The Travel Rule and EBA’s New Draft Guidelines

Travel rule and TFR Refresher

The Travel Rule mandates that VASPs must establish the identities of the senders and recipients of cryptocurrency transactions exceeding a specified threshold. This includes:

Names and account/wallet numbers of the transacting partiesPhysical address, date of birth and unique identity number of the sender.

While individual jurisdictions have implemented varying interpretations of the Travel Rule, the FATF-recommended version mandates VASPs exchange counterparty information for cryptocurrency transactions valued over USD/EUR 1,000.

The TFR is the European Union's implementation of the Travel Rule. It applies to all VASPs in the EU and provides clear guidance on how they should identify and verify the ownership of self-hosted wallets. The personal information of transacting parties is similar to that outlined under the Travel Rule and must be provided in advance or simultaneously with the transfer of crypto assets. (For more information, see Ebook on Demystifying the Travel Rule).

EBA's Draft

In an effort to streamline the implementation of the TFR within the Travel Rule compliance framework, the European Banking Authority (EBA) issued a Call for Input in October 2022 as a preliminary request for feedback on its proposed Guidelines. The EBA subsequently launched a public Consultation Paper in December 2023, giving stakeholders a chance to provide further feedback on the final version of the Guidelines. Institutions can provide input by clicking the "send your comments" button on its consultation page; the deadline for which is February 26, 2024. In addition, the EBA will host a virtual public hearing on January 17, 2024, to discuss the practical implementation of the TFR rules (you can register here by January 3, 2024). 

New Provisions in the Draft Guidelines

Based on the responses, the EBA refined its original framework, and replaced it with new Guidelines on how to comply with the TFR, which:

• Specify how to handle tools excluded from the TFR scope
  The first provision will set out common criteria for PSPs and CASPs to determine whether a payment card, e-money instrument, a mobile phone or any other digital prepaid or postpaid device with similar characteristics used exclusively for the payment of goods and services meets the TFR exclusion requirements. 

• Call for standardized data transmission
  The second provision suggests steps to standardise the exchange of data involved in the processing of transfers. This would address technical limitations arising from misalignment of Member States' data transmission rules and thus facilitate data exchange across the transfer chain. Financial institutions would therefore need to use infrastructure and services that align with the TFR rules. Nevertheless, CASPs will be granted a transitional period of up to July 31, 2025, to adjust their transmission systems.

• Underline the need for interoperable protocols
  The third provision highlights the need for interoperable protocols to ensure seamless compliance across the transfer chain, ensuring that data exchange and rule adherence are consistent even when CASPs employ various data transmission protocols.

• Clarify the minimum set of data requirements accompanying each transfer
  The fourth provision sets out comprehensive guidance on the minimum set of data accompanying transfers, including names, addresses, and Legal Entity Identifiers (LEIs) or alternative fields for crypto and fund transfer purposes.

• Define new treatment of self-hosted wallet addresses
  The fifth provision clarifies the procedures for CASPs to identify the originator/beneficiary and establish proof of ownership or control of self-hosted wallets.

• Establish rules for direct debits
  The sixth provision introduces rules governing direct debits to prevent compliance issues for the payer's PSP.

Conclusion

Following the consultation period, the EBA will incorporate the received feedback to conclude the Guidelines. They are anticipated to become effective on December 30, 2024, coinciding with the TFR’s application date.

As the crypto industry continues to grow, the need for sharpened enforcement mechanisms is becoming increasingly important. The Travel Rule is a critical cog of this mechanism, and the EBA's draft Guidelines will provide valuable guidance for financial institutions as they seek to comply with this important standard.