Compare the similarities and differences in cryptocurrency travel rules across countries

This article aims to explore the travel rules and their application in the cryptocurrency industry, analyze the progress, differences and difficulties in implementing travel rules in different regions, evaluate the effectiveness and limitations of the travel rules, and propose corresponding prospects.

In recent years, the development and popularity of virtual assets has attracted the attention of countries around the world, and has also brought new challenges and risks to financial supervision and anti-money laundering (AML)/counter-financing of terrorism (CFT) work. In response, the International Financial Action Task Force has extended the "travel rule" in the traditional financial field to the field of virtual assets, requiring that when a virtual asset transaction exceeds a certain amount, the identity information of both parties to the transaction must be transmitted along with the transaction. This That’s the “Travel Rules.”

This article aims to explore the travel rules and their application in the cryptocurrency industry, analyze the progress, differences and difficulties in implementing travel rules in different regions, evaluate the effectiveness and limitations of the travel rules, and propose corresponding prospects.

1 Concept and background of travel rules

1.1 Overview of Travel Rules: From Traditional Finance to Cryptocurrency

In summary, the Travel Rule is an international standard for anti-money laundering and anti-terrorist financing. It requires that when a financial transaction exceeds a certain amount, the identity information of both parties to the transaction must be passed along with the transaction (this is "travel"). ) so that regulators can track and prevent illegal activity.

The travel rules were originally proposed by the Financial Action Task Force (FATF) in 1996 for banks and other financial institutions in the traditional financial sector, and were revised in 2001 and 2012. With the rise and development of cryptocurrencies, FATF recognized the risks of money laundering and terrorist financing in the field of virtual assets, and in June 2019 extended the travel rules to virtual asset service providers (VASPs), that is, those who provide cryptocurrency transactions, transfers, The entity or person hosting such services.

1.2 How FATF promotes the implementation of virtual asset travel rules

FATF is an intergovernmental policy-making body composed of 39 member countries and regions. Its goal is to formulate and promote international standards and measures for global anti-money laundering, anti-terrorist financing and anti-proliferation financing of weapons of mass destruction. Founded in 1989 and headquartered in Paris, FATF is currently the most influential and authoritative international anti-money laundering and counter-terrorism financing organization in the world.

The 40 recommendations issued by FATF are internationally recognized standards for anti-money laundering and counter-terrorist financing, including legal systems, preventive measures, international cooperation, regulatory supervision, etc. The "Travel Rule" belongs to Article 16 of the 40 recommendations.

In June 2014, the FATF published "Virtual Currencies: Key Definitions and Potential Money Laundering and Terrorist Financing Risks," which was the first time the FATF defined and analyzed virtual currencies and pointed out the risks that virtual currencies may be used for illegal purposes. , and recommends that countries take appropriate regulatory measures. This means that the FATF recognizes the impact of the development and popularity of cryptocurrencies on the global financial system and cross-border payments.

Immediately, the FATF issued "Guidance: A Risk-Based Approach to the Regulation of Virtual Currencies" in June 2015. This is the first time that FATF has proposed an anti-money laundering/anti-terrorist financing regulatory framework for virtual currency activities and service providers, which means that requirements such as customer due diligence, record keeping, reporting and supervision that originally apply to traditional financial institutions also apply to virtual currency activities. and service providers. However, this framework defines the concept of “virtual currency” in a narrow scope and fails to coordinate the supervision of virtual asset risks well.

Finally, FATF issued the "Interpretative Notes and Guidance on Virtual Assets and Virtual Asset Service Providers" (hereinafter referred to as the "Guidance") in June 2019, renaming virtual currencies virtual assets and distinguishing virtual assets from virtual assets. Service providers (VASPs) are included in the scope of supervision, which means that the scope of FATF virtual asset supervision has been finalized and matured. The Standards contain guidelines for applying travel rules to the cryptocurrency space. The Travel Rule requires VASPs to collect and transmit the identity of the originator and beneficiary when processing cryptocurrency transfers exceeding $1,000 or its equivalent to prevent money laundering and terrorist financing activities. In 2021, FATF revised the Standards to better regulate rapidly developing virtual assets.

1.3 Overall Impact of Travel Rules on the Crypto Industry

1.3.1 Reporting obligations of VASPs

In the 2021 revised Guidance, FATF defines a VASP as “a business entity that provides one or more of the following services to or on behalf of others,” including:

• Exchange or transfer virtual assets
• Custody and/or management of virtual assets or tools related to virtual assets
• Participate in and provide financial services related to the issuance and/or sale of virtual assets by issuers

The document also states that VASP does not include the following types of business entities:

• Entities that only provide technical support or communication services
• Entities that only provide virtual asset wallet software or hardware
• Individuals or legal persons who use virtual assets only for themselves

VASPs that meet the above conditions assume corresponding travel rule obligations, namely: when processing virtual asset transactions exceeding US$1,000 or its equivalent, collect and transmit the identity information of the originator and beneficiary to prevent money laundering and terrorist financing activities. Specifically, VASPs should collect the following information:

• Name, account number and address of the initiator (or nationality, date of birth, ID number, etc.)
• Beneficiary’s name and account number
• Transaction amount and asset type

The VASP should send this information along with the transaction to the next participant or provide it to the appropriate authorities upon request. VASPs should also retain this information for at least five years and take appropriate actions based on risk assessment and regulatory requirements.

1.3.2 Overall impact of VASP reporting obligations

On the one hand, the travel rules will help improve the transparency and trust of the encryption industry, prevent virtual assets from being used in criminal activities such as money laundering and terrorist financing, and promote the interconnection between the encryption industry and the traditional financial system.

On the other hand, travel rules eliminate the anonymity of virtual assets to a certain extent. The Travel Rule requires VASPs to report trader identifying information and retain it for at least five years; therefore, the crypto industry needs to balance users’ needs and expectations for data security and privacy rights.

2 Application of virtual asset travel rules in various countries

2.1 FATF 40 Recommended International Regulatory Directions

The 40 FATF recommendations are not mandatory provisions with legal effect. They are policy frameworks that countries voluntarily abide by. Countries need to formulate and implement corresponding legal and regulatory measures based on their own legal systems and actual conditions. FATF conducts comprehensive assessments of member states or regions' anti-money laundering and anti-terrorist financing systems and measures at regular intervals, checks whether they comply with FATF's 40 recommendations and other relevant standards, and issues an assessment report.

If a member country fails to meet FATF requirements, it may be included in the list of high-risk or uncooperative countries or regions. These countries or regions may face sanctions or restrictive measures from other countries or regions, such as increasing due diligence, reducing financial transactions, freezing assets, etc.

2.2 Countries and regions that implement virtual asset travel rules

This article summarizes the countries and regions that have implemented virtual asset travel rules as of September 3, 2023, as shown in the table below.

It is worth noting that the EU’s Cryptoasset Market Regulation Act (MiCA) also provides corresponding guidance on travel rules. Under MiCA, the travel rule will be extended to all crypto-asset transactions that meet its definition, and exemptions from transaction minimum thresholds and minimum transfer values will be removed. MiCA is expected to be implemented in February 2024, by which time the travel rules of EU member states will be more harmonized and harmonized.

3 Conclusion and Outlook

3.1 Validity and Limitations of Travel Rules

The travel rule has certain effectiveness in the cryptocurrency field, mainly in that it promotes the standardization and professionalization of the cryptocurrency industry and improves the compliance awareness and capabilities of VASPs. The Travel Rules provide a clear regulatory framework and standards for VASPs, allowing VASPs to conduct self-regulatory management and risk control in accordance with unified requirements. This will also help improve competition fairness and market order among VASPs, and avoid regulatory arbitrage or unfair competition.

However, the travel rules also have some limitations in the cryptocurrency field, mainly in the following aspects:

First, it eliminates the anonymity and decentralization features of cryptocurrency and undermines users’ needs and expectations for data security and privacy rights. The Travel Rule requires VASPs to report trader identification information and retain it for at least five years; therefore, cryptocurrency users’ personal information may be leaked or misused, resulting in a violation of their privacy rights. At the same time, the travel rules are also contrary to the decentralized spirit of cryptocurrency, making cryptocurrency transactions subject to supervision or intervention by centralized institutions, resulting in restrictions on its autonomy and freedom.

Second, it increases the operating costs and compliance risks of VASPs, which may cause some VASPs to withdraw from the market or move into the underground economy. The travel rules require VASPs to establish and maintain a complex system of information collection, verification, transmission and storage, which requires the investment of a large amount of manpower, material and financial resources, and increases the operating costs of VASPs. At the same time, travel rules also expose VASPs to higher compliance risks. If they fail to implement travel rules in a timely or accurate manner, they may be subject to penalties such as fines or license revocation. This may cause some VASPs to withdraw from the market because they cannot withstand the pressure brought by travel rules, or to move into the underground economy, thus affecting the development of the cryptocurrency industry.

Thirdly, it is difficult to adapt to the rapid changes and innovations in the cryptocurrency field, and emerging forms such as DeFi, NFT, etc. may not fall within the scope of VASP or be inapplicable to travel rules. The cryptocurrency field is a field full of innovation and change, with new technologies, products and services constantly emerging, such as decentralized finance (DeFi), non-fungible tokens (NFT), stable coins, etc. These emerging forms may not fall within the scope of VASPs or apply to travel rules because they may not have a centralized service provider or involve traditional identity information. This brings challenges and difficulties to the enforcement and supervision of travel rules.

Finally, it is difficult to achieve unified implementation and supervision on a global scale, and there are differences in progress and difficulties in the implementation of travel rules in different countries or regions. Although the FATF provides a common regulatory framework and standards, countries have different progress, methods and details in implementing travel rules based on their own legal systems and actual situations. This brings complexity and uncertainty to cross-border transactions, and also creates obstacles to collaboration and communication between regulatory agencies.

3.2 Direction of improvement of travel rules

First, expand the scope of application of travel rules to include more types or forms of crypto assets or service providers, such as DeFi, NFT, stable coins, etc. Like DeFi, its advantage is that it can provide greater efficiency, transparency and fairness, but its disadvantage is that it is difficult to enforce travel rules because it has no clear service provider or customer identity information. This article believes that DeFi’s own information sharing platform or protocol can be used for on-chain verification, so that DeFi traders can automatically collect, verify, transmit and store identity information and realize self-execution of travel rules.

Second, the travel rule enforcement threshold is lowered, exemptions from the minimum transaction amount or minimum transfer value are eliminated, and the travel rule is applied to all amounts of crypto-asset transactions. This is in response to the increasing number and segmentation of cryptocurrency transactions, as well as the regulatory difficulties caused by cryptocurrency price fluctuations. This direction is consistent with the direction pointed out by MiCA.

Finally, establish unified technical standards and solutions, such as using blockchain, distributed ledgers, smart contracts and other technologies to achieve secure transmission and storage of information. This is to solve the technical obstacles and security risks of information sharing between VASPs, and to improve the efficiency and convenience of information sharing, which is beneficial to the operation and management of VASPs.

references

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