The FAFT Travel Rule - now also for crypto service providers?
Pursuant to the Funds Transfer Information Regulation (Regulation EU) 2015/847, "TFR"), payment service providers are required to provide information on the sender and recipient of payments when transferring 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, viz. 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 of an extension of the CITR. On April 1, 2022, the EU Parliament finally presented its proposed amendments to the new regulation (called "TFRE").
Future implications for the crypto world
Approval of the new TRF-E regulation will result in many changes in the crypto space. We have summarized key 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, it says, 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, 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 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 may be a reason to relocate their business to non-EU countries if necessary.
For the customers of crypto companies, the implementation of the TFR-E may potentially cause delays in the processing of transactions. Since it is necessary to wait until the KYC process is fully completed before executing transactions, any delays are quite conceivable. In addition, many customers 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 a possible introduction of a minimum threshold for reportable transactions or also the handling of privately held wallets, are currently still under discussion. However, as 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 what exactly the tightened regulations in the crypto sector will ultimately look like in detail and will be happy to keep you up to date.
