On 20 July 2021 the European Commission (the Commission) published a proposed Regulation on transfer of funds and certain crypto-assets. The proposed legislation will recast Regulation 2015/847 on the transfer of funds, and once adopted, it will implement in European law the Financial Action Task Force (FATF) recommendation to accompany the transfer of crypto-assets with information on the originator and on the beneficiary of each transfer (the so called “travel rule”). The proposed legislation will introduce an obligation for crypto-asset service providers to collect and make accessible data concerning the originators and beneficiaries of the transfers of crypto-assets they undertake. A similar initiative is also underway in the UK. Shortly following the publication of the Commission’s proposal, on 22 July 2021, HM Treasury launched a public consultation  on amendments to The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 Statutory Instrument 2022. Noting recent technological developments allowing compliance solutions for the “travel rule” to be developed, HM Treasury is consulting on its approach to the implementation of the relevant requirements for transfers of crypto-assets. The below note provides a short overview of the key elements of the EU and UK approaches to the travel rule implementation.

EU: Recast of fund transfers legislation

  • Scope: The Commission proposed that the recast fund transfers legislation will apply – in addition to entities and currencies currently in scope – to transfers of crypto-assets, which are sent or received by a payment service provider, a crypto-asset service provider or an intermediary payment service provider established in the EU. The draft legislation is also intended to apply to person-to-person transfers of crypto-assets by using a payment card, an electronic money instrument, a mobile phone or any other digital or IT prepaid  or post-paid device with similar characteristics. E-money tokens, as defined in the pending Regulation on Markets in Crypto-Assets (MiCA) will be treated as crypto-assets for the purpose of the travel rule implementation. Finally, the Commission proposes limited exemptions from the requirements of the draft legislation, subject to certain conditions – including a de minimis threshold amount of EUR 1,000.
  • Key requirements: The proposed legislation details the type of information that the crypto-asset service provider of the originator will have to obtain and verify prior to executing the transfers of crypto-assets. The proposed legislation separately sets out obligations applicable to the crypto-asset service providers of the beneficiary, including the obligation to have in place effective procedures to detect missing information on the originator or on the beneficiary. This includes separate provisions concerning transfers exceeding or below the EUR 1,000 threshold, and verification requirements prior to making the crypto-assets available to the beneficiary. In terms of transfers of crypto-assets with missing or incomplete information on the originator or the beneficiary, the crypto-asset service providers will be required to adopt risk-based procedures for determining whether to execute or reject such transfers. The crypto-asset of the beneficiary will be required to assess whether any such missing or incomplete information is suspicious, and whether it is to be reported to the Financial Intelligence Unit (FIU). Finally, in terms of record retention requirements, the crypto-asset service providers will have to maintain records of the relevant information for a period of five years.

UK: Consistency across the financial services legislation

  • Scope: The proposed regulations will apply to crypto-asset exchange providers and custodian wallet providers as defined in The Money Laundering and Terrorist Financing (Amendment) Regulations 2019, which are carrying on business in the UK. The relevant amendments are intended to be consistent with the corresponding requirements for the banking sector, as set out in the Funds Transfer Regulations (FTR). As such, HM Treasury is considering replicating – to the extent feasible – the relevant FTR’s requirements for the crypto-assets sector. To this end, it seeks industry views on the impact of the implementation of the travel rule on businesses, including costs. HM Treasury is also considering the introduction of a grace period after the relevant changes are adopted in order to allow the in-scope firms to develop and adopt their compliance solutions. It seeks the stakeholders’ views on a prospective length of such grace period.
  • Key requirements: Crypto-asset firms will need to provide information, in appropriate format, on the originator and beneficiary of a crypto-asset transfer, and ensure that such information is transmitted and received alongside the transfer. The government proposes to vary the relevant information on the transfer originator / beneficiary, depending whether the transfer is above or below a set de minimis threshold, and whether all crypto-asset service providers involved in the transaction are UK-based. To this end, HM Treasury seeks stakeholders’ views whether GBP 1,000 is the appropriate amount and denomination for the de minimis threshold, and whether transfers from the same originator to the same beneficiary that appear to be linked, made from the same crypto-asset service provider should be included in the de minimis threshold. Crypto-asset service providers will be required to have effective procedures in place for the purposes of validating the required beneficiary and originator information, and detection of any missing information. The receiving crypto-asset service provider will be required to retain the beneficiary and originator information for a period of five years, and be prepared to make this information fully available and without delay to UK regulatory authorities or the police, if so required. Finally, in respect of transfers from unhosted wallets, HM Treasury is considering putting an obligation on a beneficiary’s crypto-asset service providers to obtain the required originator information.

In terms of next steps, while both the EU and UK initiatives were published largely at the same time, they are likely to move ahead at different paces. In the UK, the implementation of the travel rule is currently in its very early stages, with the public consultation open until 14 October 2021. It remains unclear when the relevant regulations will be published for adoption. In that respect the EU’s developments are more advanced, in so far as the proposed legislation will now be transferred to the European Parliament and to the Council for a final review and adoption. During that process, both institutions will be able to introduce amendments to the drafts proposed. The legislative review process can take approximately 18 months, and any transitional period following adoption of the final law is yet to be determined.

Please address any queries concerning the planned travel rule implementation for crypto-assets in the EU and/or in the UK to anna.carrier@nortonrosefulbright.com.