UK crypto AML regulation – towards implementation of the Travel Rule
On 22 July 2022, HM Treasury launched a consultation entitled "Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 Statutory Instrument 2022."
The Consultation covered various topics, including expanding requirements to strengthen the regime and information sharing and gathering. Turning to aspects regarding crypto, one of the more controversial parts of the Consultation concerns the implementation of the so-called Travel Rule.
What is the Travel Rule?
In a nutshell, the Travel Rule requires the private sector to obtain and exchange beneficiary and originator information with virtual assets transfers over a certain threshold. Therefore, it is a requirement to obtain information (e.g. name and address) about both parties to a financial transaction. This is a concept from the US, where banks for a long time have been required to obtain and store customer information relating to transactions of a certain level.
The international Financial Action Task Force ("FATF") is driving the impetus for the implementation of the Travel Rule for crypto transactions. This is by way of the FATF Travel Rule (Recommendation 16). The most recent update is through a June 2022 FATF publication titled "Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers"
The Publication begins explaining how it has now been three years since FATF extended its anti-money laundering ("AML") and counter-terrorism financing ("CTF") standards to financial activities, including Virtual Assets and Virtual Assets Services Providers ("VASPs"). Following two previous FATF updated guidances, this third guidance now focuses on the FATF's Travel Rule.
According to FATF, this is a key AML/CTF measure that enables VASPs and financial instructions to both detect suspicious transactions and carry out effective sanctions screening.
Why is the Travel Rule controversial?
Increased regulation
As with any new technological innovation, introducing regulation which gets the balance right between encouraging and stifling innovation is always tricky. This is especially true concerning regulation that also needs to offer protection against financial crime. Of course, there are also the inevitable additional costs of compliance to consider. There are certainly some in the crypto sector who like the aspects of anonymity in transactions which can arise in some situations.
On the other hand, this is a rule that financial institution already adhere to and which clearly and demonstrably benefits the fight against financial crime. Therefore, if the crypto sector wants to be taken seriously, then they should be prepared to accept some compromise.
Data protection
In addition, there are concerns about data protection, and particularly the collection and storage of large amounts of person data and the transfer of data between jurisdictions for cross-jurisdictional transactions. Again, this an area where people can be notoriously protective about such issues. However, once again, if the crypto sector wants to be taken seriously, then it will have to embrace some level of compromise.
Technical issues
Leaving aside these debates, there are, however, also technical issues. As was neatly described in a 16 December 2021 article by Chainalysis "The Cryptocurrency Travel Rule and Interoperability: 10 Things Every VASP Must Know", the decentralised nature of the blockchain and crypto is not designed in such a way that the Travel Rule can be easily implemented. Indeed, in a notoriously complex new area with a different dynamic to previous traditional financial transactions, there have also been many debates as to the extent of transaction participants to which the Travel Rule will apply. For example, should the Travel Rule apply to the miners involved in a crypto transaction?
The Consultation and the Travel Rule – AML crypto regulation
The Consultation sets out the government's proposed changes to comply with FATF's recommendation regarding information sharing for wire transfers to cryptoassets.
It is good to see that the majority are sensibly on board with implementation of these provisions, even though there were some issues raised. Indeed, the majority of respondents agreed with the proposed approach of tailoring the funds transfer regulations to the cryptoasset sector. However, many respondents also highlighted issues around workability, specifically through the novel features of this new technology, for example, suggesting that the terms "payer" and "payee" should be exchanged with the terms "originator" and "beneficiary". The Consultation also notes that the Travel Rules will apply only to cryptoasset wallet providers and exchange providers, and not to all intermediaries.
The Consultation also noted concerns raised about the breadth of personal information collected. The Government has listened to this and the Consultation notes that only one of the originator's address, date and place of birth, and passport number will need to be sent with a cross-border transfer that is above the minimum threshold.
Overall, the government believes that the costs of compliance are outweighed from the reduction of risk of the crypto sector being used for financial crime that will be brought in by the implementation of the Travel Rule.
What does this mean – is the travel rule applicable in UK crypto AML regulation?
Implementation of the Travel Rule to some extent into UK crypto rules is almost certainly coming soon; it is now just a matter of the timeframe.
The Consultation concludes that taking the above into consideration (including the current status of compliance technology), the Government has implemented a 12-month grace period to run from the point at which the amendments take effect until 1 September 2023.
Although the Consultation hints at some concessions, the most important being the fact that the Travel Rules will not apply to all intermediaries in a transaction, once implemented, these rules will require relevant entities to comply. This will bring both compliance and technical burdens. Expert legal advice and guidance is highly recommended to ensure compliance.
Regulation and compliance
In these constantly changing times, firms that deal with cryptoassets, and additionally have exposure to firms that do, will need to carefully consider all their systems and controls to ensure that they are able to comply with all relevant AML and sanctions regulations. Gherson's white-collar crime and regulatory team are able to provide advice and assistance with AML and sanctions compliance, including in situations involving cryptoassets.
The Team has original written about how to address the risks of sanctions evasion through crypto.
Additionally, the team has recently started a series on the regulation of crypto, with the aim of advising those who work in the compliance of this sector. In addition, for those who would like advice on relevant issues, including those who have had issues with the FCA registration process, our specialist regulatory and compliance team can guide individuals and companies through the process.
Criminal investigations and litigation
In addition, Gherson's Solicitors criminal litigation, regulatory and investigatory team combine an expert knowledge of criminal and regulatory law underpinned with a firm understanding of digital assets and blockchain technology. As such, the team is able to provide expert strategic advice to anyone facing investigation in relation to any allegation of criminality involving cryptoassets.
Please do not hesitate to contact us for further advice, send us an e-mail, or, alternatively, follow us on Twitter, Facebook, Instagram, or LinkedIn to stay-up-to-date.
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.
