Crypto 101: What Is The "Travel Rule"?

The UK has become the latest country to adopt the Travel Rule: A set of measures that target virtual asset service providers (VASPs) like exchanges, in an effort to reduce financial crime.

A number of countries including the US, Canada, South Africa, Japan, Singapore, Germany, Switzerland, the Netherlands and Estonia have already adopted the Travel Rule.

But what, exactly, is the Travel Rule, and how might it affect your crypto transactions?

Know Your Wallet

The UK's Financial Conduct Agency states that "the Travel Rule advances anti-money laundering (AML) and counter-terrorist financing (CTF) efforts globally by helping cryptoasset businesses detect suspicious transactions and carry out effective sanctions screening."

In practice, this means VASPs are required to collect and provide certain information about the senders and recipients of crypto transactions. It is similar to the information required by the UK Wire Transfer Regulations.

Transfers below a certain minimum (£1,000 in the UK) require only very basic information. Above this, the VASP sending or receiving the crypto must collect additional information about the originator and beneficiary.

This applies to both incoming and outgoing transactions. The information is straightforward to collect when both originating and receiving organisations (e.g. exchanges, hosted wallet providers) are in the UK, or another country that supports the Travel Rule. When a transaction involving a jurisdiction that has not implemented the rule is involved, things become more complicated. A degree of flexibility and judgment is allowed if one of the countries does not enforce the travel rule.

Self-Hosted Wallets

The Travel Rule is designed primarily for transfers of crypto between VASPs. It does not take into account user-hosted wallets, which exist outside of any company or formal organization. The Financial Action Task Force (FATF) acknowledges the difficulty of knowing who an unhosted wallet belongs to, as well as the problem that it is impossible to refuse an incoming crypto transaction.

Clifford Chance writes: "The HM Treasury consultation notes that any individual can host their own crypto wallet (which are known as 'unhosted wallets') to make and receive transfers. It is envisaged that the Travel Rule will apply only to Cryptoasset Service Providers, not to private individuals using such unhosted wallets. Consequently, peer-to-peer transfers of cryptoassets are outside the scope of these new rules. This is intentional – the FATF recommendations expressly state that individuals are not required to comply with the Travel Rule. The recent FATF guidance provides that where a VASP transfers cryptoassets to an unhosted wallet, it should obtain the information directly from its client. This is an interesting approach given that transfers to unhosted wallets pose a heightened risk of money laundering."

In short, there may simply be no way to reliably obtain the necessary information. Consultations have established that many VASPs are already struggling to maintain compliance, given the challenges posed by the unique nature of crypto transactions.

Overall, the Travel Rule only makes sense, and can only work, if it is widely adopted—since it relies on a network of compliant jurisdictions sharing information between each other. As Clifford Chance conclude, "The success of applying the Travel Rule to the crypto industry will largely depend on its homogenous application on a global scale."

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