The UK's HM Treasury's Response

What Does the UK’s HMT’s Response Mean for VASPs?

28 Jun, 2022

The Financial Action Task Force’s (FATF’s) Travel Rule is gradually taking shape in the UK. Just last week, on 15 June 2022, Her Majesty's Treasury (HMT) published the response to their consultation about Transfer of Funds Regulations, including crypto asset transfers

The collaboration from the crypto sector - virtual asset service providers (VASPs), academia, government departments and civil society - resulted in three main changes to the UK’s Travel Rule implementation plans: 

  1. Section 6.17 states that the threshold will be set at EUR 1000 as per the FATF’s Travel Rule standard, not GBP 1000 as initially suggested.  Also, the calculation of the de minimis threshold will no longer consider both fiat and crypto asset transfers but only crypto transactions that appear to be linked. 

  2. The Travel Rule will come into force by 1 September 2023. There will be a 12-month grace period from the date of the amendment to the Money Laundering Regulations (MLRs).  

  3. As per section 6.21, proof of ownership will not be required for all unhosted wallet transfers but can be requested if transactions are identified as posing an elevated risk. 

However, there are key points in the UK’s proposed regulation that distinguish it from some other countries' implementations and are, therefore, worth highlighting:

  1. Intermediary crypto asset businesses are within the scope of the regulation and should collect and send Travel Rule information.

  2. When all firms involved in a transfer are UK-based, the information to be collected and exchanged is less strict: only the account number or unique transaction identifier is to be provided. However, more data on the beneficiary may be requested.

These changes  inspire additional probing, and some questions may arise, like:

  • When does the grace period come into effect? 

  • To whom do these changes apply? 

  • What could be interpreted as an elevated risk? 

  • What options are available to VASPs when dealing with unhosted wallets in the UK? 

When Do UK VASPs Need to Comply with the Travel Rule?

Firstly, it is estimated that the Travel Rule amendments will take effect in September 2023. The grace period will be granted from 1 September 2022 and will cease once the MLRs take effect on 1 September 2023 (section 6.7). This date is subject to Parliamentary approval. 

During this period,VASPs and crypto asset businesses must demonstrate that they are implementing solutions to comply with the Travel Rule. 

Secondly, section 6.14 explains that the Travel Rule will apply to intermediaries that are crypto asset exchange providers (also known as VASPs) and custodian wallet providers and will include intermediaries that are “contracted to provide crypto asset exchange or custodian wallet services on behalf of either the beneficiary’s or the originator’s crypto asset business”.

Which VASPs Need to Comply with the Travel Rule in the UK?

All VASPs operating in the United Kingdom will be required to follow the Travel Rule, but the requirements vary depending on the type of transaction.

When only UK-based VASPs are involved in a transfer, then they only need to collect the account number or unique transaction identifier. However, more data on the beneficiary may be requested by authorities.

How Can UK VASPs Continue to Transact with Unhosted Wallets? 

It is important for VASPs to understand what is expected of them and to be aware of their available options. Section 6.21 of the HMT’s response explains that:  "Instead of requiring the collection of beneficiary and originator information for all unhosted wallet transfers, crypto businesses will only be expected to collect this information for transactions identified as posing an elevated risk of illicit finance."

This means that when transfers pose an elevated risk, unhosted wallet owners must prove to their VASPs that they own their wallets. In other words, VASPs will need to adopt a risk-based approach (RBA) to ascertain wallet ownership per the FATF’s standards. 

What could be interpreted as an elevated risk to VASPs in the UK?

Her Majesty’s Treasury's response to the consultation regarding the Transfer of Funds Regulations, including crypto asset transfers, has introduced an overview of what the upcoming regulations should look like. The law is planned to be fully implemented on 1 September 2023.

The authority, however, did not get into details on what are the indicators of an elevated risk transaction when it mentioned this point.

In this document, the “elevated risk” an unhosted wallet may impose was not clearly defined. The Treasury, however, also stated that the minimum factors that firms should consider when determining risk would be set out in the upcoming legislation.

To achieve this in an efficient manner for your team and frictionless way for your customers, VASPs can make use of Address Ownership Proof Protocol (AOPP). 

With AOPP, compliance officers and unhosted wallet owners do not need to worry about the new UK rules. Proving wallet ownership will be a click of a button, and storing it will be automatic. VASPs that support AOPP will also easily comply with the FATF’s Travel Rule (Recommendation 16) and provide an effortless journey for their customers. 

Contact us today to see AOPP at work, or check out our video demonstration of AOPP

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