In October 2018, the Financial Action Task Force (FATF) adopted changes to its recommendations to explicitly clarify that they apply to financial activities involving virtual assets.
The amended Recommendation 15 calls for crypto companies, defined as virtual asset service providers (VASPs), to integrate anti-money laundering and combating terrorism (AML/CFT) financing practices. According to the FATF, VASPs must be licensed and/or registered with their local financial regulator and will be subjected to effective systems for monitoring or supervision in the future. Crypto and DeFi businesses should comprehend and prepare to abide by these regulations or risk losing their operational licenses.
Recommendation 16, referred to as the Travel Rule, was subsequently introduced. Taking its name and inspiration from the 1996 Bank Secrecy Act (BSA) rule: [31 CFR 103.33(g)], the Crypto Travel rule requires “all financial institutions to pass on certain information to the next financial institution in certain funds transmittals involving more than one financial institution.”
Those who work in Crypto and DeFi need to understand and abide by these regulatory regimes, which are not meant to burden businesses but prevent transactions with profound national security consequences such as terrorist attacks and human and narcotics trafficking.
Since the second half of 2019, several countries such as Germany, Singapore, Switzerland, Canada, the USA, South Africa, the Netherlands, Bermuda, and others have adopted or introduced legislation that mirrors these FATF-driven AML compliance obligations in almost every aspect.
Various jurisdictions have different levels of Travel Rule readiness. As of June 2021, 58 out of 128 reporting jurisdictions advised that they have now implemented the revised FATF Standards, with 52 of them regulating VASPs and six prohibiting the operation of VASPs. [FATF Plenary 2021]
Furthermore, many of the jurisdictions that have implemented the revised standards have varying thresholds. For example, global regulators and the FATF guidance stipulates that VASPs must apply the Travel Rule to any transaction over $1000 involving another VASP, while current US rules denote $3000. Some jurisdictions do not specify a specific threshold.
These gaps in implementation and thresholds are essential to note as companies ramp up their Travel Rule compliance plans and test cross-jurisdictional Travel Rule transactions. Notabene’s software automatically updates to include changes in regulatory information, while allowing you to send Travel Rule data alongside each transmission over $0. Additionally, our Rules Engine allows VASPs to set risk-based rules to automate transactions with counterparties that meet their internal risk criteria (e.g. by VASP, jurisdiction, KYT risk score and sanction screen matches.)
We’ve summarized Crypto Travel Rule regulations by jurisdiction below.
While most virtual asset activity is safe, bad actors take advantage of virtual assets for illicit activities. Introducing regulations to help control that and put mechanisms in place makes it a safer environment for consumers and businesses alike and will ultimately help bring more crypto adoption.
In early 2019, the FATF issued guidance that required virtual asset service providers and financial institutions participating in a transaction to exchange relevant beneficiary and originator KYC information. FATF member governments ratified these guidelines in June of 2019, with regulators from global jurisdictions following suit. The Travel Rule is now mandated to most crypto businesses globally.
Founded in 1989, the Financial Action Task Force (FATF) is an inter-governmental global money laundering and terrorist financing watchdog that sets international standards to prevent illegal activities like terrorist financing and money laundering. In 2018, the FATF adopted changes that now explicitly cover financial transactions involving virtual assets.
FATF has created a new definition of businesses operating in the crypto space that they call a VASP (Virtual Asset Service Provider). These VASPs now need to become licensed in jurisdictions they operate in. The Travel Rule probably does apply if your business is involved in:
- Exchange of cryptocurrency (both crypto-fiat and crypto-crypto)
- Transfer of cryptocurrency
- Providing financial services related to the issuance, initial offer, and sale of virtual assets
- Providing custodian wallets
The FATF stipulates that in transactions over a certain threshold, the originator VASPs must include and send the following:
- The name of the originator
- The blockchain address of the originator
- The identity of the originator’s VASP
- The originator’s identification number, e.g., National ID number or Passport number
- The virtual asset type and the amount being transmitted, and
- The identity of the beneficiary’s financial institution
- The name of the beneficiary
- The blockchain address or account number of the beneficiary
*It is important to note that different jurisdictions may require slightly different information.
View our jurisdiction pages for more details.
Future business opportunities after complying with the FinCEN Travel Rule are immense. FATF Travel Rule compliance presents the most significant opportunity for virtual assets to become widely accepted in everyday use cases. Cryptocurrency companies that comply will have better access to traditional banking, which will allow easier access to institutional investors. They will also be able to provide more visibility and trust around each transaction for their customers.
KYC is the process of identifying customers and verifying their details to comply with global regulations, including anti-money laundering and counter-terrorism financing laws. The overarching goal of the KYC process in crypto is to prevent individuals or companies from using the asset class to commit financial crimes.
KYC is the process of one VASP identifying their customer and verifying their details to comply with global regulations before allowing them to utilize their platform. Travel Rule takes it a step further–requiring two VASPs that have already KYC’ed their customers to exchange and store customer PII on transactions over a certain threshold.
Know Your Customer (KYC) is not only safe but critical to secure crypto transactions. Without KYC, it’s impossible to verify the parties of a transaction and avoid fraudulent scams due to anonymity. While Notabene does not directly provide KYC, our Wallet ID widget executes an integral part of the KYC picture.
Know Your Customer (KYC), and Anti-Money Laundering (AML) are crucial frameworks that combat the illegal practice of money laundering. AML is a complex framework of rules, regulations, and strategies to identify and prevent profit from illicit activities. At the same time, KYC feeds into the AML framework by ensuring that only those considered low-risk by financial institutions can access a particular exchange or platform.
Anti-Money Laundering (AML) and Know Your Customer (KYC) enforcement benefit VASPs and their end-users. Unlike fiat currency, virtual currency as an asset class does not have a solid regulatory framework. Some bad actors increasingly take advantage of transmitting and hiding the source and destination of their financial transactions. Standardizing regulatory practices and performing KYC and AML checks can help mitigate money laundering, terrorist financing, and illicit financing.