This way for travel rule advice


INSIGHT
Published
Sep 4th '23
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The Travel Rule has entered into force in the UK. A lot of our cryptoassets clients have received detailed requests for information from the Financial Conduct Authority (FCA) asking how they plan to comply with the new rules. This highlights the fact that this is one of the FCA’s key areas of focus and that firms need to be able to provide a compliant framework.

 

  • What does it mean?

Cryptoasset business (CB) transfers and transfers and unhosted wallet (UHW) transfers are governed by the UK’s Travel Rule (TR). At the most basic level, the TR requires CBs to request information from their client and, in the case of inter-cryptoasset business (ICB) transfers, to forward that information to their counterparty CB.

 

  • Key challenges

One of the biggest sticking points for firms has been ICB transfers, as well as the so-called ‘sunrise problem’ where a counterparty CB is located in a jurisdiction where the TR has not yet been implemented. The FCA has set out its expectations for such transfers in a statement published last August. It has offered some flexibility and allows firms to store and not transfer the required information to a counterparty CB in certain circumstances.

 

However, this generosity addresses another challenge that companies face with ICB transfers, namely when the central banks with which they transact use non-interoperable solutions (which effectively limit the ability to send each other the required information). does not apply if it interferes with or complicates the Separately from the Sunrise issue, the FCA’s statement says companies must be “fully compliant”. Companies therefore need to consider how they can be fully compliant if the central banks they do business with use non-interoperable solutions and  cannot otherwise submit the required information. there is. This means that the only appropriate action for a company to achieve full compliance is to not make any transfers (or, if the company is the beneficiary central bank, transfer the received crypto assets to the sender’s central bank). It may even mean returning it to the bank).

 

This begs the question, given that counterparty CB is utilizing a non-interoperable technology, how would a business know the transfer is an ICB transfer? According to the draft JMLSG guidelines on the TR, companies must use all reasonable efforts to determine the counterparty and whether the transfer is coming from or going to a CB. Blockchain analysis is one of the provided example measures. Consequently, companies ought to contemplate whether they have suitably integrated their blockchain analysis instrument into their TR flow to facilitate the identification of ICB transfers (along with any other rational approaches to do so).

 

Even though the sunrise problem and the incompatibility of solutions have drawn a lot of attention, these are still only two factors that must be taken into account in order to achieve TR compliance; other factors that must be taken into account for the UK’s implementation include timing, screening, data integrity, and reporting.

 

The TR also applies to UHW transfers, which have specific restrictions, as was previously mentioned. Since information does not need to be sent to a counterparty CB, these requirements appear to be simpler than those for ICB transfers. But businesses will have to show that they obtain the necessary data for a UHW transfer at the proper time, based on risk. The purpose of the transfer has proven to be a particularly difficult factor to include in the firm’s risk assessment of the transfer; this is a requirement under the amended regulations, and prior to the TR, firms frequently would not have been eliciting and incorporating this factor into a risk assessment for UHW transfers.

 

Without a question, businesses will continue to face difficulties complying with the Travel Rule and managing the continuous complications brought on by shifting regulatory requirements and the state of technology. These difficulties extend beyond registered businesses, who now have to comply with the TR, to businesses looking to register, who must provide the FCA with evidence of a strong framework.

 

Regarding the Travel Rule, general cryptoasset compliance, and the FCA’s expectations for cryptoasset enterprises, we possess substantial knowledge. Contact us to talk about how we can support you.

 

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