Travel Rule regulation comes into force in the UK for crypto asset firms

Quick Take

  • UK Virtual Asset Service Providers (VASPs) need to comply with FATF’s Travel Rule from September 1.
  • Crypto transfers that do not meet requirements could be delayed, rejected or blocked.

Crypto asset firms in the UK are now required to comply with the Financial Action Task Force's Travel Rule, which came into effect on September 1. The rule represents a global attempt to apply anti-money laundering and counter-terrorist financing regulations to on-chain activities.

The UK's Financial Conduct Authority will now enforce the Travel Rule, requiring UK-based Virtual Asset Service Providers (VASPs) to collect, verify, and share information on domestic and cross-jurisdictional transactions. According to an FCA statement, cryptoasset businesses domicile in the UK are required to "comply with the rule when sending or receiving a cryptoasset transfer to a firm that is in the UK, or any jurisdiction that has implemented the Travel Rule."

In addition to this, the FCA's statement included procedures for receiving cryptoasset transfers to or from jurisdictions without the Travel Rule. Enforcing the rule when dealing with these jurisdictions could impede certain crypto transfers. UK crypto businesses are required to collect information according to money laundering regulations from entities in non-Travel Rule jurisdictions. If information is missing or incomplete, businesses must make a risk-based assessment before releasing the cryptoassets to the beneficiary.

Challenges to implementing the Travel Rule

Chainalysis UK Public Policy Lead Jordan Wain said implementation of the Travel Rule will be challenging. "Companies will need to collect relevant Travel Rule information, and create a means to delay, reject or block transfers that do not meet the required criteria," he said in a note sent to The Block.

"Third-party providers will undoubtedly have a significant role to play in helping companies with compliance at each stage of the transaction flow," Wain said in a note sent to The Block. The FCA guidance states that "firms remain responsible for achieving compliance with the Travel Rule, even when using third-party suppliers."

XBTO Senior Compliance Officer Aja Heise in a note sent to The Block, said the Travel Rule "is another example of the complex web of different regulatory requirements institutions have to follow."

Heise questioned whether the new regulation will work in practice, "given the technology and development requirements posed to institutions to comply with the requirements." Heise added that, "Better regulatory alignment and clarity is needed globally, so institutions have a consistent understanding of what is expected of them."


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UK is tailoring its approach to the Travel Rule

Fireblocks Associate General Counsel Meiran Shtibel stated that the UK is tailoring its approach to comply with Travel Rule requirements. The UK amended its Money Laundering, Terrorist Financing and Transfer of Funds regulation in July 2022, to allow for the enforcement of the new rules. After the legislation was passed, a one year grace period was installed, so crypto-related businesses could prepare for compliance. The grace period ended at the beginning of September.

On August 17, the FCA published guidance on how firms could adapt to the new rules, which Shtibel said were more flexible than those developed by FATF. "The FCA provides more flexibility than the guidance put forward by the intergovernmental Financial Action Task Force (FATF), which includes VASPs limiting virtual asset transfers within their customer base and only allowing first-party transfers outside of their customer base," she said in a note sent to The Block.

"Pseudo-anonymity is a crypto-native ideal, this is a significant step that could benefit the digital assets sector by legitimizing it and paving the road to mass adoption,” Meiran Shtibel added.

The Financial Action Task Force (FATF) updated its rules to apply the Travel Rule to digital asset exchanges in June 2019. The inter-governmental body that sets international standards, argues the rule promotes more accountability and safer digital asset transactions.

However, in a March 2022 FATF survey, the agency expressed concern that more than half of its member states had yet to effectively implement the Travel Rule. "Of the 98 jurisdictions that responded to FATF’s March 2022 survey, only 29 jurisdictions have passed relevant Travel Rule laws," the agency said. According to current adopters of the regulation include the U.S., Germany, Japan, Singapore, Switzerland, Canada, South Africa, the Netherlands, and Estonia.

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

About Author

Brian McGleenon is a UK-based markets reporter for The Block. He has worked as a financial journalist and producer for multiple news outlets over the years, such as Fuji Television, The Independent, Yahoo Finance, The Evening Standard, and The Daily Express. Brian is also a screenwriter and producer with one feature film produced and one in development with Northern Ireland Screen. Apart from web3 and cryptocurrency developments, he is also interested in geopolitics, environmental issues, artificial intelligence, and longevity research. Get in touch via email [email protected].


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