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Attempts to Unify Cryptocurrency Regulation and Introduction of the Travel Rule

Apr 17, 2020

It has been almost a year since the Financial Action Task Force (FATF) released its controversial crypto directives, which merged the cryptocurrency industry into existing banking policy, requiring firms to comply with the same requirements as traditional financial institutions. FATF stated that it would give 12 months to adopt the guidelines.

FATF’s guidelines will:

  • increase transparency regarding who actually owns legal entities to prevent money laundering and terrorist financing through opaque structures;
  • provide financial regulators with better access to data through centralized bank account registers;
  • tackle terrorist financing risks linked to anonymous use of virtual currencies and prepaid instruments;
  • improve the cooperation and exchange of information between anti-money laundering supervisors;
  • broaden the requirements for identifying high-risk third countries and ensure a high level of protection for money moving to or from such countries.

One of the most notable directives is the Travel Rule which requires “virtual asset service providers” (VASPs) — including crypto exchanges and custodial wallet providers — to disclose customer information when facilitating a trade of $1,000 or higher. This requirement requests information covers both the sender’s and recipient’s name, geographical address and account details.

The United States is charged with the conception of the FATF guidance after basing the directives on the Bank Secrecy Act (BSA) — the primary Anti-Money Laundering law in U.S. In 2013, the Financial Crimes Enforcement Network (FinCEN) determined that the BSA should apply to the cryptocurrency industry, and within this recommendation, FinCEN also confirmed the application of the BSA Travel Rule, issuing its own guidance for VASPs in May 2019. According to FinCEN the breach of the Travel Rule is one of the most commonly cited violations — and it often goes unpunished. Reasons for this could be FinCEN understanding attitude towards the crypto industry, giving them time to build compliance solutions, or FinCEN realizing that an enforcement action too early would incentivize many U.S. entities to move their businesses offshore in order to avoid regulatory oversight.

One of the latest countries to enforce FATF guidance is Switzerland. The Swiss Financial Market Supervisory Authority pretty quickly implemented Travel Rule and lowered the transaction threshold for unidentified crypto exchanges from $5,000 (5,000 CHF) to $1,000 (1,000 CHF). Merging with FATF’s travel limit, the new Financial Services Act aims to address the “increased money-laundering risks” within the crypto market.

On January 10th this year the EU’s Fifth Anti-Money Laundering Directive (5AMLD) came into force, which is considered as not as stringent as the FATF’s guidance. The 5AMLD take a lighter approach to customer recordkeeping. FATF guidance recommends data-gathering on both the recipient and the sender as well as liaising with other VASPs, while the 5AMLD merely entails recordkeeping and the submission of data to financial intelligence organizations upon request.

Singapore have been particularly receptive to FATF directives guidelines. Payment Services Act 2019 requires “digital payment token” services — which includes both crypto businesses and exchanges — to comply with FATF-ready AML rules. Additionally, to adapt FATF directive requirements, Singapore set its Travel rule threshold at around $1000 (SG $1,500).

In 2017 Japan started acknowledging Bitcoin and its crypto derivatives as property within Japan’s Payment Services Act. In addition, Payment Services Act calls for local crypto business to comply with AML regulations and register with a competent local finance entity.

Although Estonia is not a member of FATF, updated guidance is considered as a foundation for new legislative changes in Estonian cryptocurrency licensed businesses. In May 2019, the Estonian officials passed legislation tightening licensing requirements, and in January 2020, it went further, asserting that virtual currency service providers will be treated the same as financial institutions under the Estonian Money Laundering and Terrorist Financing Prevention Act.

Regardless of the jurisdictional implementation, only few crypto firms have actually complied with FATF guidance. Not a single major crypto business has actually been compliant on the Travel rule despite the applicability of the rule since 2013. One of the main reasons for this, could be the divided nature of the crypto industry compering to traditional banking. Challenge of constructing a successful unified framework is difficult to succeed. At the moment exchanges don’t have a clue and have a different approach as to how to implement it.

Although, FATF guidelines should help to overturn perception that cryptocurrency is used to conduct unlawful activities considering that same rules as fiat should be applied, additional compliance costs may wreck the business for smaller firms. Added scrutiny will help mature the cryptocurrency asset class, even though in the short-term, “VASPs will likely incur additional expenses as they seek to comply with the Travel Rule.

Some VASPs may cease to exist or others may move to unregulated countries such as Panama. Nevertheless, this will be a positive impact on the industry because Travel Rule will help virtual assets grow into an asset class that is safe for investors.

Offshorelicenese team are ready to assist to our clients with Crypto license obtaining in Switzerland, Singapore, Japan and Estonia according to newest legislation requirements, or acquire Estonian shelf companies with active crypto licenses.

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