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FATF Assessment Finds Majority of US Exchanges are Compliant with Virtual Asset Guidance

The Financial Action Task Force (FATF) has published an assessment of the US’s compliance with its revised criteria for anti-money laundering (AML) and terrorist financing (CTF) through virtual assets and found that most virtual asset providers are compliant.

Recommendation 15 – Travel Rule

It began in June of 2019, one of the most authoritative regulatory organizations worldwide, the Financial Action Task Force (FATF), issued new guidelines on how digital assets should be regulated.

A point that caused great concern and confusion for exchanges was the “travel rule,”: which refers to section 7(b) in the Interpretative Note to Recommendation 15 in the FATF Guideline, which requires Virtual Asset Service Providers (VASPs) to collect and transfer customer information during transactions.

While the recent FATF assessment concludes that, “the US remains rated as Largely Compliant with R.15,” it still cited minor deficiencies such as the requirement for US-registered money services to only be obligated to keep records of transactions of $3,000 or more, a limit three times that recommended by FATF, which the regulatory watchdog believes could be manipulated by bad actors. From the assessment, FATF wrote,“This higher threshold is not clearly supported by low ML/TF risks.”

The FATF also concluded that US Regulators, such as FinCEN and the SEC, are also behind in their investigations of convertible virtual currency (CVC) business. The watchdog was critical of the US Regulating bodies’ strategy which “does not specifically identify higher risk virtual asset service providers (VASP),” making their “various” examinations of high-volume exchanges and peer-to-peer networks insufficient.

Advantages of the Travel Rule

In a previous interview with RegTech expert and CEO of IComply, Matthew Unger told Blockchain.News about the advantages of implementing Recommendation 15 despite the concerns of many VASP and exchange operators.

Unger said, “First and foremost, there’s the mainstream adoption—because this is the last piece of compliance needed for crypto assets to be held to the same standard as the rest of the financial industry.”

“Secondly, without the FATF travel rule or something similar to the travel rule, the security token industry will never survive because every platform is creating its own protocol, which is causing massive fragmentation.” He concluded, “Finally, the use of the travel rule enables more institutional investors to trade cryptocurrencies for their clients while lowering the cost and manual compliance work required for each trade.”

Crypto & the FATF Travel Rule: FinCEN Suggests Challenges in Governance, Not Technology

The Financial Action Task Force (FATF) Travel Rule has been in the center of attention lately, which concerns crypto transactions above a certain amount must be accompanied by identifying information.

The rule is an update to the existing FATF Recommendation 16, regarding cross-border and domestic wire transfers, and is intended to address the anti-money laundering (AML) and counter-terrorist financing (CFT) challenges as crypto adoption increases. The FATF Travel Rule could mean implications for virtual asset service providers (VASPs), including cryptocurrency exchanges, wallet providers, and custodians.

Financial institutions in the FATF member states are recommended to implement the new regulations by June 2020, a year after it was adopted by the FATF in June 2019.

The FATF has started observing digital assets in 2014, and defining certain terms has always been a challenge for the task force. As Amy Davine Kim, the Chief Policy Officer at the Chamber of Digital Commerce explained at Consensus: Distributed explained, there are still ongoing concerns regarding cybersecurity and privacy concerns over the travel rule.

Since the COVID-19 pandemic emerged, the Financial Crimes Enforcement Network (FinCEN) has published advisories on March 16 and April 3, to warn financial institutions to stay alert for malicious fraudulent transactions, and AML operations during the COVID-19 pandemic. This was due to the increase in these types of cases, as bad actors have leveraged the pandemic for theft and money laundering activities.

The FinCEN has taken a technology-neutral approach so far, as the network has seen the most challenges relating to governance and processes, rather than technology.

Kenneth Blanco, Director of the FinCEN stated, “the FinCEN also plans to publish multiple advisories highlighting common typologies used in pervasive fraud, theft, and money laundering activities related to the pandemic to better help the financial sector to better protect, and report this activity.”

Blanco also added that the FinCEN has observed that cybercriminals predominantly launder their proceeds and purchase the tools to conduct malicious activities via virtual currency. He said, “During this time of crisis where our people are more at risk or more vulnerable than ever, we, all of us, have a duty and responsibility to use our abilities, tools, and talents to protect others and ensure the stability of this ecosystem that we are creating and it depends on trust.”

Blanco concluded,

“We encourage the virtual currency sector to continue collaborative efforts to develop and implement these solutions and to keep FinCEN apprised their progress, including to participate in FinCEN’s innovation hours program.”

Coinbase recently revealed that the company has become a banking client of JP Morgan’s, impacting the future outlook of cryptocurrency exchanges and banking relationships.

Regarding the news, Jeff Horowitz, the Chief Compliance Officer at Coinbase said the company is focusing on analytics and transaction monitoring systems as banks will want to see these features in the crypto ecosystem. While he is pleased to see JP Morgan and other banks getting into the space, he said he hopes to see solutions for lower barriers to entry, as well as the solutions to comply with the travel rule do not come from a money-making perspective.

He further suggested that a “regulated” VASP has not been defined globally, and the industry must work to decide a framework regionally, then work on going global.

Adam White, Chief Operating Officer at Bakkt said, “We’re going to see a bifurcation in the crypto space, we’re going to see white crypto, and we’re going to see grey crypto, and the different forms of crypto will most likely trade for different prices. Offshore unregulated exchanges that aren’t complying with the travel rule, their assets will be traded at different prices.”

Crypto & the FATF: ING Develops Travel Rule Protocol for Tracking Crypto Transfers Ahead of FATF Plenary Meeting

The FATF has a wide range of recommendations, a total of 40 to ensure regulatory alignment between the compliance imposed on financial institutions and the regulations in its member states. The FATF Travel Rule is Recommendation 16, which has received a lot of attention from the crypto industry, especially virtual asset service providers (VASPs).

The Travel Rule requires crypto transactions above a certain amount to be accompanied by identifying information. The rule requires these financial institutions to collect, disclose, and transfer information including names, addresses, and account numbers to be able to identify the originators and beneficiaries of the financial transactions.

The requirement of disclosing identifying information of the persons involved in financial transactions becomes an irony for cryptocurrency transactions — known for its anonymity and privacy features. Travel Rule requirements have raised concerns within the crypto ecosystem as it goes against the ethos of digital cash like privacy when transferring cryptocurrencies.

Financial institutions in the FATF member states are recommended to implement the new regulations by June 2020, a year after it was adopted by the FATF in June 2019. June 2020 is a significant month for the Travel Rule as their efforts will be reviewed at FATF’s plenary meeting, scheduled for June 24, 2020.

Around 90% of non-VASP activity will eventually pass through a VASP at some point or is required to make contact with a system connected to a VASP. With the implementation of the FATF Travel Rule, some parties may find themselves moving their crypto-related activities to unregulated or underregulated markets, which could mean riskier VASPs.

Netherlands-based ING Bank has recently developed a new protocol to assist crypto exchanges and companies dealing in digital assets to adhere to the Financial Action Task Force’s Travel Rule requirements.

The new solution, the Travel Rule Protocol (TRP), developed by ING is also backed by Standard Chartered Bank, Fidelity Digital Assets, and Bitgo, and other firms in the crypto industry.

A source close to ING allegedly said that ING is not currently looking at dealing in cryptocurrencies, but will be focusing on security tokens and similar products.

Although ING does not seem like it is joining the crypto ecosystem, ING is no stranger to blockchain. ING is one of the founding members of Contour, a blockchain-based trade finance platform built on R3 Corda.

Crypto Service Providers Willing to Embrace FATF Travel Rule, Study Shows

The Travel Rule, which now governs service providers in the digital currency ecosystem, is arguably not a source of concern as a new report from Notabene shows many firms in the space are in compliance already.

Per the report, which surveyed 56 businesses across North America, Asia Pacific, Europe, Africa, and the Middle East, as many as 70% of businesses are either practising the rule or planning to complete their compliance in Q1/Q2 2022.

The Travel Rule demands businesses involved in cash or money transfers to report funds transactions of $1,000 and above to authorities, a move that is expected to curb money laundering and terrorist financing. With the emergence of Bitcoin (BTC) and altcoins, the Financial Action Task Force (FATF), an international watchdog responsible for developing the rule, has published guidelines and revisions to fit the evolution in the nascent digital currency ecosystem.

Per the Notabene report, about one-third of firms (31%) completely or partially adhere to the regulation. The report also revealed that 92% of respondents have internal compliance and legal departments, and 78% of these businesses consider these teams able to guarantee the company acts in accordance with external rules and internal controls.

In all, crypto-assets service providers are shown to be in broad compliance with many who have no technical expertise to implement the rules exploring other protocols that can be adopted.

Many critics have often dwelled on how cryptocurrency exchanges and other service providers have backed illegal use of Bitcoin and other coins with pseudo-anonymous provisions. However, platforms like Coinbase Global Inc, Binance, and Huobi have notably implemented transaction monitoring tools, a move that suggests players in the digital assets ecosystem are not anti-regulation.

From Notabene’s report, the broad compliance of players in the space to the Travel Rule can help them become active partners in shaping the future of the crypto payment industry.

Crypto Exchange bitFlyer Implements Travel Rule for Crypto Asset Transfers

BitFlyer, a leading Japanese crypto asset exchange operator, announced the implementation of new regulations known as the travel rule, aimed at preventing criminal activities and enhancing security in the crypto industry. The company made this announcement on March 23, 2023, in line with updates to the Act on Prevention of Transfer of Criminal Proceeds and other relevant regulations.

Effective from Tuesday, May 30, 2023, around 15:00 JST, bitFlyer will begin implementing the travel rule for all corporate and individual customers who send and receive crypto assets through their services. The company will use the Travel Rule Universal Solution Technology (TRUST) to facilitate compliance with these regulations.

Currently, bitFlyer supports the travel rule solution for several crypto assets, including Bitcoin (BTC), Ethereum (ETH), and ERC-20 tokens such as BAT, LINK, MATIC, MKR, SHIB, and PLT. However, as of May 30, 2023, only the sending and receiving of BTC will be possible between bitFlyer and Coincheck. The availability of sending and receiving ETH and ERC-20 tokens will depend on the completion of Coincheck’s development.

Under the new regulations, customers can send crypto assets to exchange operators that can send and receive the legally required information notifications through TRUST. In Japan, the designated exchange operator is Coincheck, while outside Japan, customers can refer to the list of TRUST-compatible players provided on the Coinbase website. Additionally, customers can also send crypto assets to private wallets like MetaMask, which are not managed by exchange operators.

However, it should be noted that sending crypto assets to exchange operators registered with authorities in Japan or other legally designated countries and regions that cannot send and receive the legally required information notifications through TRUST is not supported.

BitFlyer emphasizes the importance of receiving crypto assets in compliance with the travel rule. Upon receiving crypto assets on their platform, bitFlyer will verify the notification information and may contact customers via email if clarification or additional information is required. Customers are advised to allocate sufficient time for the confirmation process and respond promptly to any communication from bitFlyer.

BitFlyer also mentions its commitment to improving customer convenience and may expand the travel rule solutions based on the practices of other crypto asset exchange operators. This implies that the methods for handling supported crypto asset transfers may be subject to change in the future.

The travel rule, a requirement put forth by the Financial Action Task Force (FATF) to combat money laundering and terrorist financing, mandates that exchange operators providing crypto asset transfers must provide specific information about the sender and recipient to the receiving exchange operator.

BitFlyer, as a crypto asset exchange operator and a type-1 financial instruments business, is dedicated to the development of the crypto asset and web3 industries. The company aims to provide a secure environment for customers to trade crypto assets and contribute to the further advancement of the crypto industry.

Customers are encouraged to refer to the provided references and resources for additional information about the travel rule, including the Japan Virtual and Crypto Assets Exchange Association (JVCEA) and the Financial Services Agency (FSA).

FCA Unveils Guidance on Cryptoasset Promotions Compliance

The Financial Conduct Authority (FCA) has unveiled a “finalised non-handbook guidance” document on Cryptoasset Financial Promotions. This release followed observed lapses in adherence to the new laws governing crypto asset promotions, which took effect on October 8, 2023.

On June 8, 2023, the pertinent legislation concerning cryptoasset financial promotions was enacted, and subsequent rules were published under the identifier PS23/6. Central to these rules is the stipulation that financial promotions must embody fairness, clarity, and accuracy to prevent misleading the public. In tandem with these final rules, a consultation on the proposed Guidance was also issued to ensure firms grasp the nuances of this requirement as it pertains to crypto asset promotions.

The consultation phase came to a close on August 10, 2023, paving the way for the FCA to review the feedback and finalize the Guidance which is detailed in Chapter 2 of the document. This finalised Guidance, published on November 2, 2023, doesn’t introduce new obligations but elucidates the existing regulatory obligations of firms. It emphasizes that adherence to this Guidance will be deemed as compliance with the relevant rule or requirement, although it’s not mandatory to follow the Guidance to achieve compliance.

A noteworthy mention in the document is the introduction of a secondary international competitiveness objective, activated on August 29, 2023. Although this objective wasn’t in effect during the publication of the final rules, its spirit was considered in PS23/6. This objective aligns with the broader policy to shield consumers while fostering beneficial innovation that potentially fuels long-term economic growth in the UK.

The Guidance underscores the primary aim of mitigating consumer harm by clarifying the expectations of firms, thereby promoting better compliance with the relevant rules. By doing so, it aims to prevent the erosion of trust in financial services that may arise from consumers not fully grasping the risks associated with cryptoasset purchases. Through clearer and fairer promotions, consumers are envisaged to make well-informed decisions that resonate with their risk profiles and needs.

The transition hasn’t been smooth, with reports indicating a dismal degree of compliance since the rules came into play. Some market participants have even expressed intentions to exit the UK market due to the perceived restrictive nature of these laws. The FCA, however, has been proactive in issuing multiple warnings and reminders since June 8.

Moreover, certain significant technical benchmarks have been slated for January 8, 2024. Amid these developments, the FCA’s Guidance also touches on the Travel Rule, formulated by the Financial Action Task Force, and its implementation in the UK on September 1.