The “Travel Rule” and its Effect on EU Crypto Users

Share:

It seems we can’t discuss crypto regulation without mentioning the EU “Travel Rule” in one form or another. When we couple the fact that non-EU countries (E.G. South Korea) are also implementing their own form of “Travel Rule” regulation, the implication affects global crypto participants. However, despite the focus from a regulatory standpoint on the implementation of said regulation, the majority of individuals transacting in crypto are still uninformed on what the Travel Rule is and how it affects them individually.

When I first heard the term “Travel Rule” the most conspicuous conclusion would be that the regulation is in relation to travel, potentially movement of crypto on hard wallets from and to the EU. Yet the term “Travel” here refers to the movements of crypto through the blockchain from one wallet to another: more specially, wallets within the EU as well as those outside the EU, with different restrictions applying to each transaction.

On June the 20th, 2021, the European Commission released a series of regulations relating to the transfer of crypto assets with the intention of protecting the existing financial system from Money Laundering and Terrorist Financing. The so called “Travel Rule” has taken effect as of 20 days post regulatory filing with no mention of grace periods for compliance. The core purpose of the legislation is to regulate the information, in this case KYC information, that is associated with transfers of crypto assets. The proposed regulation/standardization of KYC information is based on the standardization proposed by the FATF (Financial Action Task Force) Travel Rule.

As of February 7th, 2022, the minimum transaction size to qualify for said regulation dropped from 1000 Euros to 0, meaning all crypto transactions within the EU or to and from the EU will require the minimum KYC information outlined by the Travel Rule. So, what is this collection of KYC information required under the Travel Rule?

The most basic of the required information include the Name, account number, Crypto address, ID number, and even the place of birth of the transaction originator! One may do not give much thought to this change if most the individual’s crypto assets are held are on centralized exchanges since the majority of the above information is already required prior to opening such an account. However, if we consider transactions originating from decentralized exchanges (DEXs) or decentralized wallets, ones that only have address information associated to each transaction, a massive shift of the standard operations would be required to allow EU users to transact using their platforms.

What if we consider transactions originating from the EU to a beneficiary outside the EU? In this case, in addition to the above specified KYC information required within the EU, international transfers will also require a unique transaction identifier or information on the beneficiary of the funds outside the EU. Despite the authentic desire to minimize global money laundering, and terrorist financing, in their implementation of what the EU has labelled as “protection” crypto users are forced to forego some of their privacy. In comparison to our formal system of fiat money, small transactions that are anonymous due to cash-based transactions would now become at the best case, public to only the government and in the worst case (the most likely case) public to anyone with access to the internet. It’s interesting to note that in most crypto publications that originate from governmental entities, the term “private” throughout usually refers to the information being accessible to only the provider of the data and the government.

There is a concern that originates when governmental organizations set forth strict restrictions on crypto transactions both nationally and internationally. Primarily from a competitive perspective, increased research and investments from both private and public entities has resulted in exponential development of innovative products that have global implications. We also have a concern from the aspect of the individual user. Increased restrictions may increase the barriers to entry citizens face in relation to the crypto market. The consequences of which include limited innovation in the space, and the potential of “falling behind”. From the perspective of governments, due to the significant emphasis placed on CBDCs globally, failure to adapt to international financial changes may result in the weakening of the country’s financial system and position as a global player.

While it is necessary for the cryptocurrency industry to account for security, financial crime risks and privacy; it remains a delicate balance with minimizing complexity of the system to allow for effective utilization by the country’s citizens. It falls on governments to balance the required KYC/AML regulation with ease of industry integration for retail and non-bank institutions. We, as members of the crypto industry, are responsible for shedding light on common misinformation about the risks of cryptocurrency and voice our concerns when prevalent. No matter how small our part may be, we are all responsible for the growth, security, and improvement of the overall industry.