ARTICLE
21 February 2024

Fintech Update: Understanding The Travel Rule For VASPs

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Walkers

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Walkers is a leading international law firm which advises on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Ireland and Jersey. From our 10 offices, we provide legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers.
The Jersey Financial Services Commission (JFSC) has recently shared its guidance outlining what Virtual Asset Service Providers (VASPs) need to do to follow the 'travel rule'.
Jersey Technology
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The Jersey Financial Services Commission (JFSC) has recently shared its guidance outlining what Virtual Asset Service Providers (VASPs) need to do to follow the 'travel rule'. This article simplifies the concept of the travel rule, its development in the EU and Jersey, its significance in Jersey and key points from the JFSC's guide.

Understanding the travel rule

FATF Recommendation 16 establishes the travel rule, which is an international regulatory standard designed to combat financial crimes like money laundering and terrorism financing. It mandates that financial institutions, including those dealing with virtual assets, share specific information about the parties involved in a transaction when transferring funds electronically.

This requirement is particularly aimed at transactions exceeding a minimum threshold of €1,000 or $1,000. The rule's primary goal is to help ensure transparency and traceability of financial transactions, making it difficult for illicit actors to hide their activities.

EU approach

Within the EU, the regulatory framework for the movement of funds is outlined in the Funds Transfer Regulation (FTR). The FTR details that payment service providers must include complete information about the payer and payee with every fund transfer.

In anticipation of the evolving digital economy, the EU recently updated this regulation (Recast FTR) to extend these requirements to crypto-asset transfers, effective from 30 December 2024. This expanded travel rule shall apply to transfers of crypto-assets, including transfers using crypto-ATMs, where at least one of the crypto-asset services providers involved in the transfer is established, or has its registered office, in the Union.

Notably, the EU's regulations are more stringent than the global standards set by FATF, as they apply to crypto-asset transfers below the €1,000 threshold as well, aiming for a more comprehensive coverage.

Jersey approach

Jersey has taken a proactive approach by incorporating the travel rule into its local regulations ahead of the EU's timeline for including crypto-assets in its travel rule. By amending its legislation in September 2023, Jersey expanded the definition of 'payment service provider' to include VASPs when:

  • The person is carrying out payment services in or from within Jersey
  • Being a legal person established under Jersey law, the person is carrying out payment services in any other part of the world

This expansion means that any VASP operating within Jersey or under Jersey law elsewhere must comply with the travel rule. This local adaptation underscores Jersey's commitment to maintaining a robust regulatory framework that aligns with international standards.

Key takeaways from the JFSC's travel rule guidance 

The JFSC's guidance delineates the expectations for VASPs in complying with the travel rule. It underscores the necessity for VASPs to:

  • Implement compliance plans: VASPs should undertake reasonable efforts to align with the travel rule, including developing a clear, documented plan for achieving full compliance in a timely manner.
  • Ensure robust procedures for transactions: Compliance is required not just for transactions within Jersey or with entities in jurisdictions recognising the travel rule, but also involves ongoing vigilance regarding the rule's application globally.
  • Handle transactions with caution: The guidance elaborates on transactions involving jurisdictions without the travel rule, details requirements for transferring information between VASPs and addresses transactions below the minimum threshold of €1,000. For lower-value transactions, compliance with the travel rule is needed only when the funds to be transferred are suspected of being connected to money laundering or the financing of terrorism.

A notable point in the guidance is the cautious approach advised towards transactions involving unhosted wallets. VASPs are expected to ensure they have sufficient information to work out the control and ownership of these wallets before proceeding with transactions.

Next steps

The guidance is particularly pertinent for Jersey-based VASPs, who are now tasked with formulating and documenting their compliance strategies. VASPs should also bear in mind that the guidance provided in respect of a Jersey VASP to or from a non-VASP is general guidance only until the recast FTR becomes applicable.

As regulatory landscapes evolve, especially with the impending application of the Recast FTR in the EU, VASPs should remain alert to any updates or changes in the regulatory requirements.

How we can help

Our Regulatory & Risk Advisory team is committed to providing updates and insights as Jersey's regulatory framework for virtual assets continues to develop. We can help VASPs in drafting their compliance plans and advise on adherence to ongoing Anti-Money Laundering (AML), Counter-Financing of Terrorism (CFT), and Counter-Proliferation Financing (CPF) obligations.

Our team's extensive experience spans advising VASPs on licensing, AML/CFT/CPF obligations, launching tokenisation platforms, securitisation platforms involving virtual assets, investment funds focusing on virtual assets and the establishment of virtual asset issuers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
21 February 2024

Fintech Update: Understanding The Travel Rule For VASPs

Jersey Technology

Contributor

Walkers is a leading international law firm which advises on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Ireland and Jersey. From our 10 offices, we provide legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers.
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