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The European Union's Transfer of Funds Regulation (TFR) and the associated Travel Rule Guidelines from the European Banking Authority (EBA) are set to significantly impact how Crypto Asset Service Providers (CASPs) handle crypto-asset transactions. As these regulations come into effect, it is crucial for CASPs to understand the key requirements and prepare for compliance. 

This blog highlights the top 10 things European CASPs need to know about the upcoming Travel Rule compliance enforcement.

1. Comprehensive Data Collection Requirements

Under Article 14, paragraphs 1 and 2 of the TFR, CASPs must ensure that all transfers include specific details about the originator and beneficiary.

This includes:

Natural persons

Legal persons

This comprehensive data collection ensures that all parties in a transaction can be unambiguously identified.

2. Robust Monitoring Systems

Beneficiary CASPs must implement robust monitoring systems to detect and manage non-compliant transactions. These systems should be capable of identifying missing, incomplete, or meaningless information and should align with the risk levels associated with money laundering and terrorist financing. ^[1]

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3. Handling Non-Compliant Transactions

When a transaction lacks the required information, CASPs have four options: execute, reject, return, or suspend the transfer. The appropriate action depends on the specific circumstances and the risk assessment results. ^[2]

4. Managing Non-Compliant Counterparties

Repeated non-compliance by counterparties requires CASPs to reassess their relationships. This includes applying stricter monitoring and verification measures, potentially terminating business relationships, and reporting non-compliant counterparties to the relevant authorities. ^[3]

5. Verifying Self-Hosted Wallet Transactions

For transactions involving self-hosted wallets, the requirement to use two methods for wallet ownership verification has been removed. CASPs are now required to use only one method by default for verifying wallet ownership/control. ^[4]

6. Understanding Different Self-Hosted Wallet Transaction Scenarios 

The TFR categorizes self-hosted wallet obligations based on the transaction amount and whether the wallet owner is a customer of the CASP. These scenarios include transactions of 1,000 euros or less, transactions over 1,000 euros where the wallet owner is a CASP customer, and transactions over 1,000 euros where the wallet owner is not a CASP customer.

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7. Implementing Appropriate Risk Mitigation Measures on Self-Hosted Wallet Transactions

CASPs should adopt a risk-based approach to transactions involving self-hosted wallets and implement any necessary risk mitigation measures proportional to the identified risks. These measures may include verifying the identity of the transfer's originator or beneficiary, requesting additional information, and conducting enhanced ongoing monitoring of transactions. ^[5]

8. Ensuring Compliance with General Obligations

CASPs must ensure compliance with several general obligations, such as:

• Information transmission infrastructure: Must be fully capable of transmitting information without technical limitations. A transitional period until July 31, 2025, allows for exceptions with compensatory policies in place. ^[6]
• Compliance timing: Information must be transmitted immediately and securely, before or at the same time the crypto-asset transfer is completed. ^[7]
• Joint accounts: Transfers from joint accounts, addresses, or wallets must include information about all holders. ^[8]‍
• Information submission changes: Initial information submissions cannot be changed unless requested by the beneficiary CASP or if an error is identified. Subsequent CASPs must be informed and required to detect any missing or incomplete information. ^[9]

9. Evaluating Payment and Messaging Systems (Travel Rule solutions)

Payment and messaging system requirements: CASPs must evaluate selected messaging or payment protocols based on the following aspects:

• Communication with internal core systems and counterparty messaging or payment systems.
• Compatibility with other blockchain networks.
• Reachability, including the ability to reach counterparties and the success rate of transfers.
• Detection of transfers with missing or incomplete information.
• Data integration, security, and reliability. ^[10]

10. Preparing for the Future

By July 1, 2026, the European Commission will assess the necessity for additional measures to mitigate risks associated with self-hosted wallet transactions. This evaluation will encompass examining the efficacy and proportionality of verification mechanisms and considering potential restrictions. ^[11]

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The upcoming Travel Rule compliance regulation imposes comprehensive requirements on CASPs to ensure the integrity of crypto-asset transactions. By understanding and adhering to these requirements, CASPs can effectively manage transaction information, monitor compliance, handle non-compliant transactions, and manage relationships with non-compliant counterparties. This regulatory framework not only helps in mitigating risks associated with money laundering and terrorist financing but also fosters a more secure and transparent crypto-asset ecosystem in the European Union.

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Want to learn more? Read our blogs on beneficiary VASPs' transaction requirements under the TFR and the upcoming self-hosted wallet requirements.

The European Union’s Transfer of Funds Regulation (TFR) and the European Banking Authority (EBA)’s Travel Rule Guidelines, updated with the EBA’s final Travel Rule guidelines published on July 4, set out specific requirements for transactions involving self-hosted wallets. These wallets, controlled by individuals rather than VASPs, pose unique challenges to regulatory compliance. This article summarizes the obligations for self-hosted wallet transactions under the TFR, focusing on different transaction scenarios and the required verification measures.

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Highlights of What Changed in the EBA’s Final Travel Rule Guidelines

1. More Flexibility in the Scope of Required Originator Information:

The final version of the Travel Rule guidelines clarifies that CASPs have the discretion to determine which “alternative information items” about the originator customer to transmit and demand receiving, as long as they achieve unambiguous identification and support sanction screening. This approach is intended to be better suited for cross-border transfers.

2. Eased Requirements for SHW Transfers Below €1,000:

The final version of the Travel Rule guidelines removes verification requirements. Only information collection obligations apply, eliminating the need for technical means like blockchain analytics to cross-match collected data in order to identify and verify the originator or beneficiary.

3. Simplified Verification for 1st-Party SHW Transfers ≥ €1,000:

The requirement to use two methods for wallet ownership verification has been removed. CASPs are now required to use only one method by default for verifying wallet ownership/control.

4. Clarification for 3rd-Party SHW Transfers Above €1,000:

The Travel Rule Guidelines now clarify the requirements, specifying that if the SHW is owned or controlled by a third party who is not a customer of the CASP, the requirements from Article 19a of Directive (EU) 2015/849 apply. Additionally, the originator/beneficiary identity verification required therein is deemed to be fulfilled by collecting additional information from other sources (e.g., blockchain analytics, third-party data, or recognized authorities’ data) or using other suitable means to ensure the originator/beneficiary’s identity is known.

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Overview of Applicable Obligations

The TFR categorizes obligations based on the transaction amount and whether the wallet owner is a customer of the Crypto Asset Service Provider (CASP). These scenarios include:

• Transactions of 1,000 euros or less.
• Transactions over 1,000 euros where the wallet owner is a CASP customer.
• Transactions over 1,000 euros where the wallet owner is not a CASP customer.

Understanding these categories is crucial for CASPs to ensure compliance with the TFR and the associated Travel Rule Guidelines.

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A. Transactions of 1,000 Euros or Less

For transactions of 1,000 euros or less involving self-hosted wallets, the TFR mandates that CASPs collect and hold specific information about the parties involved. As outlined in Articles 14/5 and 16/2 of the TFR, transactions involving self-hosted wallets of 1,000 euros or less require CASPs to obtain and hold information about the parties to the transaction. The scope of information that CASPs are required to collect mirrors that which is mandated for CASP-to-CASP transactions.

The Travel Rule Guidelines clarify in paragraph 80 that this information must be sourced from the CASP’s customer. This includes:

• Full name of the originator and beneficiary

• Distributed ledger address

• Account number

The final EBA Travel Rule Guidelines removed the requirement for CASPs to cross-match this information using suitable methods such as blockchain analytics and third-party data providers to verify the identity of the originator or beneficiary. Now, CASPs are mandated to collect and retain specific pieces of information from their customers. ^[1]

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B. Transactions Exceeding 1,000 Euros Where the Wallet Owner is a Customer of the CASP

For self-hosted wallet transactions exceeding 1,000 euros, the TFR requires CASPs to verify whether their customer owns or controls the self-hosted wallet. ^[2] The originator CASP is tasked with evaluating whether the wallet is owned or controlled by the originator, while the beneficiary CASP must determine whether the wallet is owned or controlled by the beneficiary. ^[3]

The Travel Rule Guidelines set a non-exhaustive list of verification methods available to CASPs and mandate the use of at least one method for wallet ownership/control verification, such as:

• Advanced analytical tools
• Unattended verifications (e.g., displaying the address)
• Attended verifications (e.g., live customer interaction)
• Sending a predefined amount from the wallet to the CASP
• Signing a specific message in the account and wallet software
• Other suitable technical means, as long as they allow for reliable and secure assessment. ^[4]

Where one method on its own is not sufficiently reliable to reasonably ascertain the ownership or control of a self-hosted address, the CASP should use a combination of methods. ^[5]

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C. Transactions Exceeding 1,000 Euros Where the Wallet Owner is Not a CASP Customer

The TFR does not explicitly address transactions over 1,000 euros involving third-party wallets. However, the Travel Rule Guidelines include a framework governing these transactions. According to the guidelines, the requirements outlined in Article 19a(1)/(a) of Directive (EU) 2015/849—verification of the originator or beneficiary’s identity—are considered fulfilled if the CASP:

• Collects additional information from other sources to verify the submitted information (e.g., from blockchain analytics, third-party data, or recognized authorities’ data)
• Uses other suitable means as long as it is fully satisfied that it knows the originator’s or beneficiary’s identity. ^[6]

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Verification and Risk Assessment

CASPs must adopt a risk-based approach to all transactions involving self-hosted wallets. This includes assessing the risks associated with each transfer and applying enhanced due diligence when high ML/TF risks are detected. The verification process involves collecting additional data from various sources, such as blockchain analytics, third-party data providers, recognized authorities, and publicly available information.

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General Obligations for Self-Hosted Wallet Transactions

In addition to specific transaction-based requirements, CASPs must adhere to several general obligations when dealing with self-hosted wallets:

1. Self-Hosted Wallet Identification

Use technical methods to discern whether the transaction involves a VASP or a self-hosted wallet. If technical means are insufficient, acquire the necessary information directly from the customer. ^[7]

2. Threshold Calculation

Compute the transaction amount based on the exchange rate prevailing at the time of the transfer. ^[8]

3. Risk Assessment

Assess the risks associated with self-hosted wallet transactions and apply appropriate risk mitigation measures. ^[9]

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Additional Context and Considerations

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FATF’s Recommendation 16

Transactions between VASPs and self-hosted wallets fall within the scope of FATF’s Recommendation 16, following its revision in October 2021. Unlike VASP-to-VASP transactions, there is no mandate to transmit originator and beneficiary details to a counterpart. Instead, VASPs must adhere to specific obligations, which can vary significantly across jurisdictions.

Regulatory Expectations and Trends

Although regulatory expectations vary significantly across regions, the requirement for VASPs to verify their customer’s or a third party’s control over the wallet address involved in transactions is gaining traction. The TFR’s requirements reinforce this trend, as further detailed in the sections above.

Future Assessments

By July 1, 2026, the Commission will assess the necessity for additional measures to mitigate risks associated with self-hosted wallet transactions. This evaluation will encompass examining the efficacy and proportionality of verification mechanisms and considering potential restrictions.

The EU TFR sets comprehensive requirements for self-hosted wallet transactions to mitigate the risks associated with money laundering and terrorist financing. CASPs must ensure compliance by verifying wallet ownership, implementing robust monitoring systems, and adopting a risk-based approach to all transactions. By doing so, CASPs can enhance the security and transparency of crypto-asset transfers, contributing to a safer financial ecosystem.

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The EU TFR sets comprehensive requirements for self-hosted wallet transactions to mitigate the risks associated with money laundering and terrorist financing. CASPs must ensure compliance by verifying wallet ownership, implementing robust monitoring systems, and adopting a risk-based approach to all transactions. 

Interested in learning more? Check out our blog on what the TFR says beneficiary VASPs should do when it comes to incoming transactions and the top 10 insights European CASPs need to know about their upcoming Travel Rule compliance framework.

The European Union's Transfer of Funds Regulation (TFR) and the European Banking Authority’s final Travel Rule Guidelines impose stringent requirements on Crypto Asset Service Providers (CASPs) to ensure transparency and security in crypto-asset transactions. Beneficiary CASPs, in particular, have critical responsibilities in managing incoming transactions despite their limited control over deposit flows compared to originating CASPs.

Beneficiary CASPs cannot proactively block incoming deposits and rely on the compliance of the originator CASP to meet obligations. Therefore, it is crucial to evaluate strategies for handling non-compliant deposits. This article focuses on the specific requirements for beneficiary CASPs and strategies for managing transactions that fail to meet compliance standards.

Required Information for Transactions

Under Article 16/1 of the TFR, beneficiary CASPs are obligated to receive specific information about both the originator and the beneficiary of each transaction. Articles 14(1) and 16(1) of the TFR specify the required information, including:

• Full name of the originator and beneficiary
• Distributed ledger address and account number
• Address and official personal document number of the originator
• Additional optional information, such as customer identification number or date and place of birth, to ensure unambiguous identification.

Monitoring Systems for Detecting Non-Compliance

The TFR mandates that beneficiary CASPs implement robust monitoring systems to detect non-compliant transactions. According to the Travel Rule Guidelines, these systems should include:

1. Methods for detecting missing, incomplete, or meaningless information.
2. Pre- and post-monitoring practices aligned with money laundering and terrorist financing (ML/TF) risk levels.
3. Criteria for recognizing risk-increasing factors. ^[1]

Managing Non-Compliant Transactions

Beneficiary CASPs must follow specific procedures to detect a transaction lacking the required information. Article 17 of the TFR outlines four possible actions:

1. Execute: The CASP can proceed with the transaction if the risk assessment allows it.
2. Reject: The transaction can be rejected if it does not meet compliance standards.
3. Return: The funds can be returned to the originator if the necessary information is not provided.
4. Suspend: The transaction can be temporarily suspended while additional information is requested.

The Travel Rule Guidelines provide more granularity on how CASPs should define the appropriate follow-up action:

• Beneficiary CASPs can request missing information from the originator CASP rather than immediately rejecting or returning the transfer. ^[2] 
• If the information is not provided within a specified timeframe (three working days for EU transfers and up to seven days for others), the CASP must decide whether to proceed based on a risk assessment. ^[3] 
• If the rejection is technically impossible (e.g., the crypto-assets have already been received), the transfer should be returned to the originator. ^[4]
• If returning the transfer to the original address is not possible, CASPs should hold the returned assets in a secure, segregated account while communicating with the originator CASP to arrange the proper return of the crypto-assets. ^[4]

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Managing Non-Compliant Counterparties

When beneficiary CASPs identify deposits missing Travel Rule data, it not only disrupts the transaction but also strains relationships with non-compliant counterparties. Here’s how CASPs should manage these situations according to Article 17/2 of the TFR:

1. Reassess the Relationship: Evaluate if the counterparty repeatedly fails to provide the required information.
2. Report Non-Compliance: Notify competent authorities about the non-compliance.

Assessment Criteria

To determine the appropriate course of action, CASPs must assess whether the counterparty has repeatedly failed to meet their obligations. The assessment involves both quantitative and qualitative criteria:

• Quantitative: Frequency of incomplete transfers and unanswered follow-up requests. ^[5]
• Qualitative: Counterparty cooperation, agreements for extended time, and reasons for missing data. ^[6]

Steps for Repeated Non-Compliance

1. Issue Warnings: Inform the counterparty of potential consequences and set deadlines for compliance.
2. Enhanced Due Diligence: Apply stricter measures to manage risk.
3. Terminate Relationship: If necessary, end the business relationship or reject future transfers.
4. Report Repeatedly Non-compliant CASPs: CASPs must report non-compliant counterparties within three months of identifying non-compliance and include details of the non-compliant counterparty CASP, nature and frequency of breaches, justifications provided, and actions taken. ^[7] 

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General Obligations

Finally, the Travel Rule Guidelines offer a concise overview of supplementary requirements that CASPs should consider when dealing with deposits. 

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Pre vs. Post Transaction Monitoring

CASPs are responsible for establishing policies and procedures to determine which transfers require monitoring before or during the transfer process. This decision should consider any factors that may increase risk, as specified in the “EBA’s Guidelines on Money Laundering/Terrorist Financing (ML/TF) Risk Factors.” ^[8]

Meaningless and Inconsistent Information

CASPs should treat information as missing if essential fields are left empty or if the provided information is deemed meaningless or inconsistent. For example, random strings of letters should be considered meaningless information. ^[9]

Communication Systems

When contacting the counterparty for clarification, CASPs should use the same messaging system utilized to transmit the initial information. ^[10]

Self-Hosted Wallet Deposits

For deposits from self-hosted wallets, any requests for clarification should be directed straight to the customer. ^[11]

Interested in learning more? Check out our articles on Self-Hosted Wallet Transaction Requirements Under the EU TFR and Top 10 Insights European CASPs Need to Know About the Upcoming Travel Rule Compliance Regulation.