The Financial Conduct Authority (FCA) has published a statement (Statement) on its expectations for UK cryptoasset businesses (CBs) complying with the Travel Rule (as defined below).
From 1 September 2023, CBs will be required to collect, verify and share information about cryptoasset transfers, i.e., a CB transferring a cryptoasset to another CB, (known as the “Travel Rule”). These requirements are set out in a new Part 7A of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs) and implement the updated version of the Financial Action Task Force (FATF) recommendation on the Travel Rule. The Travel Rule aims to bring greater transparency to cryptoasset transfers, making it harder for criminals to use cryptoassets for illicit activity.
The Travel Rule applies to CBs registered under the MLRs, namely: (i) cryptoasset exchange providers (including cryptoasset automated teller machines, peer-to-peer providers and issuers of new cryptoassets); and (ii) custodian wallet providers (including a firm or sole practitioner who safeguards, or safeguards and administers, cryptoassets or private cryptographic keys on behalf of customers).
In June 2023, FATF explained the challenges arising from delays in adoption and varied timelines for enforcement of the Travel Rule across jurisdictions. As a result, the FCA noted that it has worked closely with the industry to provide guidance for CBs on how to comply with the Travel Rule and what it reasonably expects of CBs ahead of other jurisdictions adopting the Travel Rule.
The Statement sets out the FCA’s expectations of CBs in relation to the Travel Rule. In particular, CBs:
- should take all reasonable steps and exercise due diligence to comply with the Travel Rule;
- will remain responsible for achieving compliance with the Travel Rule, even when using third-party suppliers;
- should comply with the Travel Rule when sending or receiving a cryptoasset transfer to a firm in the UK or any jurisdiction that has implemented the Travel Rule; and
- should regularly review the implementation status of the Travel Rule in other jurisdictions and adapt their business processes as appropriate.
The Statement also provides that when sending a cryptoasset transfer to a jurisdiction without the Travel Rule:
- a CB should take all reasonable steps to establish whether the firm can receive the required information; and
- if the firm cannot receive the necessary information, the CB must still collect and verify the information required by the MLRs and store that information before making the cryptoasset transfer.
Additionally, the Statement provides that when receiving a cryptoasset transfer from a jurisdiction without the Travel Rule and the transfer has missing or incomplete information, a CB must consider the status of the Travel Rule in the countries in which the firm operates. CBs should consider these factors when making a risk-based assessment of whether to make the cryptoassets available to the beneficiary.
The FCA intends to keep these expectations under regular review as the Travel Rule is adopted globally.
Alongside the Statement, the FCA has been working with the industry, the Joint Money Laundering Steering Group and HM Treasury on guidance to help CBs comply with the Travel Rule (Guidance). The consultation on the Guidance closes on 25 August 2023.