The FAFT Travel Rule - now also for crypto service providers?
Under the Transfer of Funds Regulation (Regulation EU) 2015/847 ("TFR"), payment service providers are required to provide information on the sender and the beneficiary of a transfer of funds. This so-called Travel Rule ensures a uniform implementation of the FAFT requirements for payment service providers throughout the EU. So far, however, the regulation only applies to the transfer of funds, i.e. coins, banknotes, giral notes and cash. Coins, banknotes, scriptural money or e-money - but not for cryptocurrencies.
This could soon change.
After FAFT updated its recommendations regarding cryptocurrencies and crypto service providers last October, the Union now wants to follow suit. Already in July 2021, the Commission had published a proposal for an extension of the CITR. On 1 April 2022, the EU Parliament finally presented its proposed amendments to the new regulation (called "TFRE").
Future impact on the crypto world
Approval of the new TRF-E regulation will result in many changes in the crypto sector. We have summarised the main points below:
It obliges crypto service providers such as crypto exchanges to report every transaction to the authorities. Data such as the name, address, date of birth and account number of the sender and recipient of the payments are to be forwarded. All crypto transactions are to be affected by the reporting obligation. Although the FAFT recommendation only includes all crypto-transactions above a minimum threshold of 1,000 euros, the EU Commission wants to go one step further: it wants to introduce a zero-euro threshold. The reason for this is that small crypto transactions are often used for terrorist financing or money laundering. A zero-euro threshold would ensure full traceability of all transactions and prevent such a loophole for illegal activities.
Furthermore, the implementation of an effective KYC process to identify and verify customers is essential. For crypto service providers, this may mean that adjustments need to be made within the company in order to comply with the Travel Rule. This may represent a corresponding additional expense for the companies. For small crypto companies in particular, additional costs arising from a KYC process implementation can be a reason to relocate their company to non-EU countries if necessary.
For the customers of crypto companies, the implementation of the TFR-E may possibly lead to delays in the processing of transactions. Since it is necessary to wait until the KYC process is fully completed before carrying out transactions, any delays are quite conceivable. In addition, many clients are critical of the aforementioned full traceability of transactions, as this leaves little room for anonymity.
Nothing is final yet.
Exact details of the TFR-E, such as the possible introduction of a minimum threshold for reportable transactions or the handling of privately held wallets, are currently still being discussed. However, since the introduction of the new regulation is aimed at fulfilling the FAFT guidelines, no fundamental changes are expected. Currently, the proposal is still pending approval from the European Union. We at CURENTIS are curious to see exactly what the tightened regulations in the crypto area will ultimately look like in detail and will be happy to keep you up to date.