Crypto ‘Travel Rule’ 101: What does it mean for you? – WazirX Blog

The Financial Action Task Force, an intergovernmental organization that develops anti-money laundering (AML) policy for the G-7 and about 30 other wealthy countries, issued the FATF Recommendation #16, also known as the Travel Rule to deal with the crypto market’s heightened money-laundering concerns. 

The Travel Rule mandates that organizations collect and exchange personal data from transaction parties. The Rule initially only applied to banks. The FATF, however, expanded this regulation to crypto firms in 2019. In addition, the G20 and several other jurisdictions began incorporating the Travel Rule into their local anti-money laundering laws in 2020.

Let’s look at the impact of the Travel Rule in more detail.

Travel Rule 101

Crypto exchanges, custodial wallet providers, and other virtual asset service providers (VASPs) must disclose personal client data accurately during transactions under this regulation. Information such as the sender’s and recipient’s names, geographic addresses, account numbers, and more must be collected and submitted to the appropriate authorities. Specifically, whenever the amount transacted exceeds $1,000, the regulations oblige VASPs to share information about the originator and beneficiary’s identities.

Simply put, if two parties exchange crypto valued at more than $1,000, the sender’s crypto service provider is expected to communicate the sender’s personally identifiable information to the recipient’s crypto service provider and vice versa. 

Albeit, member states can interpret and implement variations of the guidance that best suit their crypto sectors.

Significance of Travel Rule for Crypto Transactions

The reasons why the travel rule is significant are as follows:

  • The primary goal of this Rule is to prevent terrorist financing and money laundering.
  • Increases transparency in the cryptocurrency sector.
  • The law enforcement agencies can obtain transaction data by issuing subpoenas.
  • The travel rule assures that crypto firms follow sanctioned practices.
  • It is the first worldwide crypto law, and it has the ability to pave the way for more standard crypto regulation.
  • The most significant effect of this Rule will be to integrate the crypto market into the existing financial industry, allowing for a more organized and mature class of assets to emerge.

The Drawbacks

  • Concerns regarding information confidentiality are the most visible backlash here. Privacy-based laws and the FATF Travel Rule may have a counter-productive impact and create perplexity, further downsizing the market. 
  • Anonymous coins may not be able to meet the FATF’s data requirements.
  • The regional nonuniformity in enforcing this legislation is also a trouble. The travel rule’s restrictions change from country to country. The “Sunrise Problem” refers to the nonuniformity of crypto travel rules. It has been re-iterated by various experts that solving the Sunrise Problem is one of the significant paths leading to crypto mass adoption.
  • Another central talking point is the additional cost of compliance bore by the crypto corporations. This will discourage the new market entrants and further reduce the market size as well as the bargaining power of the customers.

What does it mean for us?

Yes, you have the right thought in your mind. You may have to forego some amount of your privacy while you divulge into the crypto market. Users should also be aware of the beneficiaries while interacting in the crypto market. Since crypto is still a young asset class, regulations like these pose the risk of uncertainty as well. 

But we need to remember that the travel rule is still a work in progress. Therefore, it’s impossible to say how inefficiencies in any compliance processes may affect your user experience.

Bottom Line

The FATF Travel Rule aims to prevent money laundering while ensuring the anonymity of wire and crypto transactions. Corporations and Legal bodies can detect suspicious users and avoid fraud by following this guideline, which entails collecting and exchanging sender and recipient data.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.

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