Data from both the Federal Reserve and the Financial Crimes Enforcement Agency (FinCEN) show that Bitcoin transactions have surged to a tune of $321 billion by August 2020 and $366 billion throughout 2019. Following concerns of terrorism and money laundering, the treasury proposed regulation through the Bank Secrecy Act, popularly known as the “Travel Rule“. This proposal aims at lowering the threshold of Cryptocurrency transactions outside the US from $3000 to $250.
Jamison Sites, a Blockchain and Digital Asset Tax Lead at RSM had this to say about the rules:
“The proposed rules give greater clarity and regulatory certainty to those operating with CVCs. This will be positive for the industry.”
Michael Ou, CEO of CoolBitX, said,
“The blockchain and cryptocurrency industry is at a major crossroad. As the Financial Action Task Force (FATF) continues to push its cryptocurrency guidance across the globe, compliance and preventing criminal activity can feel extremely daunting… The truth is, ‘Travel Rule’ compliance and blockchain analytics to track criminal activity are two sides of the same coin.”
The Travel Rule broadens the definition of money. It also proposes comprehensive reporting on cryptocurrency transactions, both domestic and international. Still, the proposal is now subject to public opinion before its enactment. Digital assets are defined as money by FinCEN and the Fed as they move forward through the new proposals to incorporate Convertible Virtual Currencies (CVC) as legal tender.
The Financial Action Task Force (FATF), an international body focused on preventing money laundering and terrorist activities. In its recommendation in 2019, advised the international community to adopt the Travel Rule. The recommendations suggest that specific details like the customer’s name address the recipient’s transacted amount and details to be included in transaction reports. But the move deems to interfere with an individual’s privacy.
FATF in its publication titled “Interactive to Recommendation 15,” instructs that it’s prudent for Virtual Asset Services Providers to comply with the Anti- Money Laundering (AML) and Combating the Financing Terrorism (CFT) guide Cryptocurrency firm will have one year to put in place the Travel Rule. This is according to the FATF Plenary, a publication by the Financial Action Task Force published on 30th June 2020. The firms will be subjected to this rule once a client transacts cryptocurrency valued above $ 3000. They will also be required to share KYC details on such transactions.
The Implementation of the Travel Rule
To implement the Travel Rule, the US government, through the Fed and FinCEN, has facilitated the creation of the United States Travel Rule Working Group (USTRWG). In its publication in October 2020, the working group outlines how VASPs plan to implement the Travel Rule. The objective of forming the USTRWG is to solve governance, ensuring a reliable counterparty identification and secure data transmission. In doing so, the USTRWG solution recommends a governance structure to enable the creation of a trusted VASP network. This is an encrypted, point-to-point communication channel for the secure transmission of required Travel Rule data, and a centralized bulletin board mechanism to facilitate the identification of transaction counterparties.
The latest regulation proposal by the Federal Reserve received different reactions from the industry. According to Jamison Sites, a Blockchain and Cryptocurrency Tax expert at RSM, the proposed rules will give greater clarity and regulatory certainty to firms handing the CVCs. FinCEN, through the new proposed laws, classifies the transfer of Convertible Virtual Currencies by nonbank financial institutions under the Recordkeeping and Travel Rules.
Uniform Commercial Code (UCC) does not consider cryptocurrency as money. This means cryptocurrency transactions are not subjected to travel. To remedy this, the two government bodies define money as a medium of exchange currently authorized or adopted by a domestic or a foreign government. Hence, both payments and transmittal orders related to CVCs or any digital asset have legal tender status.
The regulators’ latest move seems to be a setback to most players in the crypto space whose goal is to enable anonymity in financial transactions and may divide the sector foundation. Experts have warned that such regulations might have implications on the gains made by the entire crypto ecosystem. The Fed and FinCEN hope that they can strengthen the rule by consulting the stakeholders, making the crypto assets providers comfortable with the Travel Rule. Stakeholders have only 30 days from that date to respond with public comments before the agencies issue the final law
