Peters & Peters

The FATF’s Travel Rule for crypto may not be as heavy as it seems

No, not the one where the airlines limit your bags to 23kg per person which, if you’re me, means that you must learn the word for “heavy” in multiple languages when checking in your bag (most recently, “pesada”, if you’re asking).

I’m talking about the implementation of the Financial Action Task Force’s (FATF) Travel Rule with respect to cryptoasset service providers (CASPs), meaning that from last month crypto businesses in the UK have been required to collect, verify, and share information about crypto transfers.

Old news, I hear you say. We have already known about the implementation of the Travel Rule for some time, given that FATF recommended its introduction in relation to crypto transfers in 2019, and the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations introduced these obligations in July 2022.

Of course, the UK has already implemented the Travel Rule in relation to transfers between traditional financial institutions, and so this is simply another step by the watchdog and regulators to ensure that crypto transfers are not treated differently to fiat. “‘Tis only fair!” cry the bankers.

Quick recap. The Rule requires transfers of cryptoassets to be accompanied by identifiable information on the originator and beneficiary of the transaction. The information required depends on whether the transaction is between CASPs where both carry on business in the UK, or where only one is in the UK and either (i) the transfer is equal to or exceeds the equivalent of 1,000 euros; or (ii) transfers from a single originator collectively amount to that equivalent in a batch file transfer.

CASPs have therefore had a while to get to grips with how the Travel Rule will affect their operations. But for many this time still hasn’t been enough and the questions that critics have raised since FATF’s initial recommendation remain unanswered:

– Will it temporarily or permanently limit the jurisdictions with whom UK CASPs can do business, if those jurisdictions have not yet implemented or will never implement the Travel Rule?
– Similarly, will it limit the types of originators and beneficiaries who can transact in the UK?
– Does it heighten data privacy risks given the collection and transmission of such personal data between CASPs?
– Will it restrict the crypto businesses who can operate in this space in the UK to only those who have the resources, both financial and legal, to comply with the enhanced verification and record keeping requirements?

The  Financial Conduct Authority’s (FCA) guidance and expectations on complying with the Travel Rule seem to recognise these difficulties, for the moment at least. The FCA has been working with the industry, the Joint Money Laundering Steering Group (JMLSG), and the Treasury to assist firms in compliance, leading to the JMLSG updating its guidance to Sector 22 in Part II of its Guidance in relation to cryptoasset providers and custodian wallet providers, and a new Annex I to Sector 22 relating to crypto asset transfers.

At present, it is envisaged that the FCA will be reasonably lenient if firms at least show some effort to comply. However, given that there has been a significant period of time between the Rule being introduced and being implemented, the FCA may not be merciful for too long, resources dependent of course.

It will be interesting to see when the first sanctions for non-compliance start to trickle through, and whether the reasons for that non-compliance will simply be down to lack of efforts to comply or the other practical realities of complying with the Rule raised by critics.

Will the Rule change the way that consumers transact with UK CASPs? Probably not: it is just a further erosion of data privacy for the law-abiding ones, plus inherent delays in execution of transactions whilst the Rule and other compliance checks e.g., for sanctions breaches, are carried out.

Will it change the way that criminals operate? Surely all the clever ones will either find (or have already found) a way of circumventing the Rule, or they have already reverted to using good old-fashioned anonymous cash. Although best not carry too much of the latter whilst travelling, otherwise you might breach all sorts of good old-fashioned travel rules. Pesada indeed.

This article first appeared in City A.M. on 6 October as part of  the ‘Crypto Counsel with Charlotte Tregunna’ column