Travel rule:
virtual assets emerging from the shadow

A brief introduction to the FATF's activity

The FATF is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. [1] It regularly publishes thematic guidelines which are recognized as a global standard in the financial sector. The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. [2]

The FATF, being worried that anonymity of virtual assets transactions may attract criminals who want to escape authorities' scrutiny, introduced the new order of how such operations have to be conducted. Travel rule is a conditional concept, and it originates from the Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, namely – from Recommendation 16.

The travel rule aims the virtual assets (VA) to emerge from the shadow. It prescribes that all transactions above USD/EUR 1,000 must be accompanied by identifying information – names, account numbers, etc. The rule obliges Virtual Asset Service Providers (VASP) to exchange information about their customers when transferring VAs. This innovation is similar to SWIFT technology in bank transfers. Additionally, each blockchain wallet should be checked against a complete set of AML risk assessment scenarios and their potential association with illegal activities. [3]

VASPs cover a wide spectrum of individuals (natural persons) and legal entities which provide financial intermediary activity. These may be exchanges, wallet providers, financial services providers related to issuance/offer/sale of Virtual Assets and any other possible business models in that area. It is also essential to know, that not only transaction with fiat or digital currencies are considered as VASP operations, but safekeeping of the digital private keys is also considered as VASP activity. [3]

Switzerland, being one of the world's financial hubs, needs to comply with high AML standards. Therefore, it has already implemented the travel rule, namely, in Art. 10 of the AML Ordinance. According to the latter, financial intermediary of the client specifies the name, account number and address of the client as well as the name and account number of the beneficiary in the case of payment orders. [5] Some experts highlight that FINMA's approach is even stricter than FATF's. For instance, FINMA does not allow VASP transaction to unregulated wallets and requires any transaction party to be verified. [3]

To reflect Switzerland's progress, the FATF has now re-rated the country on the Recommendation 16 - Wire transfers, from partially compliant to largely compliant. [8]

To sum up, travel rule is a step forward to a safer digital environment. It provides benefits for all players. It is a chance for states to improve their investment climate, for VASPs to build more reliable and transparent business and for users to get better security.