FCA mandates “Travel Rule” for crypto firms from first September

FCA Sets New Guidelines for UK Crypto-Asset Businesses

On 17 August 2023, the Financial Conduct Authority (FCA) published a statement setting out its expectations for UK crypto-asset businesses complying with the Travel Rule. From September 1. 2023, crypto-asset businesses in the UK will be required to collect, verify and share information about crypto-asset transfers, known as the ‘Travel Rule’. 

This blog analyzes the UK’s dedicated efforts in harmonizing global standards and highlights the emerging challenges and opportunities. 

What is the Travel Rule? 

The Travel Rule is a directive under FATF Recommendation 16, combating money laundering and terrorism financing (ML/TF). It mandates Virtual Asset Service Providers (VASPs) and financial institutions involved in Virtual Asset (VA) transfers to collect and share comprehensive sender and recipient information during transactions. The name “Travel Rule” originates from the idea that individuals’ data “travels” with their transactions. 

For transactions below a threshold of 1,000 USD/EUR, VASPs must gather names and VA wallet addresses or a unique transaction reference for both the sender and recipient. This data is subject to verification if there’s a suspicion of ML/TF. 

For transactions above this threshold, more detailed information is required, such as the originator’s physical address or date of birth and similar details for the beneficiary. 

Recommendation 16 covers transactions involving traditional wire transfers, transfers between VASPs, or between a VASP and entities like banks. It also addresses transfers to non-obliged entities, like unhosted wallets, but with special provisions. 

While sharing personal data is expected in traditional finance, it’s a new concept for the crypto sector, that requires the creation of a new communication framework among crypto platforms. 

Harmonizing crypto transactions: FATF’s Travel Rule and UK’s regulatory response 

The FCA mandate on Travel Rule is a direct reaction to the Financial Action Task Force’s (FATF) call for various jurisdictions to swiftly implement the Travel Rule, aiming to bring crypto-asset business transaction procedures in line with those in other financial sectors.  

Navigating the Travel Rule with JMLSG’s guidance and collaborative support  

Recognizing the scale and significance of the changes, collaborations have been established with the Joint Money Laundering Steering Group (JMLSG), HM Treasury, and key industry stakeholders. The aim is to offer guidance to facilitate the seamless compliance with the Travel Rule.  

Key points from crypto-asset transfer guidance from JMLSG 

Crypto-asset businesses must follow risk assessments, especially regarding money laundering, terrorist financing and proliferation financing (ML/TF/PF) risks from customers. Consideration factors include the nature of the business relationship, the value, frequency, and duration of transactions, and any associated risks. Actions and discrepancies must be documented.  

A) If data is missing or incorrect, the crypto asset businesses should: 

• Request the absent data; 
• Assess discrepancies using risk-based evaluations;
• Inform the originating crypto-asset businesses of major discrepancies;
• Decide to delay or return the crypto-asset based on timely rectification; 
• Exercise extra care with unhosted wallet transfers, assessing ML/TF/PF risks. Key steps involve understanding the transaction’s purpose, assessing value and frequency, verifying fund sources in high risks, and filing a Suspicious Activity Report if needed.

B) Wallet attribution demands a risk-based approach. Measures may include: 

• Blockchain analysis;
• Using discoverability methods of the chosen travel rule solution;
• Consulting the crypto asset businesses’ address book;
• Gathering information on wallet status or identity;
• Continuous rescreening is recommended for compliance and addressing discrepancies. 

C) Intermediaries and Transfer Returns, businesses must: 

• Ensure complete information before transfer;
• Retrieve missing data from the original crypto-asset business;
• Decide on holding or returning the crypto-asset;
• Be aware of risk assessments;
• Send all transfer data onward and relay post-transfer data swiftly;
• For returning transfers, assess risks, ensure returnability, and don’t classify as crypto-asset transfers under the rule.

Reporting and audit trail  

Crypto-asset businesses should document actions during data provision failures and have an escalation process. Consistent crypto-asset business failures should be reported to the FCA. Repeated failure is based on a risk-driven approach, factoring in transaction volume size and failure percentage. 

The UK’s proactive approach to regulatory compliance and market integrity 

The UK’s commitment to implementing the Travel Rule signifies its resolve to fortify the crypto-asset sector against money laundering and terrorism financing activities. The Travel Rule symbolizes the UK’s commitment to fostering a transparent, safe, competitive crypto-asset market.   

It sits alongside other initiatives, like the financial promotions regime for crypto-assets slated for October 2023, underscoring the UK’s efforts in upholding market integrity and ensuring the enduring vitality of its crypto sector. The Travel Rule has been conceived to bring about increased clarity and transparency to crypto-asset transfers. The aim is to deter criminals from exploiting crypto-assets for illegal ventures. This rule is an essential step in fortifying global AML and CTF measures.   

With FCA’s articulated expectations and comprehensive guidance, UK crypto businesses now have a more precise roadmap to comply. The crypto world is undoubtedly evolving, and with proactive regulation, it takes a significant stride toward establishing its legitimacy in the broader financial ecosystem.   

Feedback on the guidance was open until August 25. 2023.

To learn how we can help your business achieve compliance with crypto regulations, please get in touch with our advisors here.