Governments are starting to roll out the FATF travel rule worldwide

10 min read

It has been almost eight months since the Financial Action Task Force issued its divided crypto guidelines and laid down traditional banking regulations in the crypto sector. With the year-long adoption deadline approaching fast, how have the world's regulatory authorities reacted to the guidelines so far?

The FATF – an intergovernmental organization responsible for combating money laundering – found itself at the center of controversy last June after the release of its latest crypto guidance. The directive has merged the cryptocurrency industry with the existing banking policy, whereby companies must meet the same requirements as traditional financial institutions.

One of the most striking guidelines is the travel rule: a requirement for "virtual asset service providers" or VASPs – including crypto exchanges and securities portfolio providers – to disclose customer information in a transaction of $ 1,000 or higher. The requested information includes the name, the geographical address and the account details of the sender and recipient.

The guidelines stemmed from the FATF observation that the "threat of criminal and terrorist abuse of virtual assets" could develop into a serious problem. In a public statement, the authority stated that it would give its 37 members 12 months to adopt the guidelines. So, with less than five months to go until the FATF in June, how do Member States comply with the directives?

The United States: Ahead of the curve

The US is responsible for drafting the FATF guidelines after having based them on the Bank Secrecy Act – the country's most important anti-money laundering legislation. In 2013, the Financial Crimes Enforcement Network of FinCEN determined that the BSA should apply to the cryptocurrency industry. In this recommendation, FinCEN also confirmed the application of the BSA travel rule and published its own guidelines for VASP's in May 2019.

FinCEN has not been shy when it comes to enforcing control. In 2015, the agency hit Ripple, a cryptocurrency payment protocol, with a $ 450,000 fine after the company "intentionally violated the BSA rules."

However, according to FinCEN director Kenneth Blanco, the violation of the travel rule is one of the most frequently mentioned violations – and this often remains unpunished. Thomas Maxon, head of the American activities at blockchain solutions company CoolBitX, spoke with Cointelegraph and reasoned that a lighter touch could have been applied to promote American innovation:

“This can be interpreted in two ways: FinCEN is flexible and comprehensible to the crypto industry, giving them time to build compliance solutions, or FinCEN realizes that an enforcement action would prematurely encourage many US entities to move their companies offshore. to avoid regulatory supervision. The latter is more likely. & # 39;

Switzerland takes over the travel rule

As recently reported by Cointelegraph, Switzerland is one of the newest countries to enforce FATF guidelines. Last week, the Swiss financial market regulator lowered the transaction threshold for unidentified crypto exchanges from $ 5,000 (CHF 5,000) to $ 1,000 (CHF 1,000). In line with the FATF threshold for travel rules, the new Financial Services Act aims to address the "increased money laundering risk" in the cryptomarket.

Of course the guidance of the FATF is exactly that – guidance. Despite the ominous June deadline, the guidelines are advisory and therefore not legally enforceable. It is likely that Switzerland only complies with EU standardization, especially in the aftermath of the recently imposed Fifth Money Laundering Directive, or 5AMLD.

The EU's interpretation of FATF guidelines

The EU's fifth anti-money laundering directive entered into force on January 10 and appears to be largely in line with the FATF guidelines. With 27 Member States, including Germany, France and – until recently – the United Kingdom, the implementation of the FATF directives by the EU is of enormous importance. Although an attempt to adopt the guidelines has clearly been made, the 5AMLD is not as strict as the FATF guidelines.

The 5 AMLD-confirmed wallet providers and crypto-to-fiat exchanges to the list of mandatory entities of the directive. This introduced the requirement for crypto-to-fiat exchanges to keep a record of customer transactions and to perform Know Your Customer and AML checks.

The distinction between this and the FATF & # 39; s guideline, however, lies in semantics. Crypto-to-crypto exchanges, which fall under the FATF definition of a "VASP", are not listed on the EU list of mandatory entities. This indicates that crypto-to-crypto companies are exempt from 5 AMLD compliance.

The 5 AMLD guidelines also use a lighter approach to customer administration. FATF guidelines recommend the collection of data about both the recipient and the sender, as well as contacts with other VASPs, while the 5AMLD only means that data is stored and provided to financial intelligence organizations upon request.

Interestingly, despite the UK's recent departure from the European Union, the country's financial sector was forced to follow the 5 AMLD directives as they came in before the January 31 Brexit deadline.

That is why the Financial Conduct Authority, in its role as UK AML authority for crypto activities, has announced a new compliance regime. In addition to standard AML practices, including those derived from 5AMLD, the FCA required all crypto companies to & # 39; continuous monitoring of all customers & # 39; to implement – a definitive nod to FATF compliance.

FATF impact all over the world

Japan, South Korea and Singapore are exceptionally receptive to FATF guidelines. Singapore announced its Payment Services Act 2019 at the end of January. Unlike the ambiguous 5 AMLD definition of the EU, the PSA requires digital payment token & # 39; services – which include both crypto companies and exchanges – to comply with FATF-ready AML rules. In accordance with the FATF guidelines, Singapore has set the threshold for travel rules at around $ 1000 (SG $ 1,500).

Related: Singapore AML Framework can attract crypto companies, not scare them away

In the meantime, Japan has always been an avid observer of cryptocurrency regulations. Already in 2017, the government began to recognize Bitcoin and its crypto derivatives as property under the Japanese Payment Services Act. In addition, the document calls on domestic crypto companies to comply with the AML regulations and to register with a competent local financial office.

South Korea has also responded to the FATF opinion and adopted a law in November 2019 that established a legal structure for cryptocurrencies. The bill introduced an AML framework that requires all crypto-related companies in South Korea to follow FATF compliance closely.

What action is being taken by crypto platforms?

Judging by the large number of violations of the travel rules, it seems that only a few crypto companies have actually followed FATF guidelines, regardless of the legal implementation. Maxon – whose company CoolBitX is trying to ease KYC procedures – goes one step further and claims that compliance with crypto companies in the US does not exist: “No large crypto company complies with the travel rule despite the applicability of the rule since 2013. "

Nevertheless, there has been an abundance of companies offering compliance solutions in recent months, including TRIPA from CipherTrace, OpenVASP, Bitcoin Suisse, Chainalysis, Elliptic and Netki, among others.

For many, the guidance of the FATF is similar to squeezing a square pin into a round hole. Bob Morris, global chief of compliance for Apifiny – a distributed trading network – believes that the fragmented nature of the crypto industry is not conducive to existing FATF policies. Morris spoke with Cointelegraph:

“In the traditional banking sector, the travel rule is feasible because everyone works together via one system. But in the fragmented world of cryptocurrency exchanges, the challenge of designing a successfully unified framework is too hard to succeed – currently, exchanges have no idea how to implement it. "

Reuben Yap, chief operations officer at Zcoin, took the opposite view and told Cointelegraph that conventional banking rules could further legitimize the crypto industry, and added:

"It will also help to create the perception that cryptocurrency is being used to facilitate illegal activities, since it will now be subject to the same rules as fiat."

However, Yap warned that additional compliance costs could be the death blow for smaller companies. Thomas Glucksmann, vice president of global development at blockchain analysis company Merkle Science, shared a similar opinion to that of Yap and suggested that government and regulator confidence will ultimately promote industry growth:

"In the long term, a better exchange of information between institutions offers more confidence and confidence in the industry's ability to combat money laundering and other criminal activities, which hopefully results in better relationships with banks and regulators for a broader application of cryptocurrency. "

In the same vein, CipherTrace chief financial analyst John Jefferies claims that additional research will help to ripen the cryptocurrency asset class, although in the short term "VASPs are likely to incur additional costs if they try to comply with the travel rule." He added:

“Some VASPs may cease to exist or others such as Deribit may move to non-regulated countries such as Panama. It will be good for the industry in the medium and long term as the travel rule will help virtual assets grow into an asset class that is safe for investors. "

The (not so huge) impact on privacy coins

Still, a crucial question remains: do the FATF guidelines pose a risk to privacy coins? Following the FATF guidelines, exchanges such as Coinbase and OKEx have started to launch privacy coins in an effort to comply. This, says Yap, stems from a "misunderstanding" of the travel rule. According to him, privacy coins are confronted with the same tests as any other cryptocurrency, because travel rules are observed off-chain:

"Whether or not a coin has privacy functions does not affect compliance with the travel rule, since a VASP can always provide information about its transactions with other VASPs, since it already has the identity and KYC of the customer has."

Privacy coin developers indeed claim that their protocols can still be subject to FATF guidelines. For example, the crew behind Beam – a cryptocurrency based on the MimbleWimble confidential transaction protocol – has already taken steps to provide a transaction control function.

Glucksmann explained that such protocols allow privacy coins to continue unimpeded: "Exchanges and other cryptocurrency companies can support these privacy coins while still meeting legal requirements." However, Jefferies noted that additional layers of privacy in important cryptocurrencies can contribute to compliance issues:

“Important tokens, including Bitcoin and Ethereum, add privacy layers so that VASPs and supervisors must understand and mitigate compliance risks. When cryptocurrencies from central banks are introduced, privacy will play a crucial role in its acceptance in countries that value privacy. "

In adversity and adversity, the FATF guideline has encouraged at least several Member States to promote regulation of cryptocurrency. Undoubtedly – even in the worst case – regulations add guarantees that can help strengthen the legitimacy of the industry. Although some remain diametrically opposite to what they consider ill-fitting counseling, the positive impact on the industry may outweigh the short-term disadvantages.

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Don Bradman

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