The Travel Rule mandates crypto exchanges to obtain, hold, and transmit required originator and beneficiary information immediately and securely during crypto asset transfers.
This rule aims to enhance the ability of law enforcement agencies to track illicit funds and combat money laundering and terrorist financing.
Money laundering refers to the process by which individuals or entities attempt to conceal the origins of illegally obtained money, typically from actions such as fraud, corruption, or other criminal activities. They often do this by passing the funds through a complex sequence of banking transfers or commercial transactions. The goal is to make the funds appear legitimate and thus usable without raising suspicion.
Terrorist financing refers to the process of providing financial support to individuals or groups engaged in terrorism.
Crypto exchanges are required to comply with the Anti-Money Laundering (AML) regulations of the various countries in which they operate, which are designed to help detect and report suspicious activity. By adhering to AML regulations, crypto exchanges not only enhance their own credibility and avoid potential legal repercussions, but they also contribute to maintaining the integrity of the financial system and the rule of law.
Unpacking the Travel Rule
The Travel Rule is a term used to refer to a recommendation from the Financial Action Task Force (FATF) designed to combat money laundering and terrorism financing. In the context of crypto assets, the Travel Rule states that any crypto transaction of over a specified threshold respective to its jurisdiction must be accompanied by the personal information of the originator and beneficiary of the crypto asset transfer.
In other words, full transaction information, including the originators and beneficiary’s personal information, must “travel” along with the funds themselves through all the intermediaries involved in processing the transaction. The Travel Rule originated from traditional financial transactions.
Each member country in the FATF is responsible for passing regulations which enforce FATF recommendations like the Travel Rule.
Legal Framework
Global international AML/CTF frameworks are modeled after the FATF’s global standards for combating money laundering and terrorism financing. These standards are set through the FATF Recommendations and their respective Interpretive Notes.
In June 2019, the FATF published its Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (VASPs), extending AML/CFT obligations to cover crypto assets and VASPs. This directive included the Travel Rule, which obliges financial institutions (FIs) that exchange, hold, safe keep, convert, and sell crypto assets to obtain, hold, and transmit required originator and beneficiary information immediately and securely during crypto asset transfers.
The Travel Rule takes its inspiration from the FinCEN Advisory publication 31 CFR 103.33(G), which obliges all FIs to pass on certain information to the counterparty FI in certain transfers of funds.
US legal framework
The Bank Secrecy Act of 1970 (BSA), a U.S. law aimed at preventing money laundering, requires all originating financial institutions of a fund transfer to provide information about the fund transfer to the beneficiary financial institutions. The Travel Rule was then extended to include Virtual assets and Virtual assets service providers.
UK legal framework
The Crypto Travel Rule was passed into law in the UK on July 21, 2022, and entered into force on September 1st, 2023, via part 7A of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
EU legal framework
The Transfer of Funds Regulation (TFR) which will enter into force December 31, 2024, is the European implementation of the FATF’s Travel Rule. The TFR sets uniform Travel Rule requirements across all 27 member states, extending the obligation of payment service providers to accompany transfers of funds with information on the payer and payee to transfers of crypto assets.
SG legal framework
The crypto travel rule is implemented in Singapore through Notice PSN02 issued by the Monetary Authority of Singapore (MAS). The Notice has been in effect since January 28, 2020, and was further specified by MAS' Guidelines to Notice PSN02, issued on March 16, 2020. Section 13 of the Notice sets forth the obligations of VASPs when sending or receiving crypto assets on account of an originator or a beneficiary.
BVI legal framework
VASPs in scope of BVI are required to be registered in accordance with the Virtual Assets Services Providers Act, 2022 , and comply with all relevant laws. The Travel Rule was integrated into BVI law with the 2023 amendments to the Anti-Money Laundering Code of Practice (“AMLTFCoP”) and the Anti-Money Laundering Regulations (“AMLR”), specifically in the sections 19(4) and Part VA, sections 41B through 41F of the AMLTFCoP. Therefore, all VASPs operating in and from within the Virgin Islands are required to comply with and operationalize the Travel Rule.
Making Sense of the Rules
Regulations like the Travel Rule may seem daunting, especially for those new to crypto. While the Travel Rule is considered relatively new to crypto, it has been implemented for decades in the traditional financial world. As such, the Travel Rule implementation will treat crypto transactions similarly to those of its traditional fiat counterparts.
Exchanges may request their users to provide additional information regarding the transaction before processing it. It is important to note that each exchange’s implementation of the Travel Rule may vary.
While the Travel Rule adds an additional layer of compliance to cryptocurrency transactions, it's a vital measure for maintaining transparency and detecting and investigating financial crimes. As we continue to embrace digital currencies, understanding such regulations will become increasingly important.