What is the FATF Travel Rule?
by Stephanie Hanselmann, Senior Compliance Officer at Bitcoin Suisse
Over the past year, there has been much discussion about the future of cryptocurrencies and crypto-financial services in light of new regulatory requirements from the Financial Action Task Force (FATF).
As the international standard-setter in the field of money laundering, the FATF plays a leading role in the development and maintenance of global regulatory guidelines to help ensure the integrity of international financial systems.
While the cryptocurrency industry has developed over the past decade, the FATF has been observing developments closely. And on 21 June 2019, it adopted anti-money laundering and counter-terrorism financing (AML/CFT) recommendations relating to virtual assets and Virtual Asset Service Providers (VASPs). One of the requirements imposed under this publication is the transmission of required beneficiary and originator information when transferring virtual assets.
This is what is referred to as the FATF Travel Rule.
Who (or what) is a VASP?
Since the Travel Rule applies to so-called VASPs, one important point to establish is the definition of what a VASP is.
A VASP is a firm, operating in the space of virtual assets, which provides one or more of the services below:
- custodial wallet service
- trading with some measure of technical control or influence over a client transaction (programmatically or otherwise)
- cryptocurrency exchanges (buying or selling crypto/virtual assets professionally)
- crypto funds
- payment or hybrid payment token issuance (where a token may be used as both a payment token and be considered an asset or utility token)
A VASP, of course, may also be a bank or more traditional financial intermediary which handles crypto assets and whose services mirror those which are in Switzerland already regulated under Article 2 of the Anti-Money Laundering Act (AMLA).
What does the Travel Rule actually mean?
The FATF Travel Rule has several implications for the transfer of crypto assets.
With the exception of transfers to and from unregulated wallets, token transfers must (just like a conventional bank transfer) provide information about the originator and the beneficiary. This is the only way for the receiving financial intermediary to check the name of the sender against sanction lists or for it to check the correctness of the beneficiary information.
In short, the Travel Rule, which already applies to transfers of fiat currencies between financial institutions, lays out how crypto assets can “travel” from one company to another as part of their service offering for clients.
What does the Travel Rule mean for crypto in Switzerland?
In Switzerland, the recommendations of the FATF are taken into consideration very carefully. Because of this, the Swiss Financial Market Supervisory Authority (FINMA) published guidance in August 2019 on how these FATF recommendations should be applied to VASPs operating with blockchain-based financial services.
This comes in addition to regulations which have already been in place before the FATF issued its recommendations. Art. 10 of the Anti-Money Laundering Ordinance (AMLO-FINMA) stipulates the obligation to provide information on the originator and the beneficiary in a payment order.
The obligation is to be interpreted in a technology-neutral way which also makes it applicable to services in the blockchain area. These Swiss regulations allow payment traffic to and from external wallets only if they belong to one of the institution’s own customers.
What does this mean?
Companies which want to operate in a compliant way — as Bitcoin Suisse does — and which want to do business with other compliant companies — need to have complete clarity about the funds of their clients as they flow into (and also out of) their systems.
Since there is currently no system with which identification data for payment transactions on the blockchain can be reliably transmitted, the client’s power of disposal over the external wallet must be verified by means of suitable technical measures.
What does the Travel Rule mean for Bitcoin Suisse?
The requirement of the Travel Rule and its corresponding regulation in Switzerland may be viewed by some as a steep hurdle to overcome. But at Bitcoin Suisse, we have taken this as an opportunity to help advance the industry as a whole.
In particular, Bitcoin Suisse has taken two very important steps.
The first is to implement a proof-of-ownership process for deposits and withdrawals of cryptocurrencies from Bitcoin Suisse accounts. The second is to join together with other leading VASPs in Switzerland and organizations around the world to launch and develop the OpenVASP protocol.
In the next two parts of this series, we take a closer look at proof-of-ownership — and how it actually helps crypto adoption, as well as the great potential of OpenVASP.
Originally published at https://www.bitcoinsuisse.com on September 21, 2020.
