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The time is here; The UK’s Travel Rules obligations go live from today. What’s more, the Joint Money Laundering Steering Group (JMLSG) has just published its Travel Rules industry guidance, which will provide firms with greater clarity on how to meet the new obligations.
Elliptic’s Mark Aruliah co-chaired CryptoUK industry working groups on the topic with Notabene’s Catarina Veloso, and he personally worked on the guidance with the UK Treasury, the Financial Conduct Authority (FCA) and the JMLSG.
In this blog, Mark breaks down what the travel rule actually is and discusses the challenges UK crypto firms may face due to the new obligations.
What do the changes mean?
The obligations will require UK crypto firms to send user and principal information before or when transferring digital assets to another crypto firm.
As mentioned in my previous post, this reflects fiat asset transfer obligations – more commonly referred to as the travel rule. The new obligations will strengthen law enforcement’s ability to more easily identify and take action against bad actors.
As a former regulator, I welcome these commitments, but they come with challenges.
I will continue to co-chair the CryptoUK Working Group and focus our attention on implementation challenges and provide a feedback loop to the FCA and the UK Treasury.
Unanswered questions
For me, the key challenge is that the UK Travel Rule does not have a de minimis threshold or any other actual form of proportionality (excluding transactions related to non-hosted wallets, where there is a level of proportionality).
That, in essence, is the heart of the challenge for the industry. The lack of clarity about what firms must do becomes apparent when dealing with the types of transactions. For example, what does a UK crypto firm do when:
- receives a transaction from a virtual asset service provider (VASP) in a jurisdiction that does not have obligations under the travel rules and does not voluntarily provide relevant information – for example, some EU firms;
- interacts with a VASP from a jurisdiction with Travel Rules obligations, but where there is a de minimis threshold, and thus transactions below that figure would not impose a legal obligation to send relevant information – so, for example, the US, which has $3,000 de minimis threshold; or
- having difficulty identifying interoperable Travel Rule solutions for transmitting information in a secure environment to a third-party VASP?
Also, the lack of proportionality in relation to transactions of low monetary value will impose costs on UK industry that may not be proportionate to the risk of money laundering.
Given the scope of the industry dialogue, the UK Treasury and the FCA will be aware of these challenges. However, it was disappointing that the JMLSG did not include some of the recommendations from CryptoUK members that would address a number of these issues.
That said, I greatly appreciate the work the JMLSG has done to deliver this guidance in a timely manner to support the UK crypto industry. I also understand, from my previous time at the FCA, the challenges of agreeing such guidelines with a number of stakeholders.
FCA guidelines
The FCA provided further guidance on the obligations of the Travel Rules prior to the aforementioned publication of the JMLSG. This was helpful, as it confirms the challenges facing the UK crypto industry and addresses some of the elements I mentioned above.
However, I think the FCA guidance has not provided the full clarity the industry needs, meaning there is a risk that well-intentioned UK crypto firms – who clearly want to be fully compliant – could inadvertently fall short of supervisory expectations.
I’m sure my former FCA colleagues will come out with further guidance to support the industry in the coming weeks. Ultimately, the absence of such clarity will make monitoring firms more challenging if there is market confusion about the regulator’s view.
Furthermore, having worked with the industry on this issue, I am confident that most are in dialogue with the FCA – and even if there is no further guidance from the FCA, there may be individual supervisory dialogue to address concerns. Industry preparation on this topic has been good, although firms may need some time to prepare.
A bigger challenge for the UK crypto industry could actually come next month, when the FCA’s financial promotion obligations go live. Having led the FCA’s financial promotion policy team for some time, I believe the challenges for the industry will be greater. As there is a greater risk of harm to investors, the FCA is likely to take a more active role in enforcement to convey messages to the market.
The Travel Rule is a new piece of UK law now in force. We at Elliptic’s GPRG team are always happy to communicate with clients about our understanding of these and other crypto-related regulations. Email mark.aruliah@elliptic.co.
Compliance with EMEA regulations
