Are you aware of the key details pertaining to the Financial Action Task Force (FATF)’s Travel Rule?

As a relative newcomer into the global securities and digital legislation field, the Travel Rule—also referred to as “FATF Recommendation 16”—has garnered significant attention as of late, particularly with 2022 closing the year with several alarming instances of crypto market-related security issues. While the Travel Rule has not been “formalized” into governing legislation, it is referenced as such because it closely resembles U.S. requirements pertaining to documenting both the originator and recipient identities of virtual asset transactions.

Recommendation 16 represents the understanding of both FATF and the global financial legislation community that the exchange of virtual currencies and assets like cryptocurrency opens new avenues for financial crime and corruption. Below, we’ll take a quick look at some of the basics of the Travel Rule, as well as what to anticipate from continued legislative efforts in the future.

What is the “Travel Rule”

The Travel Rule was introduced in 2019 as a way to establish better visibility and more consistent standards for transactions using virtual asset service providers (VASPs). As described above, the Travel Rule recommends that virtual exchanges attach a unique identifier to both the originating and destination wallet in order to verify and assess the known risk attached to involved entities.

By removing the “anonymous” nature of virtual exchanges and implementing a form of traceable accountability, the risk of fraud lowers and it becomes difficult for criminals to conduct illicit activities like money laundering, terrorist financing, and more.

At present, the guidelines suggested by the FATF predominately apply to transactions exceeding $1000 USD/ €1000, with exchanges under this amount only needing the name of the originator/beneficiary as well as the specific VA wallet or transaction code for each. If a transaction exceeds the $1,000 threshold, the following data points are recommended:

• Originator/Beneficiary name
• Account number of the Originator and Beneficiary (wallet address)
• The geographical address of the Originator
• National identity number (SSN or SIN) for all involved parties
• The Customer ID number for the ordering institution
• DOB and place of birth

While the Travel Rule is often discussed when pertaining to VASPs, it is also applicable to financial institutions when a transaction involves virtually masked parties (e.g. a wire transfer that ‘legitimizes’ the assumed value of cryptocurrency during cashout).

From Recommendation to Legislation

As mentioned earlier, the Travel Rule we know today remains more of an international recommendation rather than a globally upheld financial regulation. With that being said, the European Parliament is currently in the process of implementing a new bill designed to close known gaps in the current EU regulatory environment.

The Markets in Crypto-Assets (MiCA) is expected to be voted on in early 2023, with possible adoption in 2024, and aims to establish harmonized rules for crypto-assets handled within the European Union.

Under the current framework of MiCA, crypto-assets are defined as any “digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology” and regulated into 3 different categories:

• Asset-Referenced Tokens (ARTs)
• Electronic Money Tokens (EMTs)
• Other

Under current guidelines, MiCA does not apply to security tokens, NFTs, or E-Money Directives.

Both the Travel Rule and MiCA play a vital role in the continued regulation and safekeeping of virtual asset exchanges. Digital and cyber-based crime is anticipated to become one of the most prevalent forms of fraud in the next few years (source); with this in mind, a continued commitment to compliance and security is essential for all institutions and entities that interact within the global marketplace.

Protection with Ease through iComply

At iComply, we know that staying on top of constantly evolving AML and KYC protocols can be challenging, especially with the rapid pace virtual assets continue to expand. We are proud to offer a one-of-a-kind end-to-end suite of KYC + KYB software that makes it simple to stay informed and compliant with the latest AML legislation, taking a strict stance against the harms caused by all forms of fincrime.

Our KYC software, iComplyKYC can be integrated into your existing framework within minutes and easily configured to match the regulatory guidelines of nearly 250 international jurisdictions, giving you safety and peace of mind when it matters most.

Learn how you can stay ahead of evolving AML and fraud standards, and discover why iComply is your leading choice for software solutions by talking to our team today!

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