What crypto has to do with FATF, VASP, MiCA and the Travel Rule
Regulation and compliance in crypto might be not the most interesting things for many of us but it should be very clear by now that the adoption we want won’t happen without an adequate regulatory framework. When digging a bit into the proposed frameworks, you will quickly find terms like FATF, VASP, MiCA, Travel Rule and others and it can become very quickly very confusing. Let me untangle some of the terms, what they mean and why they matter.
Let’s start with FATF which stands for Financial Action Task Force, an intergovernmental organization which’s sole purpose is to set standards that aim to prevent money laundering, financing of terrorism and proliferation. The world’s biggest nations are part of the FATF, totalling 39 member countries today.
With the growing interest and adoption of crypto, FATF started to also describe and formulate the standards for firms operating in the crypto world. These parties are referred to as Virtual Asset Service Providers or in short VASPs. Crypto exchanges, crypto funds, custodial wallet service providers, banks with exposure to digital assets and others are all considered a VASP. In June 2019 the FATF announced its anti-money laundering and anti-terrism guidelines related to VASPs. This regulation is formally referred to as the Travel Rule, which requires VASPS to communicate the information of the originators and beneficiaries of crypto transactions that exceed a certain threshold ($1000 USD).
Basically, the crypto service provider of the sender is expected to communicate the personally identifiable information (PII) of the sender to the crypto service provider of the recipient. Say for example you want to send 1 ETH from your Kraken account to your friend’s wallet who uses Coinbase. Kraken will be obliged to provide your personal information such as name, address, acocunt number and others to Coinbase. This is in fact no different from the traditional finance world whenever you do a bank transfer from one bank to an other.
So the travel rule on a high-level asks VASPs to introduce two solutions into their processes:
One for collecting data
Another one for sharing data
Implementing the travel rule globally also comes with its challenges as the regulation is nonuniform and differs based on the region. For example, Switzerland takes a much more stringent approach to comply with this rule than other countries. Collecting and sharing Personal Identifiable Information between VASPs also requires interoperable communication systems that facilitate data sharing in the most efficient way. VASPs around the globe are coming together to build protocols such as the OpenVASP or Shyft to streamline these processes.
The FATF and the travel rule as described above set a global regulatory framework on how to comply when transacting crypto between VASPs. In June 2022 the European Union with its 27 member states published their version of a very comprehensive crypto regulation that will be applied in Europe and which is formally referred to as Markets in Crypto Assets or in short MiCA. MiCA does not directly address anti-money laundering however the proposal has been designed to further harmonize EU law with the FATF recommendations including the travel rule by aligning terminologies and scope. The process to put any new EU law is very complex however the aspiration is to have the MiCA framework in place by 2024. The MiCA is very comprehensive and if you are interested to dig deeper into the various aspects of it check you this link.
Please share this post if you found it helpful.
Quick summary of the various abbreviations and terms
FATF - Financial Action Task Force
An organization that sets global standards and recommendations on how to fight money laundering, terror financing and proliferation
VASP - Virtual Asset Service Providers
Firms that are exposed to digital assets and crypto including but not limited to crypto exchanges, custodial wallet providers and banks
Travel Rule
Regulation that requires virtual asset service providers to exchange and collect personal information of the users that transacts digital assets
MiCA - Markets in Crypto Assets
EU legislation that aims to streamline virtual asset regulation in the European Union whilst protecting users and investors. It also takes the FATF and travel rule into consideration by streamlining scope and terminologies.
Other articles that may interest you 🔥
I am starting separate posts only accessible for paid subscribers where I publish much more in-depth ecosystem articles and highlight investment opportunities not only for cryptos but also in the NFT & Metaverse space. The paid subscription only costs $5 per month (4.60 CHF) or $40 USD (37 CHF) per year. With the subscription you also support my work, thank you 🚀