The eyes of the cryptocurrency community are firmly fixed on the High Court in London for the trial of Dr Craig Wright, an Australian computer scientist who has made numerous claims that he is Satoshi Nakamoto, the elusive creator of Bitcoin.
Dr Wright has brought various actions in defamation against those who contradict these claims, and asserts that, as the author of Bitcoin's foundational white paper, he enjoys IP rights in the cryptocurrency's blockchain. The Crypto Open Patent Alliance (a group of cryptocurrency exchanges and developers) seeks an order from the High Court confirming that Dr Wright is not Satoshi Nakamoto.
The trial may offer clarity on one of the key enigmas of the development of cryptocurrency. However, it takes place in the context of increasing transparency in the monitoring and transfer of cryptoassets. This article discusses recent developments in the UK and the global regulatory environment of cryptoassets.
The new Travel Rule in the UK
The Financial Action Task Force (FATF, a global intergovernmental organisation aimed at combatting money laundering and terrorism financing) issued its "Recommendation 16" in October 2021, stating that certain information must be recorded in respect of cryptoasset transfers in accordance with the "Travel Rule".
The Travel Rule was implemented in the UK on 1 September 2023 by way of amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 Part 7.
The Regulations apply regardless of the commercial purpose of the transfer.
The new Travel Rule requires cryptoasset businesses operating in the UK to collect, verify and share information pertaining to the transfer of cryptoassets. Its key aim is to pose additional hurdles to the use of cryptoassets for illicit activities.
The cryptoasset businesses to which the newly extended Travel Rule apply are:
- cryptoasset exchange providers (i.e. those engaging in or arranging exchanges of cryptoassets, cryptoassets for money, or money for cryptoassets); and
- custodian wallet providers (i.e. those providing services to safeguard cryptoassets on behalf of customers, or which provide private cryptographic keys on behalf of its customers in order to hold, store and transfer cryptoassets).
According to the FCA, the Travel Rule is intended to bring "greater transparency to cryptoasset transfers" and to help cryptoasset businesses "detect suspicious transactions and carry out effective sanctions screening".
Compliance with the Travel Rule in the UK
In respect of all transactions, cryptoasset businesses must collect the name and the account number or unique transaction identifier of both the sender and beneficiary.
Additional information is required in respect of the sender where one of the cryptoasset busineses is operating outwith the UK and the value of the transfer is at least €1 thousand. If the sender is a firm, its cryptoasset business must obtain the its customer identification number and registered office address (or, if this is not available, its principal place of business). In respect of individual senders, their cryptoasset business must obtain their customer identification number, address, birth certificate number, passport number or national identify card number, or their date and place of birth.
If the transfer concerns UK-based cryptoasset businesses only, this additional information must be provided by the cryptoasset business of the sender on the request of the cryptoasset business of the beneficiary within 3 working days. It is otherwise not required.
The FCA has emphasised its expectation that firms take all reasonable steps and exercise all due diligence to comply with the Travel Rule. The Joint Money Laundering Steering Group (JMLSG) has issued further guidance advising that, where incomplete or inaccurate information is provided, cryptoasset firms must apply appropriate risk assessments, accounting for proportionality, reasonableness and any reasonable justification for the discrepancy.
Cryptoasset businesses should clearly document how any discrepancies have been addressed and repeated failures by a cryptoasset business to provide the required information should be reported to the FCA.
Developments elsewhere
To date, forms of the Travel Rule broadly similar to the UK's legislation have been implemented in the US, Canada, South Africa and Singapore, among others.
Various European jurisdictions have also implemented appropriate regimes which will shortly be superseded by the EU's Regulation (EU) 2023/1113 on information accompanying transfers of funds and certain cryptoassets. This legislation entered into force on 29 June 2023 and will apply directly in member states from 30 December 2024. Regulation 2023/1113 applies to all cryptoasset businesses operating in the EU and aims to harmonise the Travel Rule across member states.
On 16 January 2024, the European Banking Authority (EBA) released its Final Report on amendments to its Guidelines on money laundering and terrorist financing risk factors (EBA/GL/2021/02), which will apply from 30 December 2024. These updates extend the scope of the Guidelines to cryptoasset service providers. The Final Report specifically mentions (at paragraph 21.6) that a customer's compliance with the EBA's Travel Rule Guidance may contribute to reducing their risk profile.
However, implementation is by no means universal. FATF has urged those of its extensive network of member countries who have not yet implemented domestic legislation to expedite recognition of the Travel Rule in early course.
FATF and JMLSG further recognise that the staggered implementation of the Travel Rule and varying timelines for enforcement can present challenges for entities interacting with counterparties in jurisdictions where the Travel Rule has not yet been implemented. This is referred to as the "sunrise issue"..
Additionally, there are significant differences in the implementation of the Travel Rule. A key example is the financial threshold for the application of the Travel Rule. In contrast to the abovementioned de minimis rules in the UK, there is to be no minimum threshold in the EU, and the US's Bank Secrecy Act requires compliance only in respect of transactions in excess of US$3 thousand.
Similarly, the information required to be collected and shared varies across jurisdictions. Canadian laws require cryptoasset businesses to always record the address of parties to cryptoasset transactions (this is not a requirement in the UK, provided that certain other information is obtained). Singapore requires only the name of the beneficiary of a cryptoasset transaction, whereas the UK also imposes an obligation to share the beneficiary's account number.
The inconsistencies in implementation of the Travel Rule and jurisdictional variations of the requirements pose clear compliance challenges for global cryptoasset businesses and their advisers. Fluctuations in the value of cryptocurrencies may also cast doubt on whether particular transactions surpass the local thresholds determining the applicability of the Travel Rule.
Alongside consideration of the Travel Rule, businesses must also be mindful of local data privacy requirements. Sanctions for non-compliance also vary throughout the nations which have implemented FATF's recommendations, resulting in different risk profiles in each jurisdiction.
The path forward: changing perceptions of cryptoassets
The FCA has advised that firms "regularly review the implementation status of the Travel Rule in other jurisdictions and adapt business processes as appropriate".
The steps taken across the globe to introduce measures aimed at increasing the transparency of cryptoasset transfers demonstrates a clear departure from cryptocurrency's reputation and roots. There is a tension between the factors which originally drove the adoption of cryptocurrencies (namely, pseudo-anonymity, decentralisation and privacy) and these more recent developments. The latter are, however, likely to assist in legitimising cryptocurrencies and allowing the digital assets sector to move further into mainstream territory.
Whilst the outcome of the ongoing High Court trial is eagerly awaited, it appears increasingly unlikely that the cryptocurrency community will require to contend, in an environment of increased monitoring and tightening regulations, with similarly enigmatic figures.
In the meantime, monitoring of the global transparency requirements is clearly essential in ensuring regulatory compliance, particularly in the case of cryptoasset businesses catering to those engaging in multi-jurisdictional transactions.
Those interested in cryptoassets might enjoy our Crypto Bytes podcast series exploring issues and developments that are shaping the world of digital assets. Subscribe and listen to the podcast here.
