Cryptocurrency

Rule

Diligence

<p>Cryptocurrency compliance is a noose that keeps on tightening, if you’re in the crypto space, there’s a good chance you’ve heard about the Financial Action Task Force’s (FATF) crypto travel rule. A new set of rules that is going to get implemented or already is and could have lasting effects in some jurisdictions. In this article, we delve into the intricacies of the crypto travel rule, its implications, and how to be compliant with the state in the future.&nbsp;</p> 
<p><strong>The FATF crypto travel rule requires virtual asset service providers (VASPs) like exchanges and wallet providers to share personal information about senders and recipients when transferring cryptocurrency funds over $1000. This regulation aims to increase transparency and prevent illicit activities by ensuring customer data “travels” with each crypto transaction above that threshold.</strong></p> 
<h2 class="wp-block-heading" id="what-is-the-fatf-crypto-travel-rule">What Is The FATF Crypto Travel Rule?</h2> 
<p>The crypto travel rule is a recommendation by the Financial Action Task Force, in short FATF, and is a new rule regarding wire transfer requirements for digital currencies.&nbsp;</p> 
<p>This new requirement from governments aims to prevent money laundering and illicit financial flows, specifically through cryptocurrency.</p> 
<figure class="wp-block-image size-large">
 <img loading="lazy" loading="lazy" decoding="async" width="1024" height="576" src="https://droomdroom.com/wp-content/uploads/2023/11/Money_Laundering_Cycle-1-1024x576.png" alt="Crypto Travel Rule" class="wp-image-16768" title="Crypto Travel Rule: Should You Care? 28">
</figure> 
<p>The name travel rule comes from the personal data that ‘travels’ with each transfer. Although this crypto travel rule already existed for traditional wire transfers in and inbetween countries, the rule is set to expand in the coming years to all virtual asset transfers i.e. cryptocurrency transactions.</p> 
<p>All VASPs need to obtain and accurately record all information from their clients. Which is essentially, that each cryptocurrency service provider is required to share personal information about their clients. a.k.a. snitching on you to the government.&nbsp;</p> 
<p>This requirement formally known as FATF Recommendation 16 will thus essentially expand existing regulations around sharing customer data for on and off ramps and cover ALL transactions made in cryptocurrencies as well.</p> 
<h2 class="wp-block-heading" id="the-importance-of-the-crypto-travel-rule">The Importance of the Crypto Travel Rule</h2> 
<p>Regulators are implementing the “crypto travel rule” to address concerns around cryptocurrencies, some of these concerns are the following; </p> 
<p>Exchanges and crypto businesses must collect KYC identity information from their customers. They must then share this data with partner exchanges/firms in order to prevent money laundering streams or potential terrorist financing.</p> 
<p>By mandating cross-border transaction details they want to make it harder for illicit actors to transfer ill-gotten money. All suspicious activity must be halted!</p> 
<p>If all these steps are taken by the “crypto travel rule” and by everyone involved there will be a more uniform regulation to the crypto industry, which pleases the regulators dearly.</p> 
<h2 class="wp-block-heading" id="who-are-considered-virtual-asset-service-providers-vasps">Who Are Considered Virtual Asset Service Providers (Vasps)?</h2> 
<p>The firms that fall under this new regulation are officially termed VASPs or virtual asset providers. To comply, VASPs are required to collect specific information, including the names of senders and recipients of digital assets, this includes all info, addresses, unique transaction reference numbers, IP addresses, device fingerprints, legal names, and account numbers of the transacting parties and so on.</p> 
<p>VASPs are not only exchanges or brokers, they could include entities that enable control over virtual assets, think about hardware wallet providers or software wallet providers. In some cases, this could also mean the end of decentralized lending platforms, and exchanges. But also peer-to-peer (P2P) platforms could be classified as VASPs, with each definition that will depend on the jurisdiction where it the crypto travel rule applies.</p> 
<blockquote class="wp-block-quote"> 
 <p><a href="https://droomdroom.com/evolution-of-crypto-exchanges/">Exchanges evolved from 24/7 platforms to full-service banks, learn more about their radical differences from traditional exchanges here.</a></p> 
</blockquote> 
<h2 class="wp-block-heading" id="what-are-the-main-requirements-of-the-fatf">What Are the Main Requirements of the Fatf?</h2> 
<p>The core requirements of the crypto travel rule are the following:</p> 
<ul> 
 <li>VASPs must monitor transactions and report suspicious activity.</li> 
</ul> 
<ul> 
 <li><strong>Due Diligence on Counterparties</strong>: Originating VASPs (virtual asset service providers like exchanges) must conduct proper identification and verification checks on any counterparty VASPs before sharing data.</li> 
 <li><strong>Identification of Originators</strong>: The originating VASP needs to collect identity information like name, address, nationality, etc. directly from the person or entity initiating the crypto transfer.</li> 
 <li><strong>Record Keeping</strong>: In addition to obtaining and sharing the required originator/beneficiary data, VASPs must retain all the records of all transactions.</li> 
 <li><strong>Sanctions Screening</strong>: VASPs are obligated to screen all transactions in real-time against lists of sanctioned individuals or entities.</li> 
 <li><strong>Suspicious Activity Reporting</strong>: If a VASP detects any suspicious activity they must file it to the appropriate financial authorities.</li> 
 <li></li> 
</ul> 
<h2 class="wp-block-heading" id="how-can-vasps-comply">How Can VASPs Comply?</h2> 
<p>Well, the future’s looking bleak for the virtual asset providers, as compliance with the crypto travel rule involves a great number of steps. First, they need to find a KYC solution for all new and existing users, they also must start to collect all the data that comes with these procedures.&nbsp;</p> 
<blockquote class="wp-block-quote"> 
 <p><a href="http://same for: https://droomdroom.com/crypto-exchanges-without-kyc-to-look-out-for/" target="_blank" rel="noreferrer noopener">While useful for some, critics argue no-KYC exchanges can enable illicit activities – weigh the tradeoffs in our analysis.</a></p> 
</blockquote> 
<p>They have to get their monitor systems right and find to create secure ways of sharing users’ data with counterparties. A big task if you ask me. Just by applying these new rules, we can see many platforms leaving off-shore or offering their services to citizens of crypto-friendlier areas.&nbsp;</p> 
<figure class="wp-block-image size-full">
 <img loading="lazy" loading="lazy" decoding="async" width="988" height="692" src="https://droomdroom.com/wp-content/uploads/2023/11/all-wallets.png" alt="What’s the Crypto Travel Rule and Why Should You Care?" class="wp-image-16769" title="Crypto Travel Rule: Should You Care? 29">
</figure> 
<h2 class="wp-block-heading" id="crypto-travel-rule-implementation-worldwide">Crypto Travel Rule Implementation Worldwide</h2> 
<p>Currently, we see that more than 35 jurisdictions have implemented the crypto travel rule. New implementation of the travel rule will arrive shortly for many jurisdictions. Let’s take a look at some major countries and their digital agenda:</p> 
<ul> 
 <li>European Union – Applied from December 2024</li> 
 <li>UK – In force since September 2023</li> 
 <li>Singapore – In force since January 2020</li> 
 <li>Canada – In force since June 2021</li> 
 <li>South Korea – In force since March 2022</li> 
</ul> 
<h2 class="wp-block-heading" id="challenges-related-to-the-travel-rule">Challenges Related to the Travel Rule</h2> 
<p>But as with all things, the idea is great but execution is a different story. We see that the implementation of the crypto travel rule does come with its share of issues.&nbsp;</p> 
<p>Some include potential miscommunication between VASPs and interaction with unlicensed or unregistered foreign VASPs. Which could happen more than once, since crypto is a global market.&nbsp;</p> 
<p>Also, the interpretation of travel rule requirements such as de thresholds, data privacy issues, and how unlicensed, unregistered, and non-hosted wallets are treated is not the same in each different jurisdictions. Therefore there has to be a one-suits-all technology to meet the FATF and local compliance obligations.&nbsp;</p> 
<blockquote class="wp-block-quote"> 
 <p><a href="http://same for: https://droomdroom.com/best-ethereum-wallets/" target="_blank" rel="noreferrer noopener">Choosing the right wallet like MetaMask or Trust is critical – we cover top options in this piece on securing your crypto.</a></p> 
</blockquote> 
<p>In short, we can list the following challenges VASPs and regulators will face shortly when they try to incorporate the crypto travel rule:</p> 
<ul> 
 <li>No uniform approach – as requirements differ across jurisdictions, this will cause much confusion, more than there already is.</li> 
 <li>Need for interoperable data sharing systems – VASPs must be able to securely send customer information to each other.</li> 
 <li>Perceived privacy risks – Many view it as an increased surveillance state and of financial freedom.</li> 
 <li>Data security risks – If personal data is transferred it is also a matter of time when cyber criminals breach one of the data banks.</li> 
 <li>Data privacy compliance – VASPs also have to ensure that their data sharing isn’t breaching local privacy laws.</li> 
</ul> 
<blockquote class="wp-block-quote"> 
 <p>C<a href="https://droomdroom.com/centralized-cryptocurrency-exchanges-explained/" target="_blank" rel="noreferrer noopener">entralized platforms need to be compliant as they influence prices and liquidity in crypto, as analyzed here.</a></p> 
</blockquote> 
<h2 class="wp-block-heading" id="how-does-this-affect-everyday-crypto-users">How Does This Affect Everyday Crypto Users? </h2> 
<p>What is probably more important is how this rule is influencing our behavior as cryptocurrency fanatics. Well for regular crypto traders and investors such as ourselves, the crypto travel rule could mean that we could face:</p> 
<h3 class="wp-block-heading" id="strong-increased-kyc-requirements-strong"><strong>Increased KYC Requirements</strong></h3> 
<p>Individuals will have to submit more extensive know-your-customer (KYC) documentation whenever they deposit to or withdraw from exchanges/wallets. </p> 
<h3 class="wp-block-heading" id="strong-transaction-limits-strong"><strong>Transaction Limits</strong></h3> 
<p>This could potentially mean imposing limits on large single transfers over a certain dollar threshold for example any transactions of $1,000 .</p> 
<h3 class="wp-block-heading" id="strong-delays-strong"><strong>Delays</strong></h3> 
<p>The need for multi-party coordination may slow down the speed of funds moving between addresses. Which is totally against the permissionlessness of the blockchain.</p> 
<h3 class="wp-block-heading" id="strong-reduced-anonymity-strong"><strong>Reduced Anonymity</strong></h3> 
<p>Strict originator/beneficiary identification essentially removes the degree of pseudo-anonymity and will doxx a lot of people for good. </p> 
<p>While these rules are set to be for combating illicit money flows, they will mostly hurt small traders and investors. This will come at a price of reduced privacy and convenience for many users. Some will care, others will not, what do you think this new rule effects will be?&nbsp;</p> 
<h2 class="wp-block-heading" id="conclusion">Conclusion</h2> 
<p>In conclusion, The <a href="https://www.fatf-gafi.org/en/publications/Fatfrecommendations/targeted-update-virtual-assets-vasps-2023.html" target="_blank" rel="noreferrer noopener nofollow">FATF crypto travel rule</a> is aimed at improving transparency in cryptocurrency transactions and wants to tackle anonymity in crypto transactions and prevent illicit activities. Although most of the illicit fundings are being done by normal bank transactions, the crypto travel rule will create new burdens for legitimate crypto participants.</p> 
<p>For VASPs or virtual asset providers, the need to comply is the same as the need to survive, if not they are set to pay fines, lose their reputation, and get ostracized by regulators. So hopefully with the right solutions, compliance can be manageable.</p>

Crypto Travel Rule: Should You Care?

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