The Travel Rule Explained: Your Guide to Crypto Compliance
What Is the FATF Travel Rule?
The Financial Action Task Force (FATF) is an intergovernmental financial watchdog. Additionally, the FATF is responsible for suggesting global standards. The Travel Rule, also known as Recommendation 16, is one of these standards.
The Travel Rule is a set of rules virtual asset service providers (VASPs) need to follow when conducting virtual asset transfers. It confirms which personal data of the wallet owner needs to be collected and verified before a successful transaction can take place. The Travel Rule is part of the Transfer of Funds (TFR) Regulation.
Read more about the FATF Travel Rule below:
What Is the Travel Rule? All a Crypto Firm Needs to Know to Avoid Staying out of Business
Updated FATF Travel Rule Guidance: New Clarifications
What Is MiCA?
As part of its digital finance strategy, the EU Commission introduced a proposal to regulate Markets in Crypto Assets (MiCA) Regulation. All crypto assets (virtual assets) that did not fall under pre-existing governance or regulations would fall under MiCA. Examples include e-money, utility and asset-referenced tokens.
Read more about the Markets in Crypto Assets (MiCA) Regulation below:
What Is The Market in Crypto Assets (MiCA) Regulation?
Does MiCA Impact Crypto Asset Service Providers (CASPs)?
What Is the TFR?
The Transfer of Funds Regulation (TFR) was recently updated and now aims to implement the Financial Action Task Force’s (FATF’s) Recommendation 16 (Travel Rule) - which previously only applied to traditional wire transfers - to virtual asset transfers.
The TFR is part of the Anti-Money Laundering (AML) Package as well as the Markets in Crypto-Asset (MiCA) Regulation.
Read more about the Transfer of Funds (TFR) Regulation here.
What Is the Difference Between the TFR and MiCA?
The difference between the Transfer of Funds Regulation (TFR) and the Market in Crypto Assets (MiCA) is that MiCA builds the legal framework for crypto, including crypto asset service providers (CASPs) licensing regimes and definitions, while the TFR only brings crypto Travel Rule into the European Union.
The TFR covers CASP to CASP transfers and CASP to and from self-hosted wallet (unhosted wallets) transactions. The new agreement brings changes in the anti-money-laundering demands to both cases.
Read more about the Transfer of Funds (TFR) and Market in Crypto Assets (MiCA) Regulation below.
What Is a VASP?
A virtual asset service provider is an organisation/person that operates for or on behalf of another person. As defined by the Financial Action Task Force (FATF), VASP activities include:
Exchange between virtual assets (crypto assets) and fiat currencies,
Exchange between one or more forms of virtual assets,
Transfer of virtual assets,
Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets,
Participation in and provision of financial services related to an issuer's offer and/or sale of a virtual asset.
Jurisdiction-dependent, a VASP can also be known as
A crypto asset trading platform (CTP),
A money services business (MSB),
Crypto asset secondary service providers (CASSPrs), or
A crypto asset exchange service provider (CESP).
What Is a CASP?
As per the Markets in Crypto Aseets (MiCA) Regulation , crypto asset service provider (CASP) activities include:
The custody and administration of crypto assets (virtual assets) on behalf of third parties,
The operation of a trading platform for crypto assets,
The exchange of crypto assets for fiat currency that is legal tender,
The exchange of crypto assets for other crypto assets,
The execution of orders for crypto assets on behalf of third parties,
The placing of crypto assets,
The reception and transmission of orders for crypto assets on behalf of third parties,
Providing advice on crypto assets.
In summary, if a business provides any of the below services to citizens in Europe, it is deemed a CASP:
Offering custody and administration of crypto assets on behalf of a third party,
Offering a crypto exchange service or running an exchange,
Offering crypto advisory services, or information defined as advice on investing in crypto assets. This does not include portfolio management services.
MiCA is a European framework that only applies to the 27 EU member states.
How Should VASPs Transact with Self-hosted Wallets?
Before anything else, virtual asset service providers (VASPs) need to make sure of the jurisdiction requirements - is the Travel Rule live? Does the jurisdiction follow the Transfer of Funds (TFR) Regulation or the Financial Action Task Force’s (FATF) variation of the Travel Rule?
Once this has been ascertained, we recommend the following reading for jurisdictions following the FATF’s Travel Rule: Updated FATF Travel Rule Guidance: New Clarifications.
For jurisdictions complying with the TFR, we recommend the following:
Transacting with Self-hosted Wallets as a VASP: Questions & Answers
When To Apply the Transfer of Funds Regulation: 4 Self-hosted Wallet Case Studies
For both the FATF and TFR:
Self-hosted Wallet Verification Methods: An Overview
The Hassle of Travel Rule Transacting with Non-Custodial Wallets
How Can VASPs Verify Self-hosted Wallets?
There are 4 main ways virtual asset service providers (VASPs) can verify self-hosted wallet ownership, namely;
Address Ownership Proof Protocol (AOPP),
Read more about self-hosted wallet verification methods here.
What Are the Travel Rule Regulations for Switzerland?
The Travel Rule is active in Switzerland.
With a zero threshold, the Swiss regulator, FINMA, was one of the first regulators to issue its own guidance on the application of the Travel Rule to virtual asset service providers (VASPs) in August 2019, with stricter rules than the Financial Action Task Force (FATF).
Read more about Travel Rule regulations in Switzerland here.
What Is a Virtual Asset?
The Financial Action Task Force (FATF) defines a virtual asset as a “digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes”. The FATF generally does not consider non-fungible tokens (NFT) as virtual assets, but this depends on their characteristics. They may fall under the definition if they are used for “payment or investment purposes”.
Examples of virtual assets include specific currencies like bitcoin and Ether, as well as stablecoins, and the MiCA equivalents asset referenced tokens and electronic money tokens.