Stay Updated on Crypto Compliance & Crypto Regulation in the EU

As of 30 December 2024, compliance with the Transfer of Funds Regulation (TFR) and respective EBA Guidelines is mandatory for any CASPs operating in the EU.

▶︎ Watch this special video message from Lana Schwartzman, Head of Regulatory & Compliance at Notabene, explaining why compliance with TFR is so important, as what consequences may face CASPs that fail to comply.

A common misconception that we hear is that there is a “grace period” that delays the need to comply until July of this year. While it is true that the EBA guidelines foresee a transitional period until July 31, 2025, during which CASPs may exceptionally use infrastructures or services with certain technical limitations, this does not exempt them from Travel Rule compliance. CASPs using such infrastructures are required to take additional technical steps to ensure full compliance with the Travel Rule during this period.

This provision from the EBA Guidelines gave rise to misinterpretations that many are now incorrectly viewing as a grace period or exemption. The EBA already clarified that this is not the case. In page 51 of the final Guidelines “the EBA stresses that non-compliance with Regulation (EU) 2023/1113 is not accepted”. In fact, paragraph 24 of the EBA Guidelines clearly states that the technical limitations “need to be compensated by additional technical steps or fixes to fully comply with these Guidelines”.

It is therefore very clear that the TFR obligations must be fully complied with as of December 30, 2024. 

CASPs that repeatedly or systematically fail to accompany crypto-asset transfers with the required information on the originator and beneficiary may face severe penalties and consequences under the Transfer of Funds Regulation and related EU directives. All told, the risks that a company faces by not complying with TFR are substantial. 

Let’s have a look at the potential consequences of non-compliance with the TFR.

1. Financial Penalties

One of the most immediate and tangible consequences of non-compliance is the imposition of financial penalties. These can be substantial and may vary depending on the severity of the breach and the specific regulations in each EU member state. The regulation allows for substantial monetary sanctions:

• Standard Penalty: A maximum administrative fine of at least twice the amount of the benefit derived from the breach (if determinable) or a minimum of €1,000,000.
• Enhanced Penalties for Financial Institutions: For CASPs classified as credit or financial institutions, the penalties can be more severe:
  • Legal Persons: Fines of up to €5,000,000 or 10% of the total annual turnover, whichever is higher.
  • Natural Persons: Fines of up to €5,000,000

Keep in mind that penalties can accumulate, potentially resulting in daily fines. In addition, increased compliance costs and operational burdens may be necessary to resolve deficiencies, resulting in additional financial burden.

*Source: Article (3) of Directive (EU) 2015/849

2. Criminal and Administrative Sanctions

In more severe cases, particularly those involving deliberate non-compliance or gross negligence, entities and individuals may face criminal or administrative sanctions. This can include:

• Criminal liability for Chief Compliance Officers (CCOs) or executives responsible for overseeing AML/CFT protocols
• Administrative sanctions that could significantly impact business operations
  • Public Statement: Authorities may issue a public statement identifying the CASP and detailing the nature of the breach.
  • Cease and Desist Order: The CASP may be ordered to stop the non-compliant behavior and refrain from repeating it.
  • Authorisation Suspension or Revocation: For authorized CASPs, their operating license may be suspended or withdrawn entirely.
  • Managerial Ban: Individuals responsible for the breach, including those in managerial positions, may face a temporary ban from exercising managerial functions in obliged entities.

  *Source: Article 29 of the TFR and Article 59(2) and (3) of Directive (EU) 2015/849)

3. Regulatory Sanctions

While exact details may vary, it's likely that regulatory sanctions for non-compliance could be severe:

• Suspension or revocation of operating licenses within the EU
• Restrictions on certain activities or prohibitions on cross-border crypto-asset transfers

4. Reputational Damage

In the highly regulated EU market, reputation is crucial. Non-compliance can lead to:

• Loss of trust from customers and partners
• Negative publicity that can be challenging to overcome
• Long-term impact on business relationships and growth opportunities

5. Heightened Regulatory Scrutiny

Entities found to be non-compliant will likely face increased attention from regulators:

• More frequent audits and inspections
• Increased reporting obligations, adding administrative burdens and costs
• Requirements to submit additional documentation to demonstrate compliance improvements

6. Counterparty Risks

Non-compliance can also affect business relationships, as partners may be hesitant to work with non-compliant entities, leading to lower transaction volumes and overall business success.

• Counterparties may report non-compliance to regulators. CASPs must report the repeatedly non-compliant counterparties to the competent authority responsible for Anti-Money Laundering/Counter-Terrorist Financing (AML/CTF) supervision within three months of identifying the non-compliance.
• Counterparties of CASPs that repeatedly or systematically fail to accompany crypto-asset transfers with the required information on the originator and beneficiary may be required to reject incoming transfers and terminate the existing business relationship or all reject future transfers from the non-compliant counterparty.

While no one has a crystal ball, the consequences of non-compliance with the EU's TFR after December 30th, 2024, are far-reaching and potentially severe. From financial penalties to reputational damage, the possible risks suggest that CASPs and other obligated entities should take seriously the need to be fully prepared with a TFR-ready Travel Rule solution when the regulation comes into force.

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.