To deal with the heightened money-laundering risks within the crypto market, Financial Action Task Force (FATF) issued the travel rule. This rule aims to fortify the industry legitimacy, address the security issues involved in cross-border & domestic wire transfers and establish a legal structure for cryptocurrencies.
Under this, crypto exchanges, custodial wallet providers and other virtual asset service providers (VASPs) have to accurately disclose personal customer data during transactions. Information like sender’s and recipient’s name, geographical address, account details and more have to be collected and eventually be submitted to the designated authorities – An advanced version of KYC you could say!
The most obvious backlash here is the concern about the confidentiality of information. In addition to the apprehensive human behaviour, privacy-based regulations like the stringent ‘European Union (EU) General Data Protection Regulation (GDPR)’ and the FATF Travel rule in a combination may have a cascading effect and reduce the market. Moreover, cryptocurrencies that function anonymously might not be able to comply with the data required by the FATF.
A thought to consider here is, when blockchain analytics is used while working with cryptocurrencies and when there are ‘n’ number of analytical tools available for tracking and filtering the audit trail, why is it necessary to introduce additional compliance that can be taxing? A revised feasibility study looks needed here.
There is no doubt that transparency will build trust and help to grow the crypto market positively by sealing the holes allowing money laundering and other criminal activities. However, additional compliance costs can swell balance sheets for many.
However, on a positive side, this rule, if successful, will integrate the crypto market into the traditional financial market and make way for a more structured and matured class of assets.