What is FATF’s Crypto Travel Rule?
Cryptocurrencies have taken the world by storm, and there is no doubt about that. In addition, more and more businesses are opening up to crypto payments. El Salvador had a history when it legalized Bitcoin (BTC) as legal tender, and the country’s tourism department reportedly boomed after the move. Nevertheless, the crypto world is shrouded in illegal activities and money laundering.
In June 2021, the FATF (Financial Action Task Force) issued travel rules guidance for VASPs (Virtual Asset Service Providers). The FATF is an intergovernmental agency that deals with anti-money laundering policies and currently serves the G7 nations and 30 other developed countries.
What is the crypto travel rule?
The rule is called the “Crypto Travel Rule” because it mimics the travel rule in the US Banking Privacy Act.
The rule states that the originators and recipients of crypto transactions over $1,000 must be communicated to the FATF. In addition, FATF recommends that VASPs send names and account numbers to the sender and receiver and the sender’s address.
Before FATF’s 2019 proposal, a travel rule was already in place. As part of efforts to reduce money laundering, the rule initially targeted banks and financial institutions. Essentially, the FATF’s actions in 2019 made this rule more expansive so that similar AML standards can be implemented in the cryptocurrency business.
The Financial Crimes Enforcement Network (FinCEN), acting under the US Bank Secrecy Act (BSA), had placed a similar regulation on VASPs operating within its purview prior to publishing the crypto travel rule in 2019. This rule forces crypto asset service providers to certify that crypto transactions do not originate from or go to entities that have been sanctioned.
The importance of the travel rule
The regulation’s primary objective is to prevent money laundering and the financing of terrorism. The travel restriction ensures that cryptocurrency firms follow the sanctions rules. In addition, I t makes it easier for the authorities to obtain transaction data. It is the first crypto rule to be used internationally and could pave the way for more consistent industry regulation.
However, there are some challenges with the rule. A major problem is the lack of uniformity in how the rule is perceived in different regions. Different countries have additional requirements to the travel rule, and therefore VASPs have to change their positions in other areas. This problem is popularly known as the “sunrise problem.”
Another problem is that users have to give up some of their privacy to continue interacting with crypto markets. This goes against some of the fundamentals of the crypto industry. Moreover, it can get in the way of the user experience.
