Since it first appeared in 2009, cryptocurrencies have become synonymous with its anonymous nature of transacting.
As a base, cryptocurrency transaction records are hashed whenever it transacts between 2 wallet addresses. This effectively preserves the privacy of the senders and recipients, and differs from the legacy financial system of having transactions tagged to a bank account or name. Considering this anonymous nature, the potential for illicit use cases with cryptocurrencies is a pressing concern.
As cryptocurrency adoption continues to grow, the implicit need for Anti Money Laundering and Counter Financing Terrorism (AML-CFT) measures becomes even more critical.
How does the Travel Rule play into all these? And how will it impact Coinhako and its users?
AML-CFT Measures for the Cryptocurrency Industry
The Financial Action Task Force (FATF), which spearheads AML-CFT efforts on a global scale, ensures the effective implementation of legal, regulatory and operational measures against money laundering, terrorist financing and other related threats to the integrity of the financial system.
Cryptocurrencies, on the other hand, had largely existed in a legal grey area until regulations began to gradually take shape some 3 years ago. This has allowed for the misuse of the technology to conduct illegal financial activities in a number of instances.
As a solution, the Travel Rule was introduced by FATF and it will impact virtual asset service providers (VASPs) and the cryptocurrency industry at large.
Cryptocurrency businesses will now be expected to shoulder the same responsibilities as their traditional counterparts in the legacy financial system.
What is the Travel Rule about?
Nope, it has nothing to do with your next holiday destination after border-control measures are lifted.
In June last year, the FATF — which is made up of 37 member jurisdictions and 2 regional organisations —issued a directive around the globe to impose rules on virtual asset service providers, citing “the need to adequately mitigate the money laundering and terrorist financing risks associated with virtual asset activities.
These guidelines were introduced one week ahead of the annual Group of 20 (G20) summit in Osaka, Japan and would come to be known as the so-called “Travel Rule”; This is due to its resemblance to the original Travel Rule issued under the US’ Banking Securities Act in 1996 – a law which required banks to pass on information whenever $3,000 or higher was being transacted.
How will the Travel Rule work for crypto transactions?
Whenever a user of one exchange sends cryptocurrency worth more than 1,000 USD/EUR to a user of another exchange, the originating exchange must share identifying information about both sender and recipient with the beneficiary exchange, in an “immediate and secure” manner.
It is also important to note these rules will only be applied to virtual asset service providers, such as cryptocurrency exchanges, and will not affect individuals who choose to transact in cryptocurrencies.
What has been done?
The Travel Rule mainly serves as a guideline, and is up to the individual member countries to implement country-specific rules and ensure compliance. FATF members are advised to introduce compliance measures within a 1 year window period.
With the imminent deadline looming ahead, a quick stock-take reveals the progress made by various countries:
Back in 2013, the U.S had already decided that the Banking Securities Act should apply to the cryptocurrency industry. In May 2019, the U.S implemented its own regulatory guidance for VASPs, about a month before the Travel Rule guidelines were introduced.
Just about a month after the introduction of the Travel Rule, the Japanese government led “ a global push” to set up an international network for cryptocurrency payments, similar to the SWIFT network —the internal messaging protocol — that traditional banks use to transfer money around the world.
Japan’s swift action comes as no surprise, as they have always been ahead of the curve in terms of crypto regulations — the Japanese government regulated crypto as early as 2017, acknowledging bitcoin and other crypto derivatives under its Payment Services Act.
Meanwhile, earlier in February this year, Switzerland enforced the Travel Rule based guidelines via its local regulatory body, by lowering the transaction threshold for unidentified crypto exchanges from $5,000 CHF to $1,000 CHF.
Closer to home, our local regulators issued the Payment Services Act (PS Act) on 28 Jan this year, which will regulate Digital Payment Token providers alongside other businesses. This will require cryptocurrency businesses to comply with localized guidelines set forth by the Travel Rule.
How will this affect the cryptocurrency landscape going forward?
The contentious Travel Rule sparked off much controversy, shocking many in the cryptocurrency space.
Concerns surrounding the difficulty of implementation ensued — the challenge was rooted in developing viable solutions to comply with the guidelines without compromising user privacy. The Travel Rule may also pose challenges for unlicensed VASPs, as users of these exchanges may experience difficulties when sending cryptocurrencies.
While the guidelines are not legally binding, and are up to each member country to enforce, the lack of adherence to these guidelines may subject VASPs to rejection and exclusion from the global financial network.
However, it is worth noting that cryptocurrency users will still be able to send and receive cryptocurrencies to their self-custodial wallets, and there will be a process for customers to verify ownership of their personal wallets.
“The Travel Rule ensures transparency of virtual asset transactions, and serves as a gatekeeper to keep funds linked to crime and terrorism out of the ecosystem.”
Having these regulations in place will strengthen trust and security for digital currencies and blockchain technology, and help to shift the perception of virtual assets into a positive light. With greater accountability, the technology will be seen as a sturdy and sustainable channel to transfer value.” – Coinhako’s Compliance Lead
How will this affect Coinhako?
We have already embarked on increased efforts to conduct all the necessary due diligence and ensure compliance with requirements set forth by the Travel Rule.
As with any effective regulatory framework though, rules and guidelines will be subjected to further development over time. We endeavour to develop our platform, on the basis of ensuring compliance but also providing all our users with the best possible services and product offerings.
Stay tuned for more updates!
*The information presented in this article does not constitute investment advice and is purely for educational and/or informational purposes.
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