The Travel Rule and Cryptocurrency Meet
After years of self-regulation and watching it’s own house, cryptocurrency rules are now being spelled-out by government organizations. The Financial Action Task Force (FATF) Recommendation 16, also called the “Crypto Travel Rule,” as it mimics the U.S Banking Secrecy Act’s Travel Rule, is now here. The new rule comes with specific requirements for exchanges and virtual asset providers, which we will go over here, but first a little history lesson.
Travel Rule Origins
The Travel Rule is a counter-money laundering initiative that forces financial institutions to share information about their customers and assume the responsibility to report suspicious activities. Marshall Billingslea from the USA, was awarded the presidency of the Financial Action Task Force (FATF) during 2018 & 2019. Mr. Billingslea of the United States assumed the position of President of the FATF on 1 July 2018. He succeeded Mr. Santiago Otamendi of Argentina.
FATF consists of 39 member countries with a group goal of reducing financing terrorism and money laundering.
The Travel Rule originated in the United States as a direct measure against money laundering. It initially applied to traditional financial institutions that were required to comply with the U.S.’ Banking Secrecy Act (BSA).
What is The Travel Rule?
A lot of the focus was on designation of what falls into the class of Virtual Asset Service Provider (VASPs).
VASPs include any person or entity that provides these services as part of their business:
- Fiat and virtual asset exchange
- Exchange between virtual assets
- Transfer of virtual assets
- Safekeeping of virtual assets; or
- Activities related to issuing or underwriting virtual assets.
Know-Your-Customer (KYC) vs. Travel Rule
First off, KYC is a requirement for basic due diligence that identifies customers transacting with a business. These are things like being asked for a government-ID when buying Bitcoin, then verification takes places and the transaction after.
KYC is a legally required process for countries, while The Travel Rule is legally a non-binding guidance for countries and VASPs.
The Travel Rule also requires VASPs to communicate. KYC is an internal rule that companies do to protect against terrorism and liability. The Travel Rule requires compliant VASPs to share key receiver and sender information on transactions over 1000 USD or Euro.
VASP Requirement Differences
Conclusion
As seen above in the chart, the Travel Rule is a feature to compliment existing KYC policies. It stresses the sharing of information like in the traditional banking system with minimum dollar requirements that trigger these events.
The critics stress this rule will add cost and complexity to their business flow. But, solutions for reusable identities from companies like Bridge, that are user-controlled and operated are where the development is going for larger firms. A user should be able to verify their identity and then send the required information and virtual assets, all within their digital asset wallets.
One positive that many cryptocurrency advocates all agree on, is that these rules will help make this new technology more mainstream and trusted.
