule will play a pivotal role in fostering trust and transparency for the crypto industry, and we are proud to be at the forefront by providing an effective solution that caters to the demands of an increasingly complex regulatory landscape.”
Kristina Taylor is a highly knowledgeable journalist who has been following the financial news and cybercrimes space since 2011. She holds a degree in communication and media studies from Aarhus University and has always had a passion for writing.
Throughout her career, Kristina has become a well-traveled journalist within the industry and has contributed to many well-known publications. She has a keen eye for detail and is often found poring over white papers to gain deeper insights into the latest trends and developments.
Kristina’s extensive knowledge and experience in the field of finance and technology make her an invaluable contributor to Financial Magazine. She is highly respected in the industry and is known for her ability to break down complex concepts into easy-to-understand pieces for her readers.