Monday, February 10, 2025
banner


We asked a selection of industry experts for their thoughts on two recent regulatory developments: progress on the EU Markets in Crypto Assets Directive (MiCA) and the recent HM Treasury (HMT) Funds Transfer (Travel Rule) announcement.

In this analysis, Sushil Kuner and Charles Kerrigan look at HMT’s statement on the Travel Rule and explore how it could affect crypto business in the UK.

(Click here to read Charles Kerrigan and James Burnie discussion of MiCA.)

Fund Transfer Opinion/Travel Rule

The overarching theme here bodes well for the crypto industry. HMT recognized the need for a risk-based approach to avoid processes becoming disproportionate. Therefore, the collection of information for non-hosted wallets should be on a risk basis, not for all transactions; we have confirmation that the Travel Rule only applies to intermediaries who are cryptoasset exchange providers or custodian wallet providers (ie already within MPRs); and when a transfer is not accompanied by the required information, virtual asset service providers (VASPs) retain some flexibility to decide what action is appropriate to take.

But the industry needs to show that it can practically work within the rules and not game the system. Therefore, we can assume that the threshold for obtaining a cryptoasset license will remain high, as the senior teams at the firms that own them are trusted to operate within the spirit of the rules.

The titles are it. This means that instead of requiring the general collection of user and originator information for all non-hosted wallet transfers, VASPs will only be expected to collect this information if the transfer is deemed to be a higher risk.

Brokerage business with crypto assets

HMT carefully considered industry feedback regarding the definition of “crypto-asset brokerage” but decided to retain the proposed definition. After some consideration, the HMT believes that the definition is actually clearer and narrower than those used in other jurisdictions it has considered.

While there are potentially many entities sitting between VASP originators and beneficiaries, the HMT believes its definition makes it clear that the Travel Rule only applies to intermediaries who are cryptoasset exchange providers or custodian wallet providers – ie. those crypto firms currently within the purview of the MLR, and to which the Travel Rule is intended to apply.

Block the inbound transfer of cryptoassets

Industry feedback highlighted a desire for more clarity on what is the appropriate follow-up action where a transfer is not accompanied by the required information. They include the development of an outline that sets out the factors that VASPs should take into account when deciding on the level of risk of a transfer, and therefore the appropriate follow-up action.

As the appropriate follow-up action will vary depending on the circumstances of the transfer – in particular, whether it presents a high risk of illicit financing – they suggest retaining flexibility for the VASP to decide what is the appropriate action to take. This is in line with the Financial Action Task Force (FATF) standards and the approach taken in the Funds Transfer Regulation.

Charles Kerrigan, Partner, Banking and International Finance, CMS.

FATF

FATF’s Travel Rule guidelines in Recommendation 16 recommend that VASPs – including exchanges, banks, OTC desks, hosted wallets and other financial institutions – share certain recipient and payee identification information for cryptocurrency transactions over $1,000 or €1,000 globally. The FATF Guidelines, while setting global standards, are not enforceable until they are adopted into domestic legislation, and final adoption and standards are left to participating member states.

The EU and the UK recently proposed changes to their anti-money laundering (AML) frameworks to extend the current information exchange requirements for wire transfers to cryptoassets. In the UK, HMT consulted on initial proposals in July 2021 and published its response to the consultation last month.

The government has acknowledged that compliance with the new travel rule represents a cost to business. Although the overall costs of this are said to be outweighed by the benefits to the sector and the economy as a whole, from the reduced risk of crypto-assets being used for illicit purposes and the improved confidence in the sector that this will bring.

The government is proposing a 12-month grace period from when amendments to the UK Money Laundering Regulation come into force (September 2022) until 1 September 2023. However, it expects crypto-asset companies to implement solutions to enable compliance with Travel rule.

The adoption of the Travel Rule will clearly create new obligations and costs for VASPs and require them to improve their compliance processes to collect the necessary identifying information in the future. It is clear from HMT’s response that it prioritizes acting in accordance with global standards and not deviating from key points of the law. This is logical given the global nature of financial crime and the need for consistent standards to combat it.

It is also important to note that the HMT will introduce a new requirement for buyers of cryptoasset firms to notify the Financial Conduct Authority (FCA) prior to such acquisitions. This will allow the agency to assess the “fitness and propriety” of a proposed acquirer, giving the FCA powers to object to any such acquisition before it takes place and cancel the registration of the firm being acquired.

The measure closes a current loophole where firms can effectively circumvent the requirements of an accessor to registration by buying already registered cryptoasset firms, potentially allowing a company to acquire illegal activity before the FCA can take action.

It is clear that the UK sets high standards for the crypto industry and, while encouraging fintechs in the UK in general and wanting to become a global hub for cryptocurrencies, the UK clearly only wants to attract legitimate companies that adopt high compliance standards.

Sushil Kuner, Principal Associate, Financial Services Regulation, Gowling WLG LLP.

Do you find this interesting? Share on your network.



banner
crypto & nft lover

Johnathan DoeCoin

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar.

Follow Me

Top Selling Multipurpose WP Theme

Newsletter

banner

Leave a Comment

crypto & nft lover

John DoeCoin

Learn all about cryptocurrency and NFT, we publish news and interesting fauths from the world of crypto.

@2022 u2013 All Right Reserved. Designed and Developed by Evegal.com