Number of Virtual Asset Transactions Triggering Travel Rule Thresholds Could Increase Significantly Under FinCEN’s New Rules: Report

Blockchain security firm Ciphertrace has noted that FinCEN’s suggested rule change for the Travel Rule Threshold would “more than double” compliance events for US-based virtual asset service providers or VASPs.

CipherTrace confirms that FinCEN had released a proposed rule change (in October 2020). The recommendation was to “lower the threshold for travel rule information sharing and retention from $3,000 to $250 for all cross-border payments involving US financial institutions,” CipherTrace noted in a blog post.

The blockchain security company pointed out that the proposed new rule will “definitely apply” to Convertible Virtual Currencies (CVCs). It added that this particular rule change would increase the number of “qualified travel rule triggers by at least 2.5 times.”

More than 1 million Travel Rules events may get triggered for US-based VASPs under suggested rule changes, CipherTrace revealed. It also predicted that “increased volume and complexity will significantly increase VASP compliance costs.”

As stated in CipherTrace’s blog post:

“On October 23, 2020, the Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve Board proposed a rule change that would amend the recordkeeping and travel rule regulations under the Bank Secrecy Act. The proposal would require financial institutions, including banks and cryptocurrency exchanges, to collect and store transfer information on international payments at a much lower threshold.”

The blockchain firm further noted:

“Currently, financial intuitions must store and forward records for transfers of funds abroad in excess of $3000. The new rule would see much smaller transfers—anything over $250—come under the same requirements. Notably, the rule specifically includes cryptocurrency transfers as a class of transactions to which the proposal would apply.”

CipherTrace points out that lowering the current threshold for collecting, retaining, and transmitting details on the transmittals of assets that “begin or end outside the United States” could potentially increase the number of transactions triggering Travel Rule thresholds or limits each year by “a factor of at least 2.5,” according to the blockchain firm’s analysis.

US VASPs may have been required to send more than 34,000 messages during October 2020 in order to comply with the US Travel Rule threshold of $3,000, CipherTrace revealed. Over 27,000 of these messages (nearly 80%) would have been “cross-border in nature,” which means that sending or receiving VASP was based outside of the US. This could lead to more than 417,000 messages every year at the $3,000 threshold.

Lowering the current threshold to $250 might push the number of required travel rule messages to be “shared and stored per year to over one million,” the blockchain firm noted. It added that “at this lower threshold, cross-border transactions make up 83% of all travel rule triggers for US VASPs.”

The CipherTrace team also mentioned:

“Intermediary banks or financial institutions are also required to transmit this information to other banks or nonbank financial institutions in the payment chain. The proposed rule change acknowledges that cryptocurrency can be transferred without third-party bank involvement but states that, in reality, many users rely on hosted wallets and exchanges to transact.”

According to CipherTrace, the cross-border nature and “global reach” of virtual assets and VASPs makes compliance with this current definition very “difficult to enforce, especially given many VASPs are often registered in multiple jurisdictions.” A financial services provider may only have “reason to know” that a particular transfer either begins or ends outside the US to “the extent that such information was shared when receiving the transmittal order or collected from the transmittor—assuming he or she even knows the true extent of the cross-border nature of their transaction.”

This is the reason why the Financial Action Task Force (FATF) arrived at the decision in its virtual asset guidance which states that “countries should treat all VA transfers as cross-border wire transfers, in accordance with the Interpretative Note to Recommendation 16 (INR. 16), rather than domestic wire transfers, based on the cross-border nature of VA activities and VASP operations.”

CipherTrace claims that until recently, lawmakers have taken “a gentle approach” when it comes to enforcing the travel rule. But with this suggested rule change, FinCEN appears to have indicated that it “takes cryptocurrency seriously and that the same AML rules that apply to fiat currency will be applied to cryptocurrency moving forward,” CipherTrace noted. The blockchain analysis firm also mentioned that FinCEN is taking feedback on the recommended rule change “on or before November 23, 2020.”

The complete proposal may be accessed here.

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