VIRTUAL ASSET SERVICE PROVIDERS’ COMPLIANCE with the TRAVEL RULE in the U.K.

This article outlines the essential components of the UK’s Travel Rule, emphasizing its implications for a foreign Virtual Asset Service Provider (VASP) planning to establish operations in the UK. 

1. Regulatory Framework

The UK’s implementation of the Travel Rule is in line with the Financial Action Task Force (FATF) Recommendation 16. The FATF mandates that VASPs collect and transmit information regarding both the originator and the beneficiary during virtual asset transfers. The Travel Rule requires that basic identifying information must be shared, ensuring transparency and reducing the risk of illicit financial activity.

The UK formally introduced the Travel Rule on September 1, 2023, under the Money Laundering and Terrorist Financing (Amendment) Regulations. VASPs operating in the UK are required to comply with these obligations when making crypto-asset transfers, especially between two VASPs or when dealing with unhosted wallets.

2. Key Compliance Requirements

  1. Identification of Counterparties: VASPs must ensure they correctly identify the counterparty VASP or wallet. This includes determining whether the transaction involves another regulated VASP or an unhosted wallet. Compliance depends on the nature of the counterparty and the jurisdiction from which they operate.
  2. Information Transmission: VASPs must transmit specific information about the originator and beneficiary during crypto-asset transfers. This includes names, account numbers, and additional information like customer identification numbers or addresses if needed.
  3. Cross-border Transactions: Foreign VASPs involved in cross-border transactions must be aware of differing regulatory standards between jurisdictions. The UK regulations may differ from those in other countries, and information-sharing requirements might vary based on local laws.

3. Challenges for Foreign VASPs

  1. Interoperability: One of the key challenges for foreign VASPs is ensuring that the various systems used by different VASPs are interoperable, allowing for smooth information sharing. As global implementation of the Travel Rule varies, interoperability with UK-based VASPs is critical for compliance.
  2. Sunrise Issue: The staggered global implementation of the Travel Rule means that some jurisdictions may not yet have adopted these requirements. Foreign VASPs will need to navigate this complexity when transacting with jurisdictions that have different or no Travel Rule regulations in place.
  3. Due Diligence: Foreign VASPs must perform counterparty due diligence to ensure that they are not engaging in transactions with illicit actors. This includes checking for sanctions or adverse media reports on their counterparts. The FATF recommends periodic review of this information.

4. Responsibilities and Best Practices

  1. Data Storage and Transmission: Foreign VASPs are responsible for ensuring that the required information is not only collected but also verified and transmitted in accordance with UK law if they do not operate in the UK.
  2. Automation and Risk-Based Approach: Many VASPs use automated systems to handle compliance tasks efficiently. Automation helps pre-screen transactions and identify those that require Travel Rule compliance, improving overall operational efficiency.
  3. Handling Non-Compliance: In cases where a transaction involves missing or incomplete information, the VASP must have protocols in place to handle such discrepancies, including potentially withholding assets until the information is complete.
  4. FCA Oversight: FCA in the UK oversees compliance with the Travel Rule. Foreign VASPs will need to ensure that they are registered with the FCA if they plan to operate in the UK. The FCA has set clear expectations regarding compliance, particularly for cross-border transactions with jurisdictions that have yet to adopt the Travel Rule.

5. Key Stakeholders

6. Conclusion

For foreign VASPs planning to establish business in the UK, compliance with the Travel Rule is non-negotiable. Ensuring that processes for identification, data transmission, and due diligence are in place will be crucial for successful operation in the UK’s regulatory environment. Close attention to interoperability and cross-border challenges will also be important as the global implementation of the Travel Rule evolves.

By following these guidelines and maintaining an open line of communication with regulatory bodies like the FCA, foreign VASPs can ensure smooth, compliant operations in the UK.

Sources:

* FATF Recommendation 16

* Money Laundering and Terrorist Financing (Amendment) Regulations

* Travel Rule Good Practices Guide by CryptoUK’s Travel Rule Working Group