The UK has newly integrated a regulatory guideline known as the Travel Rule, targeting businesses involved in crypto assets. The regulation comes from a recommendation from the global FATF (Financial Action Task Force).
Effective from the 1st of September 2023, this rule mandates crypto companies to collect, verify, and share information about both the sender and receiver of crypto assets. Ultimately, this information must also be shared with counterparty crypto asset service providers.
The rule is part of the UK's broader effort to align its crypto industry with Anti-money Laundering (AML) and Countering the Financing of Terrorism (CFT) policies.
The Financial Conduct Authority (FCA) is the most important financial regulator in the UK, and so it is them who have stepped up to oversee crypto asset providers. The Travel Rule is an amendment to the existing Terrorist Financing, Money Laundering, and Transfer of Funds Regulations of 2017 (MLRs). The FATF is keen for others to administer the Travel Rule quickly; this encouragement is to ensure crypto practices are standardised with more traditional financial practices. The idea is that traditional and modern finance can become more aligned.
Who is Affected?
The UK crypto travel rule applies to two types of companies under the MLRs 2017, that is
- Crypto Asset Service Providers: companies that exchange crypto assets for money or other crypto assets, or operate machines that do so.
- Custodian Wallet Providers: companies that provide services to safeguard and/or administer private cryptographic keys or cryptoassets on customers’ behalf.
The Travel Rule outlines specific steps that Virtual Asset Service Providers (VASPs) must take
- Information Gathering: the initiating VASP is required to include the names of both the sender and recipient, along with their respective account numbers or unique identifiers for the transaction.
- Verify Information: information relating to the originator must be verified by the originating VASP using documents or a reliable source.
- Share Information: when a Beneficiary VASP receives a crypto-asset, it must check whether it has received the information that is required and whether it corresponds with information verified during customer due diligence.
- Evaluating Risk: should there be any inconsistencies or omissions in the information, the receiving VASP should contemplate either postponing the transaction or sending the crypto asset back to the originator.
Compliance and Penalties
Firms are obliged to adhere strictly to Anti-Money Laundering (AML) regulations, this has always been of utmost importance in all financial aspects. Non-compliance could, of course, result in harsh punitive measures. It’s important to remember that firms themselves are responsible for achieving compliance with the Travel Rule, even when using third-party suppliers. They must also regularly review the implementation status of the Travel Rule in other jurisdictions and adapt business processes accordingly, making it quite the regulatory burden.
The UK aims to strengthen rules for crypto trading platforms, create a regime for crypto lending, and implement new rules to protect customers from market manipulation. The Travel Rule is a significant step towards a more regulated crypto industry in the UK, which although sounds restrictive, actually promotes the use of crypto in the UK.
How Businesses Should Prepare
As the UK Crypto Travel Rule takes effect, businesses in the crypto asset sector must undertake comprehensive preparations to ensure full compliance. The FCA has set forth specific guidelines, but beyond these, there are additional steps that companies should consider.
The first order of business is to update your internal systems to capture the required data for every transaction. This involves modifying your existing databases and transaction protocols to include fields for the sender's and receiver's information. These system updates should be tested rigorously to ensure they capture data accurately and consistently.
Given the legal complexities surrounding the Travel Rule, it's advisable to consult with experts familiar with crypto regulations, like Englebert. We can provide tailored advice on how to navigate the regulatory landscape, helping you ensure that your compliance measures stand up to legal scrutiny.
Compliance is not just a systems issue; it's a human error one as well. Employees must be trained to understand the importance of the Travel Rule, the data that needs to be collected, and the procedures for verifying this information. Regular training sessions and updates can help instil a culture of compliance within the organisation. At Englebert, we offer both online courses and bespoke company training to keep you on top of compliance and best practices.
The Travel Rule has global implications. Businesses must be vigilant about the rule's status in other jurisdictions and adapt their processes accordingly. If you're dealing with firms in countries that haven't yet implemented the Travel Rule, ensure you take reasonable steps to collect the required information.
When receiving a crypto asset from a jurisdiction without the Travel Rule, conduct a full risk-based assessment. This involves evaluating the countries in which your firm operates and the status of the Travel Rule there, to decide whether to make the crypto assets available to the beneficiary.
The collection of additional data brings with it the responsibility of safeguarding that information. Cybersecurity is extremely important for all firms, no less financial ones. Robust data security measures must be in place to protect this sensitive data from unauthorised access or breaches.
As a final note, even if a counterparty cannot provide the necessary information, it's important to collect, verify, and securely store the data as mandated by the Money Laundering Regulations.
The UK Crypto Travel Rule is a critical regulatory development that aims to bring transparency and security to crypto transactions. By aligning with global AML and CFT efforts, the UK is setting a precedent for other countries to follow in regulating the fast-growing crypto industry. And, for training or help with compliance with these new regulations, please get in touch with a member of our Englebert team.