Crypto Travel Rule

Travel rule illustration

What is the crypto Travel Rule?

The Travel Rule refers to recommendation 16 from the Financial Action Task Force (FATF). It states that identity information must be collected from senders and recipients of domestic and cross-border wire transfers.

In 2019, FATF’s updated guidance for a risk-based approach to VAs and VASPs applied the Travel Rule to VASPs. Therefore, VASPs must exchange identity details and KYC information before transacting. More specifically, for each transaction, the origin VASP must share data about the sender with the destination VASP and the destination VASP must share data about the receiver with the origin VASP.

The FATF assesses the progress made by the public and private sectors in implementing the Travel Rule every year. However, according to the latest 12-month review by FATF, only 29 out of 98 respondent jurisdictions had passed Travel Rule laws, while only a tiny portion started enforcing them.

Travel Rule - TOFR

The Travel rule (exchange of the information on the beneficiary and originator of the transactions between CASPs) will apply to all crypto asset transfers, regardless of the value transferred.

Verification of unhosted wallet should be applied if the threshold of 1,000 EUR is exceeded. These rules on unhosted wallets seem informed by thoughts that illicit actors primarily use them to facilitate illegal crypto funds.

However, the Travel Rule does not apply to peer-to-peer (P2P) transactions. It means that upon the implemntation of the TOFR rules, users uncomfortable with the data collection could migrate to P2P transactions.

Travel Rule - MiCA

MiCA, or Markets in Crypto Assets, is an EU-proposed regulation for crypto assets. The law proposed in 2020 aims to regulate crypto assets and crypto service providers that are currently out of EU regulations' scope. The MiCA regulation should come into force by 2024.

Travel Rule concerns

The Travel Rule brought a lot of concerns to the crypto-asset community. Here are a few:

  1. The Travel Rule can be considered a breach of individuals' privacy rights.
  2. There's a common belief that the regulations will slow down blockchain development in the EU and halt innovation in the industry.
  3. The negative impact comes from the requirement to collect data on the transactions, which could make crypto exchange activities slower and more expensive.
  4. Technical experts are concerned about the security of the data. More specifically, combining the data with information from the Crisis Management Platforms and the European Commission, European Central Bank, and European Banking Authority could make it vulnerable to cyber-attacks.

MiCA timeline

MiCA: how it started and what are the key differences?

MiCA was proposed to respond to growing regulatory concerns. Indeed, the pseudonymity of crypto assets associated with their rapid and global reach brings obvious criminal misuse risks, especially cybercrime. For example, Europol’s Internet Organised Crime Threat Assessment states that crypto assets have become the default payment method for victim-to-criminal payments in ransomware incidents and criminal-to-criminal payments on the dark web.

The key difference between some legislative packages and MiCA is that once accepted, it will be applicable throughout the European Economic Area immediately. Countries will not need to pass their legislation to apply MiCA. MiCA will also replace national frameworks for crypto assets.

MiCA key takeaways

  • Crypto asset Service Providers (CASPs) must pass fit and proper tests, undertake stress testing, and safeguard customer funds.
  • EU Member states will be the primary supervisors, but the European Securities and Markets Authority (ESMA) and European Banking Authority will have intervention powers to limit CASP activities.
  • A public register for non-compliant and non-supervised CASPs (with which EU CASPs would not be allowed to trade) will be created.
  • Under the provisions, stablecoin issuers will need to obtain authorization based on the nature of their arrangement and will be subject to disclosure requirements to demonstrate they maintain fully backed 1:1 reserves.
  • The deal will reportedly prohibit interest on stablecoin products and will prevent stablecoins that are used for payment from becoming too large (i.e,. no more than €200 million in transactions per day).
  • NFTs are mostly set to be excluded from the scope of MiCA, except where ownership is fractionalized.
  • The European Commission has given authorities 18 months to develop a more comprehensive regime for NFTs.
  • The EU excluded DeFi and lending for now and should be taken up further down the line.

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