Crypto-asset transfers to be traced in the EU under new rules

The European Parliament has passed the first EU rules on tracing crypto asset transfers, allowing transactions incorporating crypto assets to be traced in the same way as traditional money transfers. The legislation, once in force, will also enable suspicious transactions to be blocked to tackle money laundering, terrorist financing and organised crime in the virtual assets sector.

The ground-breaking rules, pending final approval by the Council of the EU, will extend the ‘travel rule’, which is already used in traditional finance, to cover transfers of crypto assets. This means information on the source of the asset and its beneficiary will have to ‘travel’ with the transaction and be stored on both sides of the transfer.

Forensic accounting expert Hinesh Shah of Pinsent Masons said: “The anonymity and private nature of cryptoasset transactions make it difficult for authorities to trace the flow of funds or identify the parties involved in a transaction, making it a popular method for criminals to circumvent or evade sanctions. But by applying the ‘travel rule’, it will be more difficult for criminals to try and evade sanctions”.

Crypto asset service providers will be under a series of new obligations. For example, service providers exchanging assets on behalf of a customer will need to record the customer’s name, address, date of birth and account number, as well as the name of the intended recipient of the transfer. The service provider of the beneficiary, meanwhile, must implement effective procedures to detect whether the information on the originator is included in the transfer.

“This legislation marks an important step in the development of a European financial crime framework governing the transfer of crypto assets, and will have specific implications for virtual asset service providers (VASPs), such as cryptocurrency exchanges and wallet providers. The legislation is likely to lead to increased compliance pressures on VASPs but it will significantly reduce the sanctions risk for individual and companies holding or trading in crypto-assets,” said Shah.     

Sanctions expert Stacy Keen of Pinsent Masons said: “Combating sanctions evasion is a priority for the G7 nations. Crypto assets are a well-recognised route for designated persons to move funds to circumvent the restrictions freezing assets, and more generally for criminal proceeds to be laundered.”

“In July 2022, the National Crime Agency and Office of Financial Sanctions Implementation published a ‘Red Alert’ highlighting that Russian money launderers had been increasingly observed by UK intelligence bodies moving significant volumes of funds by providing cash to crypto asset services. The use of crypto assets also mitigates the impact of many Russian banks being cut off from the SWIFT payment system. Transparency and compliance accountability connected to transfers of crypto assets should serve to make them a less attractive tool for those involved in nefarious activities,” she said.

She added: “In the US, enforcement activity against crypto companies has ramped up in recent years. Boston-based crypto trading company Poloniex is the second company this year to face US Office of Foreign Assets Control (OFAC) enforcement action. OFAC announced on Monday that the company had reached a civil settlement to pay $7.59 million to resolve allegations that it processed over 65,000 payments over a five-year period in breach of sanctions restrictions”.

The European Parliament has also given the green light to new common rules on the supervision, consumer protection and environmental safeguards of crypto assets, including cryptocurrencies. The new rules will cover assets that are not regulated by existing financial services legislation and create a uniform legal framework for crypto asset markets in the EU.

Businesses that issue and trade crypto assets will need to comply with regulatory requirements such as transparency, disclosure, authorisation and supervision of transactions, so consumers can be better informed about the risks, costs and charges linked to their operations.

The legislation will take effect after it is formally endorsed by Council and published in the EU Official Journal.