UK’s Travel Rule comes into effect, requiring digital asset firms to seize funds from suspicious sources

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The U.K.’s Travel Rule came into force on September 1, requiring digital asset businesses operating in the country to henceforth collect, verify, and share information about digital asset transfers, potentially withholding certain transfers if the origin is deemed suspicious or uncertain.

The rule was first introduced on August 17 by the Financial Conduct Authority (FCA), the U.K.’s top financial sector regulator, and was designed to help combat money laundering and terrorist financing via the digital asset space, as well as bring the U.K. in line with global recommendations set out by the Financial Action Task Force (FATF).

“The Travel Rule is designed to bring greater transparency to cryptoasset transfers, making it harder for criminals to use cryptoassets for illicit activity,” said FCA when announcing the new measures in August.

“Specifically, the Travel Rule advances anti-money laundering (AML) and counter-terrorist financing (CTF) efforts globally by helping cryptoasset businesses detect suspicious transactions and carry out effective sanctions screening,” it added. 

As well as expecting digital asset firms to exercise all due diligence to collect information on parties involved in transfers, the Travel Rule demands that funds be seized if the sender’s identity and the purpose of the payment can’t be verified.

“If the cryptoasset transfer has missing or incomplete information, UK cryptoasset businesses must consider the countries in which the firm operates and the status of the Travel Rule in those countries,” explained the FCA. “The UK cryptoasset business should take these factors into account when making a risk-based assessment of whether to make the cryptoassets available to the beneficiary.”

In other words, if a firm or exchange in the U.K. can’t prove who sent the money to the U.K. wallet and why, it is now legally entitled, and expected by the FCA, to seize the funds.

In terms of outgoing transactions, when sending digital assets from the U.K. to a jurisdiction without the Travel Rule, the FCA still requires firms to collect and verify the information as required by the Money Laundering Regulations and store that information before making the transfer.

Origins of the new rule

The Travel Rule originated in 1995 when the Board of Governors of the U.S. Federal Reserve and the U.S. Financial Crimes Enforcement Network (FinCEN) jointly issued a rule for banks and other nonbank financial institutions relating to the information required to be included in funds transfers. 

The Travel Rule, as it became known, was promoted by FinCEN as part of its mandate to enforce the Bank Secrecy Act, which requires financial institutions to assist U.S. government agencies in detecting and preventing money laundering, including keeping records of cash purchases of negotiable instruments and filing reports of cash transactions exceeding $10,000.

Initially targeted at payments within the fiat banking system, it was expanded in 2019 by the FATF, the global money laundering and terrorist financing watchdog, to include “virtual assets (VAs) and VA service providers (VASPs).”

In July 2022, the U.K. government updated its money laundering legislation to begin bringing the country in line with the FATF Travel Rule standards.

On August 17, the FCA outlined its expectations with regard to digital asset service providers, giving companies until September 1 to comply. It said: “The Travel Rule is designed to bring greater transparency to cryptoasset transfers, making it harder for criminals to use #crypto for illegal activity.”

Watch: Blockchain regulation with Marcin Zarakowski