In June 2019, the Financial Action Task Force (FATF) formally adopted an important new interpretation of its Recommendation 16 on financial transfers. This so-called “crypto travel rule” requires countries to ensure that virtual asset service providers (VASPs) operating in their territory share the data of both sending and receiving users with law enforcement authorities during the transfer process and upon request.
The recommendation originates from the US Bank Secrecy Act’s (BSA) travel rule for wire transfers, with the aim of reducing money laundering and terrorist financing through cryptocurrencies by identifying the sender and the recipient.
What is the Know-Your-Transaction (KYT)?
Know-your-Transaction (KYT) was the next level of blockchain analytics, which was designed to overcome certain limitations of Know-Your-Customer (KYC). While Know-Your-Customer is a screening process in which clients are identified through a strict registration process, KYT requires a more active approach. Based on the user’s profile, current and historical transaction data is tracked and reviewed periodically.
What has the travel rule solved?
There are several reasons why “Know-Your-Transaction” does not currently provide a global solution that could prevent systemic money laundering and terrorist financing facilitated by cryptocurrencies, and why the FATF recommendation may in fact be a necessary step.
• The crypto industry needs consistent and global anti-money laundering regulation
While the libertarian ideologies that defined the early days of crypto remain the driving force behind the industry, the illegal activities that have been committed have damaged the reputation and acceptance of digital currencies for years. The benefits that blockchain and cryptocurrency technology offer the world are simply too significant to allow an unregulated and uncertain state to suppress growth.
• KYT can track but cannot stop a possible illegal transaction. The “travel rule” can.
Transactions are analysed after the illegal activity is suspected or in the process of being executed, without the possibility of immediately stopping the transfer of funds. This is not prevention, but rather a chase after the bad guys.
The Travel Rule, on the other hand, requires the information on the real identity to be provided at or before the start of the transaction. This could have a discouraging effect on its own.
• The travel rule will apply in all countries, not just in a few.
Statistics show that there are currently hundreds of crypto asset providers that are not complying with anti-money laundering rules. Without the support of platforms that take legitimacy seriously, it is difficult to fight criminals effectively.
• The travel rule applies to all virtual assets
The travel rule can be applied to all virtual assets by sharing the necessary information directly at the time of the transaction.
• The travel rule marks a new beginning for the crypto sector
The analytics of cryptocurrency transactions are only focusing on the present and the past, with an emphasis on what has already happened and why. The travel rule, while it may be a potentially painful point for some, represents a mandatory – and hopefully forward-looking – new beginning for crypto businesses.