The crypto world has certainly started 2021 with a bang. All time highs for bitcoin prices (reaching around $40,000 in the first week of January) and a hotly debated rule proposal from FinCEN meant that cryptocurrencies were certainly at the forefront of many people's minds as we left 2020 and entered 2021.
There has been lots of talk recently on the newest proposed FinCEN crypto rule; however, if you are not directly part of the crypto community, it is very easy to lose track of the different proposed regulations and rules. This blog post aims to summarise the key differences between the previously proposed FATF travel rule, and the newly proposed FinCEN crypto rule, for a non-crypto savvy audience.
The FATF Travel Rule
In June 2019, an amendment was made to the Financial Action Task Force (FATF) recommendations. The change, known as ‘the travel rule’, was made to Recommendation 16, which was previously in place to help combat money laundering and terrorist financing with relation to wire transfers. This recommendation required that counterparty information be shared when conducting a wire transfer and that banks assume responsibility in reporting suspicious activity. Previously only applying to banks, Recommendation 16 was updated to include virtual asset service providers (VASPs) as well. A VASP is considered a business that provides crypto-to-fiat (Euro, British Pound, U.S. Dollar, etc) or crypto-to-crypto exchange, or any other transfer of crypto on behalf of its clients. Recommendation 10 was also updated to ensure VASPs conduct due diligence where appropriate.
The updates were as follows:
For occasional transactions above 1000 USD/EUR, VASPs must conduct customer due diligence (Recommendation 10);
The obligation to obtain, hold, and transmit required originator and beneficiary information, immediately and securely, when conducting virtual asset transfers (Recommendation 16).
This proposal caused a stir within the community in 2019, with questions being raised about how feasible it was to implement this, and its impacts on the crypto community. A key point to understand here is that this rule was proposed to only affect VASPs, and transactions between VASPs. This is a key differential between the Travel Rule and the below discussed FinCEN rules.
The Proposed FinCEN Crypto Rule
FinCEN, a bureau of the US Department of Treasury that defines rules for combating money laundering and terrorist financing, has been vocal in ensuring cryptocurrency is regulated over the years. The most recent of these attempts is a proposal released in December 2020. This rule was not well received by the community and has an ever-growing number of comments submitted against them. The proposed rule is quite different to the above Travel Rule, and reads as follows:
exchanges (read - VASPs) would have to collect names and home addresses for the owners of private crypto wallets (also referred to as self-hosted wallets, unhosted wallets or sometimes just “wallets”) receiving more than $3,000 in cryptocurrencies in aggregate in a day. If a wallet receives more than $10,000, the exchange would be required to file a Currency Transaction Report (CTR) to FinCEN.
These rules would cover all “convertible virtual currency” (CVC) transactions. This is a FinCEN-specific term for cryptocurrencies (bitcoin, litecoin, etc) that can be exchanged for fiat currencies. Note, unlike the travel rule - this covers “wallets”, which were previously outside of the scope of the FATF travel rule, which covered VASPs only.
The differences
The travel rule is built on an existing standard of rules, previously used for wire transfers. Whilst the rule itself may be difficult to implement within the world of cryptocurrencies, there is an understanding that this will bring cryptocurrencies up to the standard of the wire transfer regulations.
The main difference with the newly proposed FinCEN rule is that it is completely new regulation, and goes above and beyond requirements of a standard cash transaction. The current 7,000+comments against the proposed FinCEN rules vary with reasons as to why this rule should not be brought into action. To name just a few, some comments are around the effectiveness of the rules, while others focus on the data privacy implications.
To illustrate the differences, some scenarios are outlined below.
Context: Person A has an account on Exchange A. Person B has an account on Exchange B. Person C has a self-hosted wallet (i.e. doesn’t hold funds with a VASP).
Person A wants to transfer $4,000 worth of bitcoin to Person B. This will involve funds being transferred from Exchange A, to Exchange B.
FATF Travel Rule: This transaction would be in scope. Exchange A would have to share details of Person A, with Exchange B.
FinCEN rule: This transaction would be out of scope (covered by Travel Rule).
Person B wants to transfer $4,000 worth of bitcoin to Person C. This will involve funds being transferred from Exchange B, to Person C directly.
FATF Travel Rule: This transaction would be out of scope. The receiving counter party is not a VASP.
FinCEN rule: This transaction would be in scope. Exchange B would be required to collect the name and home address of Person C.
What next?
As the regulation continues to evolve, there will certainly be new terms and methodologies produced, which is why it’s always important to ensure the differences between new rules and recommendations are understood.
The Travel Rule has already had standards approved and will surely remain a focus of the year to come. There are still many challenges with implementing this rule, and therefore it currently has a low adoption rate. The June 2020 12 month FATF review of VASPs states that “FATF is not aware yet that there are sufficient holistic technological solutions for global travel rule implementation that have been established and widely adopted”. Until the problem of a viable technological solution is solved, it is unlikely that it will become widely implemented.
The output of the FinCEN rules will also be a hot topic in the coming weeks and months. The comment period for these rules was extended by FinCEN for a further 60 days. This conversation certainly isn’t over, and no doubt 2021 will bring more regulation to the crypto space - whether the industry agrees or not.
If you’d like to learn more, please contact Danielle Jukes, consultant or email us at: contact@fintrail.co.uk.