Kenneth Blanco, Director of the Financial Crimes Enforcement Network (“FinCEN”), recently provided remarks about FinCEN’s “Travel Rule” at the first truly-virtual Consensus Blockchain Conference. The Travel Rule, which became effective in 1996, requires money services businesses (“MSBs”) – including cryptocurrency exchanges – to maintain identifying information on all parties in fund transfers of over $3,000 between financial institutions. As we discuss below, this principle creates real-world practical problems in the digital currency industry, in which it is not necessarily easy to obtain such information, unlike the traditional banking industry.
During his remarks, Director Blanco applauded the Financial Action Task Force’s (“FATF”) guidance issued last June, about which we have blogged here, instructing its 180 international member governments to similarly demand that virtual asset service providers (“VASPs”) collect “accurate originator information and required beneficiary information” on transactions of $1,000 or more. FATF’s pronouncement sent some shockwaves through the digital currency industry.
Notably, Director Blanco also lauded the efforts of cross-sector organizations and working groups to develop international standards and solutions to aid compliance with the Travel Rule. He urged for continued cooperation between FinCEN and the virtual currency industry to effectively implement Anti-Money Laundering (“AML”) measures consistent with the Travel Rule.
Travel Rule Violations in the Virtual Currency Sector
In his remarks, Director Blanco described virtual currency service providers as “the backbone of the financial system” and “on the front lines” of the AML effort to protect people from harm. He explained that “[a]ny asset that allows the instant, anonymized transmission of value around the world with no diligence or recordkeeping is a magnet for criminals, including terrorists, money launderers, rogue states, and sanction evaders.” Since 2013, FinCEN has received almost 70,000 Suspicious Activity Reports (“SARs”) related to virtual currency exploitation. Director Blanco commended this reporting as “incredibly valuable to FinCEN and law enforcement,” which has in turn enabled FinCEN to provide the industry with information on typologies of illicit virtual currency gleaned from these SARs.
However, Director Blanco also underscored the need for businesses engaged in virtual currency to comply with recordkeeping obligations – including the Travel Rule. He claimed that recordkeeping violations related to the Travel Rule are the most frequent violations by MSBs in this industry. These remarks echoed his previous remarks, made in November 2019 at the Chainalysis Blockchain Symposium, raising concerns about the high number of Travel Rule violations in this industry since the Internal Revenue Service began examining cryptocurrency exchanges and their compliance with the Travel Rule in 2014.
The Industry’s Response
Reacting to these pronouncements regarding the Travel Rule’s application, and particularly in response to FATF’s guidance last year, the digital currency industry lamented the onerous standards of both. It argued that implementing this requirement would be near impossible and actually would undermine the regulatory goals of both entities by driving digital currency users to unregulated and anonymous platforms. The problem is that, unlike the traditional banking community, which already has established mechanisms for communication amongst institutions – including through the SWIFT system – the still-emerging digital currency industry lacks such established mechanisms.
However, the industry has collaborated to develop and implement recent measures to comply with these requirements. Most notably, a working group of crypto firms recently released a new standard, called IVMS101, which defines a uniform model for data that must be exchanged by VASPs alongside cryptocurrency transactions. The group released this standard ahead of FATF’s one-year review of industry progress towards Travel Rule solutions at its 2020 plenary meeting.
IVMS101 will identify the pseudonymous senders and receivers of crypto payments and this information will “travel” with each transaction. The standard messaging format now needs to be implemented into the various solutions that VASPs are building to comply with the Travel Rule. In its white paper published about this standard, the working group explained that unambiguous data will enable VASPs to exchange messages in an automated fashion, which will reduce costs and minimize risks. For example, firms would otherwise have to reconfigure outbound and inbound messages on a continual basis to avoid error. This universal language allows beneficiary VASPs to understand and process the required information submitted by originating VASPs.
Director Blanco did not expressly refer to IVMS101 during his remarks, but he expressed his confidence in the industry’s ability to meet these regulatory challenges. He also noted that most challenges in this sector “relate to governance and process rather than technologies, and many solutions in both governance and technology models could ultimately comply.” He described FinCEN as applying a “technology neutral approach” to compliance and urged the virtual currency sector to “continue efforts to develop and implement these solutions and to keep FinCEN apprised of their progress, including by considering participating in FinCEN’s Innovation Hours Program.” As part of this program, FinCEN provides dedicated times for users and providers of regulatory and financial technology, and other firms involved the financial services industry, to discuss their BSA-related innovative products and services, including their potential opportunities and challenges.
Director Blanco also highlighted as particularly promising the growth of numerous cross-sector organizations and working groups focused on developing international standards and measures to address the Travel Rule. Although he did not provide details on such efforts, he emphasized FinCEN’s continued commitment to monitor these groups’ developments and collaborate with them.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.