On September 1, 2023, the Monetary Conduct Authority (“FCA”) set out its expectations for cryptoasset companies within the UK’s compliance with the “Journey Rule”, launched by The Cash Laundering and Terrorist Financing (Modification) (No. 2) Laws 2022 (the “Amended MLRs”). The Journey Rule requires cryptoasset companies to collect, authenticate, and share data regarding cryptoasset transfers. Finally, the Journey Rule seeks to lift the extent of transparency related to cryptoasset transfers, bringing them into line with practices widespread in different areas of monetary providers, a function that may have broader relevance to the way forward for the UK crypto trade.
The detailed steering from the UK might also serve for instance for different jurisdictions that proceed to wrestle with implementation of the Journey Rule for cryptoassets. For instance, though US regulators have lengthy asserted the Journey Rule applies to cryptoassets, there was no particular steering on the way to apply the rule in that context. A proposed rule from the US Division of the Treasury was printed in October 2020 and would have supplied some readability on the subject, however was by no means finalized.
The Journey Rule Defined
The purpose of the Journey Rule is to reinforce transparency in cryptoasset transfers, thereby curbing the potential misuse of cryptoassets for illicit actions. Specifically, the Journey Rule is designed to advance anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) efforts by equipping cryptoasset companies to detect suspicious transactions and conduct efficient sanctions screening.
The Journey Rule was launched by the Amended MLRs as a brand new Half 7A of the Cash Laundering, Terrorist Financing and Switch of Funds (Data on the Payer) Laws 2017 (“MLRs”) and, in response to Regulation 1(3) of the Amended MLRs, comes into impact on September 1, 2023.
The FCA has said that the introduction of the Journey Rule aligns with its dedication to client safety and market integrity, and epitomises its dedication to elevating requirements throughout the cryptoasset sector. Along with the FCA’s impending monetary promotions regime for cryptoassets in October 2023, the Journey Rule is meant to contribute to safeguarding people, preserving market integrity, and nurturing the sustained competitiveness of the UK’s cryptoasset sector.
The impetus behind this regulatory shift stems from the Monetary Motion Activity Power (“FATF”), a global physique focussed on AML and CTF. The FATF has not solely urged the UK to embrace the Journey Rule, but in addition has referred to as upon different nations to promptly undertake this commonplace, with the purpose of standardizing the procedures for cryptoasset companies throughout jurisdictions and making certain uniformity in sending and receiving transactions – a transfer notably pertinent because of the interconnected nature of the monetary trade.
FCA Expectations for Implementation of the Journey Rule
Recognizing the potential roadblocks posed by various adoption timelines and enforcement delays throughout completely different jurisdictions, the FATF has emphasised the necessity for a unified method. Consequently, in collaboration with trade gamers, the FCA has laid out tips for compliance with the Journey Rule. These tips element the expectations the FCA has for cryptoasset corporations transferring ahead, together with:
- Exercising Due Diligence: Cryptoasset corporations are anticipated to diligently adhere to the Journey Rule by taking all affordable steps, together with conducting due diligence to make sure compliance.
- Third-party Duty: Even when collaborating with third-party suppliers, cryptoasset corporations stay accountable for attaining Journey Rule compliance.
- Complete Compliance: Cryptoasset corporations should totally adjust to the Journey Rule when sending or receiving cryptoasset transfers from entities positioned throughout the UK or different jurisdictions which have applied the Journey Rule.
- Adapting to Worldwide Modifications: Cryptoasset corporations should usually assess the implementation standing of the Journey Rule in different jurisdictions and adapt their enterprise processes accordingly to make sure ongoing compliance.
When a cryptoasset switch is destined for a jurisdiction with out the Journey Rule, the FCA expects cryptoasset corporations to stick to the next protocols:
- Verification Efforts: A cryptoasset agency should take all affordable steps to find out whether or not the receiving entity can receive the requisite data.
- Absence of Data: In instances the place the required data can’t be obtained, UK cryptoasset companies are nonetheless obligated to gather and validate the info as mandated by the MLRs. This data ought to be saved previous to executing the cryptoasset switch.
Conversely, when a cryptoasset switch is acquired from a jurisdiction with out the Journey Rule, the FCA expects cryptoasset corporations to contemplate the next:
- Incomplete Information Issues: In cases the place the acquired cryptoasset switch lacks full or correct data, UK cryptoasset companies ought to consider the nations wherein it operates and the standing of the Journey Rule in these nations.
- Danger-based Evaluation: The elements in 1. above ought to be taken into consideration as a part of a risk-based evaluation of whether or not the cryptoassets ought to be made accessible to the beneficiary.
The FCA have said that this framework will stay dynamic as world adoption of the Journey Rule progresses, with any alterations to its expectations being communicated to the trade. To help cryptoasset companies in complying with the Journey Rule, the FCA has collaborated carefully with trade stakeholders, the Joint Cash Laundering Steering Group, and HM Treasury to develop steering, on which cryptoasset companies have had a chance to offer suggestions. For extra data on these developments, contact the authors of this submit, Alexandra Melia or Elliot Letts in London.