Notabene's Regulatory and Compliance team is taking a proactive role in helping members of the group CryptoUK understand the requirements of the Financial Action Task Force's (FATF) Travel Rule. The Travel Rule has been implemented in the UK through the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 (MLTFR 2022) on July 21st, 2022.
Navigating the FATF's Travel Rule: CryptoUK’s Working Group's Efforts to Educate UK VASPs
The Notabene Regulatory and Compliance team is dedicated to not only educating CryptoUK members about the requirements of this rule but also to engaging with policymakers and regulators to share their insights and perspectives on the topic.
The FATF's Crypto Travel Rule is a regulation that requires certain information to be included with transactions between virtual asset service providers (VASPs). In the case of the UK, the MLTFR 2022 would be the specific set of rules that VASPs, like cryptocurrency exchanges, have to comply with.
Following a 12-month grace period, the Travel Rule will be enforced in the UK from September 1st, 2023. On July 28, 2023, the Joint Money Laundering Steering Group (JMLSG) published a draft Travel Rule guidance that is now up for public consultation. CryptoUK’s Travel Rule Working Group shared insights and feedback with regulators and the JMLSG before publishing this draft. The next order of business for the working group is submitting a response to the public consultation, due on August 25, 2023.
“Travel Rule compliance entails several new operational challenges for VASPs. And UK VASPs are in a really privileged position to overcome them - the fact that you are able to produce industry-led guidance through the JMLSG is a unique opportunity to have a say on how these challenges should be addressed and to define industry-wide compliance standards” - Catarina Veloso, Senior Associate of Regulatory Affairs - Notabene.
The JMLSG is a private sector body comprising the leading UK Trade Associations in the financial services industry. They produce Guidance that sets out what is expected of firms and their staff concerning the prevention of money laundering and terrorist financing, which is now being extended to cover the crypto Travel Rule.
Although the JMLSG Guidance is not legally binding, it is subject to approval by the HM Treasury and is taken into consideration by the FCA when supervising and by courts. Therefore, the JMLSG Guidance will provide a base from which UK VASPs can develop tailored policies and procedures for compliance with the Travel Rule.
JMLSG’s Draft Guidance on the Travel Rule: What It Means for UK Cryptoasset Businesses
The current draft of the JMLSG Guidance covers essential topics such as:
📌 Sunrise issue: The Sunrise period is acknowledged as presenting “challenges for CBs dealing with counterparties in jurisdictions where the travel rule has not yet been implemented.” The current draft guidance advises VASPs to take account of any FCA communications on this matter. Just yesterday, the FCA published a statement on precisely this topic. This statement sets expectations for how VASPs in the UK are required to comply with the Travel Rule when sending or receiving a transaction from a counterparty based in a jurisdiction where Travel Rule does not yet apply, as follows:
When sending a cryptoasset transfer to a jurisdiction without the Travel Rule:
Take all reasonable steps to establish whether the firm can receive the required information.
If the firm cannot receive the necessary information, the UK cryptoasset business must still collect and verify the information as required by the Money Laundering Regulations (MLRs) and should store that information before making the cryptoasset transfer.
When receiving a cryptoasset transfer from a jurisdiction without the Travel Rule:
If the cryptoasset transfer has missing or incomplete information, UK cryptoasset businesses must consider the countries in which the firm operates and the status of the Travel Rule in those countries.
The UK cryptoasset business should take these factors into account when making a risk-based assessment of whether to make the cryptoassets available to the beneficiary.
📌 Cross-border transactions: The Guidance clarifies that UK VASPs must follow UK Travel Rule requirements, regardless of whether their counterparty is subject to a different scope of requirements. For withdrawals, the Guidance clarifies that “[w]here the transfer is to a jurisdiction with higher requirements than those required in terms of the travel rule, a CB complies with its travel rule obligations by providing the information as required.”. Similarly, in deposits, “[w]hen there is missing or inaccurate information, the CB of the beneficiary must, when appropriate, request the missing information (regardless of whether the CB of the originator is subject to higher value thresholds in its jurisdiction), and consider making enquiries as to any discrepancies.”.
📌 Self-hosted wallet transactions: The Guidance provides more granularity into how VASPs can assess the risk associated with transactions with self-hosted wallets and determine the appropriate follow-up actions.
📌Counterparty discoverability: Acknowledging that it is challenging to discover the counterparty to a crypto transaction (in the absence of global VASP identifiers, equivalent to SWIFT codes in wire transfers), the Guidance suggests reasonable steps that VASPs can take to identify the counterparty and whether a wallet is hosted or unhosted.
📌Lightning network: JMLSG also covered the specificities of how Travel Rule applies in the context of the Lightning Network, acknowledging that “[t]hose parts of a LN transfer that are intermediate to originator and beneficiary are not in scope of the travel rule even where one or both nodes in the channel are CBs.”
Notabene's Proactive Role in UK Travel Rule Compliance: Regulatory Sandbox Testnets and Guidance for VASPs
Notabene's Regulatory and Compliance team is dedicated to assisting UK VASPs in understanding and complying with their upcoming Travel Rule obligations.
As part of that effort:
We have conducted two testnets as part of the Financial Conduct Authority’s (FCA’s) Regulatory Sandbox with firms such as Ramp, Bitstamp, Wirex, CoinPass, Altalix, Hidden Road, Bitpanda, Custody, Uphold, and Zodia Markets.
We published a brief guide that summarizes the Travel Rule obligations set forth in the MLTFR 2022.
We invite you to join the CryptoUK’s Travel Rule Working Group to be part of the conversation, contribute to the public consultation response, and continue engaging with policymakers and regulators on this topic.