article / 23 May 2023

The EU implements the Travel Rule for transfers of crypto-assets

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The so-called “Travel Rule” will soon be extended to cover transfers of crypto-assets following the approval of the revised Transfer of Funds Regulation. Crypto Asset Service Providers and intermediaries registered in the European Union will be obligated to collect, verify, store and exchange personal data of persons involved in a transaction – including when transfers are made to so-called un-hosted wallets. Crypto Asset Service Providers now need to establish procedures to adhere to the regulation as well as update and evaluate their processing of personal data.

The Travel Rule extends to apply to transfers of crypto-assets

While the Travel Rule is well established among traditional financial service providers, the revised Transfer of Funds Regulation (“TFR”) will have a major impact on entities and individuals operating in the crypto industry. The purpose of the Travel Rule is to serve as a measure to prevent money laundering and terrorist financing. By requiring financial service providers to collect and share information about their customers the aim is to prevent the use of crypto services for illicit purposes. The EU regulators now aim to ensure that crypto-assets can be traced in the same way as traditional money transfers and thus require that transfers are accompanied with certain information – including personal data.

The Travel Rule has created a buzz in the crypto community since it has raised concerns about data privacy as well as its impact on the growth and development of the industry. Especially the fact that the TFR will apply to some transfers made from or to un-hosted crypto wallets (i.e., a blockchain address which is not linked to a service provider and which is in custody of a private user) provided such wallets interact with hosted wallets managed by a Crypto Asset Service Providers and/or intermediaries (“CASPs”). This would imply that CASPs need to verify the identity of the holder of the wallet and whether the un-hosted wallet is effectively owned or controlled by this holder – thus removing the anonymous nature of these kinds of services, transactions and technologies designed to enhance anonymity, with possible exposure to authorities.

The following information shall be accompanied with the transfer

The rules will apply to basically all transfers of crypto-asset which are sent by an “originator” (i.e., the sender of the crypto-assets), and/or received by a “beneficiary” (i.e., the recipient of the transferred crypto-assets). However, the entities falling under the scope will be CASPs established in the EU. The new rules also bring transfers of crypto-assets executed using crypto-asset automated teller machines (i.e., crypto-ATMs) under scope.

According to the TFR, CASPs under scope will need to ensure that the following information on the originator accompanies the crypto transfer:

  • The name of the originator.
  • The originator’s blockchain address, or the originator’s crypto-asset account (depending on whether the account is registered on a network using distributed ledger technology or similar technology or not) or a unique transaction identifier.
  • The originator’s address, including the name of the country, official personal document number, and the customer identification number or date and place of birth.
  • The current Legal Entity Identifier (“LEI”) of the originator, where available.

And the following information on the beneficiary:

  • The name of the beneficiary.
  • The originator’s blockchain address, or the originator’s crypto-asset account (depending on whether the account is registered on a network using distributed ledger technology or similar technology or not) or a unique transaction identifier.
  • The current LEI of the beneficiary, where available.

The GDPR applies to the processing of personal data imposed by TFR

The processing activities provided for by the TFR must be made in compliance with the General Data Protection Regulation (“GDPR”). The TFR further defines that the purpose of the processing shall be only for the prevention of money laundering and terrorist financing as required under the TFR and shall not be further processed in a way that is incompatible with those purposes. The processing of personal data based on TFR for commercial purposes is prohibited. TFR also specifies the retention period for storage of personal data (generally limited to five years

subject to exemptions) and regarding information requirements to the data subjects.

TFR mean that CASPs should take measures to, among others, implement procedures for the processing of personal data and appropriate technical and organizational measures to protect personal data against accidental loss, alteration, or unauthorized disclosure or access. Considering that cross-border transactions are numerous among crypto transactions, the regulators note that it is important that CASPs operating in multiple jurisdictions with branches or subsidiaries located outside the EU apply adequate safeguards.

Additional clarification can be expected from relevant authorities

The European Data Protection Board shall, after consultation with the European Banking Authority, issue guidelines on the practical implementation of data protection requirements for transfers of personal data to third countries in the context of transfers of crypto-assets. The European Banking Authority shall issue guidelines on suitable procedures for determining whether to execute, reject or suspend a transfer of crypto-assets, in situations where compliance with data protection requirements for the transfer of personal data to third countries cannot be ensured. We can also expect national supervisory authorities to address these questions in a national context.

The TFR will now have to be formally endorsed and published in the EU Official Journal before entering into force. The TFR is planned to start applying at the same time as the comprehensive framework regulating the markets for crypto-assets in the EU: the “MiCA-regulation”. Sweden has had a relatively small but rapidly growing crypto-assets market. Setterwalls therefore monitors the legal developments within both privacy laws and crypto-assets laws to prepare clients for the legal developments in the crypto market.

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