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When To Apply the Transfer of Funds Regulation: 4 Unhosted Wallet Case Studies

12 Sept, 2022

In June 2022, The European Union (EU) Parliament reached a provisional agreement on the Transfer of Funds Regulation (TFR). 

Virtual asset service providers (VASPs) will now need to strictly adhere to the Financial Action Task Force’s (FATF’s) Recommendation 16 - Travel Rule - along with the additional regulations stipulated by the EU Parliament. There is a keen focus on unhosted wallets in the TFR.  

This focus has produced a level of uncertainty within the industry and has led to further questions. The biggest query of all is: When to apply the Transfer of Funds Regulation to unhosted wallets.  

We have clarified this with the assistance of Sadri Sali. 

Sadri’s expertise lies with European financial & technology laws, especially crypto-asset-regulatory frameworks, specialising in the Markets in Crypto-Assets Regulation, Benchmark Regulation, KYC, AML5/6 Directives, and the FATF’s Recommendations. Currently, he provides legal advice on Risk & Regulatory Compliance for crypto startups across Europe.

Below, with the help of Sadri, we have listed 4 case studies of when to apply the TFR.

1. Unhosted to Unhosted Wallet Transfers for Values Under EUR 1000 

Case Study:  Both Peter and his daughter live in the EU. Both use an unhosted wallet. Peter wishes to transfer virtual assets to the value of EUR 200 to his daughter. 

The TFR is not applicable in this instance as:

  • Both Peter and his daughter are using unhosted wallets.

However, if either Peter or his daughter were using a custodial wallet -  meaning a VASP would be involved - the TFR would apply. 

As per the TFR, the VASP is to collect the following information: 

  • Name of the originator,

  • Account number of the originator, where an account is used to process the transaction,

  • Name of the beneficiary,

  • Beneficiary’s account number, where such an account exists and is used to process the transaction.

The information collected is to be in the form of documents, data or information obtained from a reliable and reputable source in accordance with the Anti-Money Laundering (AML) Regulation. 

The above information will only need to be verified if the beneficiary requests a pay-out of the transfer in the form of cash, anonymous electronic money, or where reasonable grounds for money laundering exist. 

2. Unhosted to Unhosted Wallet Transfers for Values Over EUR 1000 

Case Study A:  Both Peter and his daughter live in the EU. Both use an unhosted wallet. Peter wishes to transfer virtual assets to the value of EUR 1500 to his daughter. 

The TFR is not applicable in this instance as:

  • Both Peter and his daughter are using unhosted wallets.

Case Study B:  Both Peter and his daughter live in the EU. Both use an unhosted wallet. Peter wishes to transfer virtual assets to the value of EUR 20 000 to his daughter. 

Technically, the TFR is not applicable in this instance as:

  • Both Peter and his daughter are using unhosted wallets.

But eyebrows may be raised due to the value or if this sort of transfer occurs on a regular basis.

Suppose case study B was to involve a custodial wallet. In that case, there is a high probability that authorities would request additional verification over the standard TFR requirements, especially if this sort of transfer occurred on a regular basis.   

3. Transfers Into the European Union

Case Study: Peter lives in South Africa and wants to transfer virtual assets to the value of EUR 2000 to his daughter, who lives in The Netherlands. Both use a locally registered VASP in their respective countries. 

The TFR applies as Peter’s daughter lives in and uses a VASP registered in the EU. 

Firstly as the value is over EUR 1000, the following information will need to be collected:

  • Name of the originator,

  • Account number of the originator, where an account is used to process the transaction,

  • Originator’s address, official personal document number, customer identification number or date and place of birth,

  • Name of the beneficiary,

  • Beneficiary’s account number, where such an account exists and is used to process the transaction.

Thereafter the EU-based VASP will need to verify the information before the transfer can be processed. The information is to be in the form of documents, data or information obtained from a reliable and reputable source in accordance with the AML Regulation.  

Once verified, and if all is in order, the transfer will take place. 

If the transaction takes place on a regular basis, i.e. a pattern is formed, additional information could be requested, and the transaction will need to be declared. However, this is a case-to-case basis. 

4. Transfers Outside the European Union  

Case Study A: Peter lives in Australia, his daughter lives in South Africa, and both use a locally registered VASP in their respective countries.  

For all transfers that occur outside the European Union, the TFR does not apply. The TFR is a European Union-based regulation. 

For all transfers that occur outside of this territory, VASPs and customers will need to ascertain the requirements for the jurisdiction before transferring. First and foremost, it would be wise to find out if the Travel Rule is live in the relevant jurisdiction. In the above example, the Travel Rule is not applicable in either of the countries, and the transfers can proceed without any information having to be verified.

However, in the below example, the Travel Rule applies. 

Case Study B: Peter wants to send virtual assets to the value of EUR 1050 to his daughter. Peter lives in Gibraltar, and his daughter lives in South Africa. Both use locally registered VASPs in their respective countries.

Peter would need to exchange the following information, as per the Travel Rule: 

  • Name of the originator,

  • Account number of the originator, where an account is used to process the transaction,

  • Originator’s address, official personal document number, customer identification number or date and place of birth,

  • Name of the beneficiary,

  • Beneficiary’s account number, where such an account exists and is used to process the transaction.

For further FATF Travel Rule clarification, click here

In parting, these are the most recently agreed upon regulations. Finer details are still being discussed. Moreover, even if VASPs comply with the above requirements, there are cases where authorities may request additional information. 

Usually, this is on the premise of suspected money laundering or other nefarious activities. 

Please note that the terms virtual asset service provider (VASP) have been used in place of crypto asset service provider (CASP). 

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