Regulation Guides


What is FATF travel rule? 

The financial action task force (FATC) trade rule is applicable to all virtual asset service providers (VASP). Here is everything you need to know about it.

The rapid adoption of cryptocurrency globally has drawn the attention of different regulatory bodies including that of the Financial Action Task Force (FATC). The regulatory agency dubbed ‘the world’s money laundry and terrorist financing watchdog’ became very popular in the crypto space following its proposed and now-enacted “Travel Rule Guideline.”

The FATF travel rule is one of the most prominent globally adopted guidelines in the financial sector, and it is targeted at virtual asset service providers (VASP). So what’s the FATF travel rule all about? Let’s find out below.

What’s FATF travel rule?

Just before we make sense of the FATF travel rule,  it is necessary to keep in mind that, in line with the rapid expansion of the cryptocurrency industry, there has also been an alarming rate of alleged crimes involving digital assets. However, there has been a steady decline in the rate of crypto crime in recent times.

According to a 2021 study by Chainalysis, 2019 had the largest level of criminal activity in cryptocurrency history, accounting for around 2.1 percent of total transaction volume and $21.4 billion in transfers. However, by 2020, the illegal share of all cryptocurrency activity had dropped to 0.34 percent ($10.0 billion in transaction volume). 

The reason for the decline in the crypto crime rate can be attributed to different factors, some of which include the emergence of blockchain analysis protocols and the impact of regulatory bodies like FATF.

Issued in June 2015, the FATF travel rule or recommendation 16 as it was alternatively called, imposes anti-money laundering and counter-financing of terrorism (AML/CFT) responsibilities on virtual assets and virtual asset service providers.

Specifically, the rule advises VASP providers to share particular identifying information about senders and receivers of crypto transactions exceeding USD/EUR 1000 on a global scale. 

In this context, VASP providers include but are not limited to exchanges (both centralised and decentralised), hosted wallets, OTC desks, and banks. 

Also, the information required of VASPs by FATF includes the customer’s name, user ID, account number, National ID number, date, as well as destination addresses of parties involved.

The FATF travel rule guideline itself happened to be one of the several attempts by the regulatory body to mitigate the risk presented by virtual currency payment products and services. 

The rule was primarily driven by the growing number of virtual assets, and more so, because they were mostly built on a decentralised system. This way, controlling the area by any means possible was crucial.

What are the specific rules for VASPs?

VASP providers, according to the FATF, are firms that conduct operations associated with virtual asset exchange, exchange, transfer, protection, or issuance and commitment of virtual assets. As such, the following travel rule or recommendation 16 is applicable;

  • VASPs collect and store the necessary and correct resource information and necessary beneficiary information and send this information to beneficiary institutions if any.
  • Beneficiary institutions acquire and store the necessary resource information and necessary and correct beneficiary information.
  • The rule extensively requires financial institutions (VASPs) to pass on certain customer and transaction information to another financial institution for certain funds transfers.

Why is VASPs’ compliance with the FATF travel rule critical?

Just like the typical requirement for indigenous financial institutes, the FATF travel guide is significant to VASPs especially while navigating their ways in the crypto space.

VASP providers who do not comply with the FATF standards are at risk of varying penalties, one of which includes being listed among high-risk watchlists otherwise known as ‘gray list.’ This list can be compared to the likes of ‘black list’ which often puts a subject on the unfavorable end of things.

To avoid the aforementioned, it also becomes a nation’s duty to mandate VASP providers to prioritise the FATF travel rule.

FATF’s deadline for implementation

Since its issuance in 2015, the FATF travel rule has been revised on different occasions with the most recent being published in July. In the revised FATF standards, the regulatory body relayed some gaps in the implementation of the rule globally.

According to the document shared online, FATF revealed that only 58 out of 128 jurisdictions reported that they implemented the revised FATF standards that were finalised in 2019. 52 of these jurisdictions regulated VASPs in compliance with the FATF standards while the remaining six others banned VASPs.

To this end, the regulatory body gave all affected stakeholders an October deadline to implement the newly-revised FATF standards. 

Ultimately, the travel rule is an effective tool that enables financial institutions in complying with global regulations.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.