25 Jun 2020

How the FATF's Travel Rule is Being Implemented Around the World

It’s been a year since the Financial Action Task Force (FATF) announced the introduction of the Travel Rule for the crypto sector. and the deadline for compliance is this month: June 2020. While crypto exchanges and custodial wallet providers have been rushing to meet the new regulations, some countries have taken a lax approach to the whole process and others are well ahead of the curve.

In this article, we look at how different countries around the world are implementing the FATF’s Travel Rule, and what that means for the future of crypto.

What is the FATF Travel Rule?

Before we dive in, it’s important to understand what exactly the FATF Travel Rule is. The FATF itself is an international organization that focuses on combating money laundering, and makes recommendations that member countries are expected to follow. 

The Travel Rule itself is not very complicated. Essentially, it is an anti-money laundering (AML) initiative that requires financial institutions to share information about their customers and assume the responsibility to report suspicious activities. The Travel Rule was previously limited to banks only, and closely mimics the Bank Secrecy Act (BSA) in the United States.

As mentioned earlier, the Travel Rule has now been expanded to include Virtual Asset Service Providers (VASPs). VASPs are now required to disclose customer information when facilitating a trade of $1,000 or higher. The requested information covers both the sender’s and recipient’s name, geographical address and account details. This is unprecedented for the crypto industry and naturally presents a number of problems.

VASPs include any individual or business that conducts any of the following activities as part of their services:

The Travel Rule in the United States

When it comes to the Travel Rule, the US is ahead of the curve. This is in part because the Travel Rule is based on the BSA, which is part of US law. Since 2013, the Financial Crimes Enforcement Network (FinCEN) has determined that the BSA has applied to the cryptocurrency industry. Additionally, FinCEN issued its own guidance for VASPs in May 2019, which includes the application of the BSA travel rule.

FinCEN has been one of the few regulatory bodies that isn’t afraid to enforce its regulations. For instance, in 2015 Ripple was given a $450,000 fine after it violated BSA rules. That being said, breaching the travel rule is apparently one of the most common violations and it often isn’t punished. This could be interpreted in a couple of different ways. Either FinCEN is being more lenient towards the crypto industry to allow them time to build compliance solutions, or FinCEN realizes that stricter enforcement would lead to US entities looking to move their businesses offshore to avoid regulation.

The Travel Rule in the European Union

When it comes to AML efforts, the European Union is on the forefront. The EU’s 5th Anti-Money Laundering Directive (5AMLD) came into effect in January 2020 and mostly corresponds to the FATF guidance. However, 5AMLD is not as comprehensive as the FATF’s guidelines. 5AMLD requires that custodian wallet providers and crypto-to-fiat exchanges keep a record of customer activity, and conduct Know Your Customer (KYC) and AML checks. However, crypto-to-crypto exchanges aren’t on the list of obliged entities, which makes them exempt from 5AMLD compliance.

Additionally, the 5AMLD directives take a more relaxed approach to user recordkeeping. While the FATF Travel Rule recommends that data is gathered on both the recipient and the sender (including communicating with other VASPs), 5AMLD only requires the submission of data to financial regulators upon request.

The Travel Rule in the United Kingdom

Although the United Kingdom is slated to leave the European Union’s trade and customs union in early 2021, the country’s financial sector is required to follow the 5AMLD directives as they came into effect prior to the Brexit deadline. As a result, the UK’s AML authority, the Financial Conduct Authority, stated in January 2020 that all crypto firms need to enact ongoing monitoring of all customers.

Now that the FATF Travel Rule is in full effect, the United Kingdom has updated its requirements. All crypto businesses are required to submit applications outlining how they will comply with the Travel Rule to the FCA by the end of this month. Although the deadline for this is technically January 2021, the FCA wants time to go through submissions. Any crypto business that has not submitted an application by January 2021 will have to cease all activity in the UK.

The Travel Rule in Switzerland

Switzerland is known for being an international financial hub, so it’s no surprise that they are also taking steps to comply with the FATF’s Travel Rule. A crucial step has been lowering the transaction threshold for unidentified crypto exchanges. The original number was $5,000 but has now been lowered to $1,000 to comply with the threshold outlined in the Travel Rule.

That being said, the FATF Travel Rule isn’t a law; it’s a recommendation and therefore, not legally enforceable. Switzerland’s actions towards compliance are in line with EU standardization of 5AMLD too.

The Travel Rule in Asia

When it comes to crypto regulation and compliance, several Asian countries have been leading the pack for several years. Naturally, the FATF travel rule is no exception and Asian regulators have been ahead of the curve. Specifically, Singapore, Japan, and South Korea have all been incredibly receptive to FATF directives and have taken the necessary steps towards compliance.

Singapore

Singapore has always been a keen adopter of the FATF recommendations. The country enacted the Payment Services Act (PSA) in January 2019, which unlike the ambiguous language of the EU’s 5AMLD, clearly defined actions that crypto businesses needed to take. The PSA requires digital payment token services (which includes both crypto businesses and exchanges) to comply with the FATF AML rules. In compliance with the Travel Rule, Singapore’s reporting threshold is around $1,000 (SG $1,500).

Japan

Japan has a reputation of being at the forefront when it comes to cryptocurrency adoption, but the country has been a keen observer of crypto regulations too. Since the creation of Japan’s Payment Services Act in 2017, domestic crypto firms have had to comply with AML regulations and register with their local finance bureau.

South Korea

Another country that has followed the FATF recommendations, South Korea also has legislation in place that aligns with the Travel Rule. The country passed a bill in November 2019 that created a legal structure for cryptocurrencies and introduced an AML framework for crypto-related businesses. All crypto businesses in South Korea are required to follow the FATF’s guidelines to the letter.

The Travel Rule in Canada

While Canada has not always been at the forefront of crypto regulations (in a 2016 report by the FATF on Canada’s AML efforts, Canada’s crypto industry was deemed to be the most at risk), it is starting to make strides to comply with the Travel Rule. Starting this month, the country’s financial regulator, FinTRAC, now treats all crypto firms as a money service business (MSB). This means that crypto businesses will have to record the name, address and account details for transactions above CAD $1,000.

This is a big step for the Canadian cryptocurrency industry, however, there are concerns that crypto firms will run into the same problems that other MSBs do. There are additional concerns that increased regulations could push crypto-related businesses overseas to countries like Singapore that have clearer guidelines. That being said, the new guidelines could increase trust in the industry that was shaken to the core by the QuadrigaCX scandal in 2019.

Conclusion - Complying with the FATF Travel Rule

Evidently, the Travel Rule marks a major change when it comes to virtual assets, and will fundamentally alter how VASPs operate in the future. Cooperation is going to become a key part of day to day operations; something which has never previously existed. 

Failing to comply could have dire consequences for VASPs and financial regulators all over the world. While the FATF does not have the power to prosecute, it does actively name and shame countries who fail to comply with its recommendations, and it will likely do the same to non-compliant VASPs.

Our sister company, SelfKey, provides DID services for consumers and has made the necessary changes to help VASPs become compliant with the Travel Rule with the SelfKey Compliance Hub. The SelfKey Compliance Hub takes advantage of multiple existing technologies and brings them together in one place, essentially streamlining the process. Data is easily verifiable and is not widely shared, making things more secure for everyone involved.

Want to learn more about the SelfKey Compliance Hub and how SelfKey is part of the solution? Get in touch.

 

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