Cryptocompliance 101: How your business should incorporate the Funds Travel Rule

September 10, 2019
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UPDATE: Funds Travel Rule compliance remains a contentious and unsettled issue within the cryptocurrency space. While a solution is not yet present as of this writing, best practices for compliance have emerged over the past couple years.

Are you confused about the Funds Travel Rule and how it applies to crypto? If so, you’re hardly alone. Even blockchain and cryptocurrency experts are still trying to work out the details.

Though the initial confusion over the surprise ruling has died down in recent weeks, many of the problems cryptocurrency businesses are facing when it comes to incorporating the travel rule into their compliance remain.

Countless business owners in the space have expressed frustration over it, and with good reason. After all, some experts worry that certain requirements will be impossible to follow.

The good news is, though the Funds Travel Rule is difficult, there are best compliance practices regarding its implementation.

This article is part of our series of cryptocompliance 101 posts to help cryptocurrency business owners understand the regulatory landscape, its nuances, and what steps need to be taken to strengthen their compliance.

It’s important to note that this article will contain an overview of the Funds Travel Rule and how it fits into AML compliance for cryptocurrency businesses, but is intended for educational guidance only.

Every business is unique, and when it comes to obligations like the Funds Travel Rule, the devil is in the details. You can reach out to us at the end of this article for cryptocurrency compliance advice if you have any questions.

What is the Funds Travel Rule?

On June 21, 2019, international financial crime watchdog the Financial Action Task Force (FATF) introduced guidance requiring cryptocurrency businesses within member countries to abide by a Bank Secrecy Act (BSA) rule that has long applied to international banks called the “Funds Travel Rule.”

BSA rule [31 CFR 103.33(g)], also simply called the “Travel Rule,” requires all financial institutions to pass on certain information to the next financial institution in certain funds transmittals involving more than one financial institution, and to maintain records of the aforementioned information.

The rule applies for any transaction of cash totaling $3,000 or more (in crypto, the rule applies for the equivalent value of $3,000).

But why is this rule needed?

Because the information it requires is incredibly useful to law enforcement. Indeed, it was designed to create a stronger “paper trail” to help investigators prosecute money laundering and other financial crime.

At face value, it seems like a fairly straightforward and uncontroversial rule, and for traditional finance, it is.

However, as we’ve detailed exhaustively, dated financial regulations weren’t designed for cryptocurrency, routinely leaving business owners feeling like the proverbial square peg.

Still, compliance with the FATF’s guidance is the obligation of every cryptocurrency business.

The key questions are: what challenges does that create, and how, ultimately, can compliance be observed?

How does the Funds Travel Rule apply to cryptos?

Though the international scope of the FATF’s ruling seems to suggest the Travel Rule is only a problem for crypto exchanges to wrestle with, it actually applies to any crypto business registered with FinCEN as a money services business (MSB). Crypto MSBs include crypto ATMs/BTMs, lenders, hedge funds, and more.

The bottom line, as we’ve discussed here before, is that most crypto businesses are MSBs in the eyes of FinCEN. This means that if you’re a business owner in the crypto industry, you need to factor the Travel Rule into your AML compliance.

The question is, how? Though cryptos have had many months to adopt policies to address the Travel Rule, it has proven an exceptional challenge, such that some firms are turning to former FinCEN bigwigs to help them figure it out.

Here’s the key problem for cryptos.

Funds Travel Rule for Crypto - BitAML BlogThe Funds Travel Rule implicitly requires crypto businesses to treat crypto wallet holders as financial institutions. The problem is, not every crypto wallet is overseen by a financial institution. There isn’t a third-party custodian; in fact, each individual could technically be their own custodian.

This is where much of the confusion about the Funds Travel Rule in crypto comes from. And it is a significant issue.

So the solution for crypto MSBs/money transmitters is to figure out what they can do to honor the rule anyway. If not the letter, at least the spirit.

This means taking reasonable steps to determine whether a customer’s wallet is tied to a financial institution, and to the degree they can know that, balancing this data point with the privacy of the customer.

How can you actually implement this?

Per the Funds Travel Rule as written, for any funds transfer of $3,000 or more, a crypto business will need to determine whether it is the “originating institution” or the “beneficiary institution” depending on whether it is sending or receiving cryptocurrency.

If acting as the “originating” institution, you will need to submit the information required by the Funds Travel Rule to the beneficiary institution (in this case, the financial institution that acts as custodian of a customer’s wallet, if this can be determined).

If acting as the “beneficiary” institution, you will need to request from the “originating” institution that information required by the Funds Travel Rule (i.e., name, address, account number, and as much of the information required as possible).

Don’t forget the importance of recordkeeping to good compliance. Retain all of the information so that you can call it up instantly by customer name. It’s important to note that the name be the actual, verified name of the individual, as the Travel Rule does not permit the use of pseudonyms (though you can use abbreviations, or variations reflecting multiple accounts, i.e., “[COMPANY] Payroll Account, and assumed names/doing-business-as aliases).

There is also some confusion over the definition of “address” in BSA rule [31 CFR 103.33(g)], even among regulators. Ultimately, FinCEN defines “address” to mean the mailing address, though P.O. boxes are also allowed.

The important thing is that such information be readily available if requested by law enforcement.

Lastly, and perhaps most importantly, for as long as Travel Rule compliance remains an unresolved issue, it’s important for businesses to demonstrate sincere efforts to comply with the rule as-is.

This means, at minimum, exploring potential Travel Rule solutions by opening and maintaining dialogs with third-party vendors who are working toward a solution.

Cryptos can and should add a section for Travel Rule compliance to their AML program, and therein, indicate that they are actively researching solutions and are willing to comply as soon as the feasibility exists.

Key takeaways

Regulators are taking more action in the cryptocurrency space, and thus far, have caused a lot of confusion and headaches for cryptocurrency businesses.

But regulatory action will only increase, so businesses need to pivot and adapt to new guidance as well as they can, even when it is unclear how to accomplish this goal in perfect accordance with the letter of the BSA.

When it comes to the Funds Travel Rule, more regulatory guidance on how to understand this rule in the context of cryptocurrency will come at some point down the road.

In the meantime, as long as cryptocurrency MSBs are taking reasonable steps to determine whether a customer wallet is tied to a financial institution and recording the information required so that it is readily available at the request of law enforcement, that will go a long way to showing regulators that this guidance is being taken seriously.

That said, every business is different, and this has proven to be controversial and confusing guidance for everyone in the industry. If you have questions about the Funds Travel Rule or cryptocurrency compliance advice is something you would benefit from, you can get in touch for a free consultation.

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