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A new rule regarding cryptocurrency transfers is coming into effect on 1 September in the UK.
Cryptocurrency exchanges will now be able to revoke payments from some customers.
The so-called Travel Rule is being introduced from 1 September 2023, which sets out rules for cryptocurrency exchanges to collect, verify and transmit information on transfers of digital assets.
Under the FCA’s guidance, in the case of a payment from an overseas jurisdiction that does not operate under the Travel Rule, a UK cryptocurrency company is required to carry out an expert assessment of the provision of assets to the recipient.
If the company deems it necessary, it may well freeze the money transfer.
This may well happen if the recipient cannot show who sent the money and for what purpose, so cryptocurrency companies in Britain now have legal grounds to seize the funds.
However, not only incoming transfers are subject to controls, but also outgoing transfers: the collection and processing of recipient information will also be mandatory for digital transfers.
What is the FCA’s reasoning behind the regulatory changes? First on the list is consumer protection, although most have the exact opposite view, as the Rule is more akin to arbitrary confiscation of digital funds.
However, the FCA’s decision is also designed to significantly reduce the number of fraudulent transactions, which means it will globally combat terrorist financing and money laundering.
Where did the “Travel Rule” come from
“Travel Rule” came into force after Financial Action Against Money Laundering (AML) and Terrorist Financing (CFT) became mandatory for crypto services and crypto exchanges in many countries.
The Travel Rule was first introduced in the US in 1996 as part of the Bank Secrecy. Under this rule, financial institutions passed information about transactions and transfers to authorities to combat money laundering and terrorist financing.
With the growing popularity of cryptocurrencies, their use for illicit purposes has also become a pressing issue. Therefore, many countries have started implementing the Travel Rule in the cryptosphere. In 2019, the rule was expanded to include digital assets and VA services (VASP). In 2022, the UK passed the relevant law and set the deadline for implementing the rule from 1 September 2023.
Organizations such as FATF (Financial Action Task Force) have developed international standards for the application of the Travel Rule in the cryptosphere to ensure uniform implementation worldwide. The United States, Japan, Singapore, Canada, South Africa, the Netherlands, Switzerland, Germany, Estonia are among the countries that have also joined the new rules.
The negative consequences of regulatory innovations for cryptocurrency holders are obvious
1. Lack of privacy. Travel Rule requires the transfer of personal information about the recipient and sender of cryptocurrency funds when making transactions. The data may also be available to third parties.
2. Technical Difficulties. To comply with the Travel Rule, crypto services and exchanges have to implement complex technical solutions and transaction monitoring systems. This can increase transaction costs and complexity for users.
3. Some cryptocurrencies and exchanges may choose not to comply with the Travel Rule due to its technical complexity or concerns about user privacy. This may result in restricted access to such services.
4. The risk of errors and data breaches will also increase, with serious consequences.
What solutions are possible for users?
For users looking to maintain a high level of privacy when using cryptocurrencies, complying with the Travel Rule and co-operating with crypto services subject to the rule can cause some concerns. However, there are a few steps and alternatives that can help respect privacy:
- Use anonymous cryptocurrencies. Some cryptocurrencies, such as Monero, Zcash, and Dash, offer a higher level of anonymity and privacy than bitcoin and other transparent cryptocurrencies. Consider using such anonymous cryptocurrencies for your transactions.
- Decentralised exchanges. Decentralised crypto exchanges (DEX) are not always subject to the Travel Rule and usually do not require you to provide personal information. They allow users to exchange cryptocurrencies directly without intermediaries.
- There are cryptocurrency wallets and services that offer muxing (mixing) of transactions to make them harder to track. Such services can improve the privacy of your transactions.
- Look to jurisdictions with weaker requirements. Depending on your location and nationality, you may want to consider crypto services operating in jurisdictions with less stringent Travel Rule regulations.
- It is important to have a good understanding of the rules and requirements in your country or region. Education and research can help you make informed decisions and choose the right cryptocurrency services.
- Contact cryptocurrency professionals and attorneys for advice on privacy and compliance in your jurisdiction.
Bottom line
While the introduction of the new rule is well-intentioned, it is unlikely that cryptoasset holders will agree to such an infringement of rights. After all, initially cryptocurrency attracted investors because it was beyond the control of banks and governments.
There are some solutions for users: buy anonymous cryptocurrencies and hold them on exchanges that do not require documents. Also, consult with experts about the specifics of regulation in your jurisdiction and use those that provide maximum privacy.
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