EU officials unveil draft legislation for applying FATF's 'travel rule' to crypto transactions

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Officials at the European Commission, the European Union's executive branch, made public Tuesday draft legislation that, if approved, would apply the FATF's so-called travel rule for crypto assets.

The EU has for months been solidifying its stance on regulating various aspects of the crypto industry, including rules around stablecoin oversight. With today's release, the EU is setting the stage for closer supervision of crypto asset transactions as part of a broader overhaul of anti-money laundering/know-your-customer rules. Still, any changes are subject to deliberation in the European Parliament and will likely take years to go into effect. 

As the draft text explains:

"The proposal extends the scope of Regulation 2015/847 to include transfers of crypto-assets made by Crypto-Asset Service Providers (CASPs) in addition to the current provisions on transfer of funds. It aims at reflecting in EU law amendments made in June 2019 to Financial Action Task Force (FATF) Recommendation on new technologies to cover ‘virtual assets’ and ‘virtual asset service providers’, and in particular new information obligations for the originator and beneficiary CASPs at the two ends of a crypto-assets transfer (the so-called ‘travel rule’)."

Under the rule, so-called virtual asset service providers, or VASPs, must share information about the senders and recipients involved in VASP-to-VASP transactions larger than $1,000. The EU refers to these entities as crypto asset service providers, or CASPS. 

As noted in the EU's press release on the matter, what's effectively happening is that the bloc is pushing service providers in the EU space to ensure that they know who their customers are and that information about them moves between companies.

Officials noted:

"At present, only certain categories of crypto-asset service providers are included in the scope of EU AML/CFT rules. The proposed reform will extend these rules to the entire crypto sector, obliging all service providers to conduct due diligence on their customers. Today's amendments will ensure full traceability of crypto-asset transfers, such as Bitcoin, and will allow for prevention and detection of their possible use for money laundering or terrorism financing. In addition, anonymous crypto asset wallets will be prohibited, fully applying EU AML/CFT rules to the crypto sector."

The intent of the initiative was further established in a section on a proposed €10,000 limit on "large cash payments."

"Limiting large cash payments makes it harder for criminals to launder dirty money. In addition, providing anonymous crypto-asset wallets will be prohibited, just as anonymous bank accounts are already prohibited by EU AML/CFT rules," the release stated.

However, possible technical solutions to ease the burden of this process have yet to be fully realized. The draft legislation makes note of this, stating that "some European Union VASP representatives27 claimed that the absence of a standardised global, open source and free, technical solution for the travel rule could lead to the exclusion of small actors from the crypto-assets market, with only important players being able to afford compliance with the rules."

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