Travel rules for crypto operators arrive

The text of the regulation on information accompanying the transfer of crypto funds – the so-called Travel Rule – has recently been approved by the European Parliament.

This will include crypto assets (Transfer of Funds Regulation). 

The measure is part of the EU’s anti-money laundering package and, together with the regulation on cryptoassets (MiCA), is intended to complete the regulatory framework applicable to cryptocurrency-related services. 

The regulation aims to ensure that the transfer of crypto-assets can be tracked and therefore suspicious transactions can be blocked by operators, thereby reducing the risk of money laundering or terrorist financing. 

To achieve this goal, the agreement provides for the extension of the so-called travel rule to crypto-asset transactions.

What is the so-called travel rule and what does it have to do with crypto?

The Travel Rule is a measure applied in the banking and financial sector, according to which information about the originator and beneficiary must be included in the data accompanying the (money) transfer and must be retained by both parties to the transaction. 

As a result, crypto-asset service providers (CASPs) will be required to provide such originator and beneficiary information to the relevant authorities.

Consequences for crypto operators

The application of the so-called travel rule requires crypto operators to verify the origin of funds in all transactions in which they are involved, regardless of the value of the transaction. 

This means, for example, that when a user makes a transaction using a wallet held at an exchange, the operator is required to transfer certain information about the identity of the executor, including the address of his or her wallet on the blockchain. 

In turn, the receiving exchange is required to verify that all the information required by the regulation is correctly transferred. This is to determine the origin of the funds and assess whether restrictive measures and/or other anti-money laundering and/or anti-terrorism measures can be applied. 

The new rules also apply to marketplaces for non-fungible tokens, but only if such NFTs qualify as crypto assets under MiCA.

In addition, an important innovation concerns unhosted wallets, i.e. wallets whose private keys are held by the owners themselves, when interacting with wallets hosted by a crypto operator. 

When a customer of the crypto operator receives an amount of crypto assets from an unhosted wallet, the crypto operator is required to obtain information about the identity of the executor. 

In addition, if the amount so transferred is 1,000 euros or more, the operator is required to verify the actual identity of the person controlling the wallet. 

On the other hand, the application of this rule is excluded where the transfer of crypto assets is made between two individuals without the involvement of an authorized crypto operator (e.g. in the case where two people send bitcoin to each other via their wallets).

What are the next steps?

The adoption of the Regulation imposes important obligations on crypto operators, which will complement those set out in the MiCA Regulation adopted at the same time by the European Parliament. 

The two regulations will thus complement each other in order to define the broadest possible set of rules for the activities of crypto operators. 

Specifically, MiCA will create, among other things, a registry of operators that do not comply with European regulations and with whom European operators will not be allowed to interact.