This way for travel rule advice

The UK’s implementation of the Travel Rule has now come into effect. Many of our cryptoasset clients have received comprehensive data requests from the FCA to elicit how they intend on complying with the Travel Rule. This highlights it is a key area of focus for the FCA and that firms must be able to demonstrate a compliant framework.

What does it mean?

Cryptoasset businesses (CBs) registered in the UK must comply with the Travel Rule (TR) when performing inter-cryptoasset business (ICB) transfers and unhosted wallet (UHW) transfers. At a high level, the TR means firms need to obtain required information from their customer, and in the case of an ICB transfer transmit that information to the counterparty CB.

Some key challenges

A key challenge for firms has been with ICB transfers and the ‘sunrise issue’ where the counterparty CB is in a jurisdiction that has not yet implemented the TR. For such transfers the FCA set out its expectations in a statement published in August. It has provided a degree of flexibility and enables firms in certain circumstances to store and not transmit the required information to the counterparty CB.

However, this forbearance does not extend to another challenge that firms have faced with ICB transfers, which is where the counterparty CB is using a non-interoperable solution (effectively preventing or making difficult the ability to transmit the required information to each other). Outside of the sunrise issue, the FCA’s statement is that firms must “fully comply”. Therefore firms will have to consider how they can be fully compliant where the counterparty CB is using a non-interoperable solution and they cannot otherwise transmit the required information – indeed, this may mean the only appropriate action for the firm to be fully compliant is to not perform the transfer (or where the firm is the beneficiary CB, return the received cryptoassets to the sending CB).

This in turn introduces the question of how would a firm know the transfer is an ICB transfer given that counterparty CB is using a non-interoperable solution? The draft JMLSG guidance on the TR states firms are expected to take all reasonable measures to identify the counterparty and whether the transfer is to or from a CB. One of the example measures given is blockchain analysis. Therefore firms should be considering whether they have appropriately incorporated their blockchain analysis tool into their TR flow to help identify ICB transfers (as well as any other reasonable measures to identify them).

While the sunrise issue and non-interoperability of solutions have received significant attention, they are still only two aspects in achieving TR compliance, with the UK’s implementation also involving considerations that include timing, screening, data integrity and reporting.

As highlighted above, the TR also applies to UHW transfers which have their own requirements. On the face of it, these requirements are less complex than for ICB transfers, as information does not have to be transmitted to a counterparty CB. However, firms will need to demonstrate they take an appropriate, risk-based approach as to when the required information is obtained for a UHW transfer. A particular challenge has been incorporating the purpose of the transfer into the firm’s risk assessment of said transfer – this is a mandatory factor under the amended regulations and one which firms will often have not been eliciting and incorporating into a risk assessment for UHW transfers prior to the TR.

Firms will no doubt continue to experience challenges in achieving Travel Rule compliance and navigating the ongoing complexities arising from changes in regulatory expectations and the technological landscape. These challenges are not limited to registered firms that must now by complying with the TR, but also firms seeking registration which will have to demonstrate a robust framework to the FCA. We have significant insight into the Travel Rule, broader cryptoasset compliance and the FCA’s expectations towards cryptoasset businesses. Get in touch to discuss how we can help.