The United Kingdom took a significant step towards aligning itself with global regulatory standards concerning the use of cryptocurrencies in 2022. The nation enacted legislation to ensure compliance with the extended Travel Rule, a framework designed to regulate cryptocurrency transactions and curb potential illicit activities. As of September 1, crypto businesses operating within the UK are mandated to adhere to the guidelines laid out by the Financial Action Task Force (FATF), specifically its Anti-Money Laundering and Counter-Terrorist Financing regulations, collectively referred to as the Travel Rule.
This legislative development was reaffirmed by a statement from the Financial Conduct Authority (FCA) on August 17, emphasizing the UK’s intention to conform to the FATF’s directives introduced in 2019.
The core principle of the Travel Rule necessitates that virtual asset service providers (VASPs) share crucial customer information during the course of transactions. By doing so, the aim is to facilitate the identification of potentially suspicious financial activities within the cryptocurrency domain. The UK took the step to enforce this regulation in July 2022, marking the beginning of a new era in cryptocurrency compliance. By September 1, all UK-based crypto businesses must have fully integrated the Travel Rule’s requirements into their operations, regardless of whether they are sending or receiving digital assets within the UK or in jurisdictions that have already embraced the regulation. Notably, even transactions involving third-party vendors fall under the purview of this legislation.
UK’s crypto sector struggles for adoption
For cases involving transactions with VASPs situated in jurisdictions yet to adopt the Travel Rule, UK crypto enterprises are obligated to ensure that recipients are capable of receiving the stipulated information. Furthermore, these businesses must diligently collect and retain the necessary data. Meanwhile, when UK-based crypto companies are on the receiving end of transactions, they are urged to exercise discernment.
The origin of the Travel Rule can be traced back to 2012 when the FATF introduced it for conventional financial institutions. In a proactive extension, the FATF incorporated virtual asset service providers into this regulatory framework in 2019. However, global implementation of the rule has faced several obstacles, with a mere 11 out of the 98 surveyed countries effectively enforcing the rule by 2022.
In tandem with these developments, the UK’s cryptocurrency sector is grappling with an escalating array of regulatory obligations. The introduction of new marketing standards by the Financial Conduct Authority, set to come into force in October, has further increased the compliance burden on crypto businesses. Moreover, the FCA’s comprehensive consultation paper released in February highlighted the increasing scrutiny on the entire cryptocurrency landscape.
This regulatory wave has also been felt across the Atlantic, where the Federal Reserve Board of the United States and the Washington State Department of Financial Institutions took decisive action against Farmington State Bank. This was due to the bank’s deviation from its approved business plan in 2022, which had not been adequately communicated to regulatory authorities.
Despite the bank’s stated intention to exit the cryptocurrency sector and revert to a focus on community banking, regulatory measures were initiated in response to its engagement in digital asset activities without appropriate notice. The Federal Reserve’s intervention, as a safeguard for depositors and the Deposit Insurance Fund, imposes restrictions on certain activities unless explicitly sanctioned by supervisors.
Despite Farmington’s stated exit strategy from the crypto realm, reports suggest it was still involved in facilitating stablecoin issuance for an undisclosed third party. This situation stands independent of the bankruptcy declaration of the cryptocurrency exchange FTX in November 2022.
