On April 20, 2023, the new Transfer of Funds Regulation (TFR) was passed in the European Parliament, extending the scope of the Financial Action Task Force’s (FATF) Recommendation 16, also known as the “travel rule”, to include Crypto Asset Service Providers (CASPs).
The TFR requires CASPs to comply with the same requirements as traditional financial institutions and make information on the originator and beneficiary available to the counterparties involved in a transfer and the competent authorities when requested.
Here's what you need to know about the TFR:
Scope of the TFR
The TFR applies to transfer of funds in any currency, transfers of crypto assets, and electronic money tokens used for conducting electronic transfers (with payment cards, electronic money, or mobile phones). The rule also applies to crypto ATMs and self-hosted wallets when a Crypto-Asset Service Provider (CASP) is involved.
However, the TFR does not apply to cash transactions, paper cheques, electronic money tokens used for payment of goods and services with payment cards, electronic money, or mobile phones, tax payments, fines, and other similar payments to a public authority, PSPs acting on their own behalf, and peer-to-peer (P2P) transactions when no CASP is involved.
Although the FATF Recommendation 16 requires the travel rule to be implemented for transactions more than €1000, the TFR captures all transfer of funds transactions in fiat and crypto currencies. As a result, the relevant originator and beneficiary of the transfer information must be collected and travel along with the transfer irrespective of amount. However, PSPs need to verify that information for transactions exceeding €1000.
Required Information for Transfers
When transferring funds, financial institutions and CASPs must obtain, hold, and share the following information.
Name of the originator
Originator's distributed ledger address
Originator's crypto asset account number
Originator's address (including the country, official personal document number, and identification number, or alternatively, date and place of birth)
Legal Entity Identifier (LEI) of the originator or other equivalent official identifier
Name of the beneficiary
Beneficiary's distributed ledger address
Beneficiary's account number
Beneficiary's LEI or other equivalent official identifier
The above information must be provided in advance or simultaneously with the transfer of crypto assets.
Missing Information on Transfers
Payment Service Providers (PSPs), CASPs, and intermediaries must apply risk-based procedures to determine whether to execute, reject, return or suspend transfer with missing information. Additionally, suspicious transfers must be reported to the relevant competent authority.
The information obtained as part of the travel rule should only be used for the purposes of preventing money laundering and terrorist financing. PSPs, CASPs and intermediaries are not allowed to use that information for commercial purposes.
PSPs and CASPs must provide new clients with the information required by the General Data Protection Regulation (GDPR) before establishing a business relationship or carrying out an occasional transaction. Additionally, they must ensure that the transmission of information is in accordance with the GDPR.
Administrative Sanctions and Measures
Member States’ competent authorities should have enhanced supervisory and sanctioning powers regarding the implementation of the TFR. Additionally, they must lay down the rules on administrative sanctions and measures for breaches.
Applicability of the Travel Rule Regulation
The new regulation repeals the previous regulation (EU2015/847) and is directly applicable to all European Member States.
The TFR will enter into force on the twentieth day following publication in the Official Journal of the European Union.
What the future will bring
As the use of crypto assets continues to grow, the TFR is an important step towards greater transparency and accountability in the financial system across the EU.
While some in the crypto industry may find the regulation burdensome, it ultimately serves to protect against illicit activities such as money laundering and terrorist financing.
As technology evolves and new forms of digital assets emerge, it will be important for regulators to continue to adapt and ensure that the financial system remains secure and trustworthy for all.