From 1 September 2023, crypto-asset businesses in the UK will be required to collect, verify and share information about crypto-asset transfers, known as the ‘travel rule’.
In advance of implementation, the UK's leading financial services regulator, the Financial Conduct Authority (FCA), together with HM Treasury and the Joint Money Laundering Steering Group (JMLSG), have published draft guidance for implementation of the travel rule. The JMLSG is a UK-based private sector body made up of the leading UK Trade Associations in the financial services industry. The guidance is open for public comment until 25 August 2023.
The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 introduced the travel rule for crypto-asset transfers by amending the UK's Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The travel rule effectively requires crypto-asset businesses (like exchanges and wallet providers) to obtain, hold and exchange information regarding the originator and beneficiary of crypto-asset transfers.
The draft guidance issued by the JMLSG addresses a number of practical problems relating to the implementation of the 'travel rule' for digital assets. It addresses batch transfers, returns, unhosted wallet transfers, linked transactions, and the use of Layer-2 solutions such as the Lightning Network. While the guidance requires that originator and beneficiary information accompany crypto-assets transfers, nothing in the guidance indicates that such information must be shared on-chain addressing potential privacy concerns.
Although the guidance is issued by a private sector body and therefore not legally binding, it has the approval of His Majesty's Treasury and is indicative of the regulator's expectations for travel rule implementation.
The application of the travel rule to certain blockchain interactions (including Layer-2 solutions) has been a grey area since the Financial Action Task Force (FATF) first introduced its recommendations to implement the travel rule for digital assets. The JMLSG's guidance clarifies a number of these matters in the context of UK implementation and will be influential as other jurisdictions move to implement the travel rule for digital assets.
Patrick Hansen, Director of EU Strategy & Policy at Circle, tweeted the following in support of the JMLSG's guidance:
In April this year, the Australian government announced its intention to designate a wider range of crypto-asset related services as designated services under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and implement the travel rule consistent with FATF recommendations. Once implemented, it is likely that digital currency exchanges and other crypto-asset businesses operating in Australia will need to take additional steps to collect and verify payer and payee information and share that information along the payment chain.
Although no draft legislation or timeline for implementation of the travel rule has been released for Australia, it is likely that the UK's approach to implementation will be highly influential.