United States

Request for comment: Travel Rule threshold adjustment

AML AND COMPLIANCE NEWS  | 

The Federal Reserve and the Financial Crimes Enforcement Network (FinCEN) have requested comment on a proposed rule that will lower the threshold on reporting from $3,000 to $250 for transactions outside the U.S. The Travel Rule would also require cryptocurrency transactions to be reported for both domestic and international transactions, as the rule expands the definition of money. Virtual or digital assets will now be defined as money under the proposed rule to include Convertible Virtual Currencies (CVC) and digital assets that are legal tender. FinCEN was the first U.S. agency to publicly address how crypto is to be regulated in guidance that was issued in 2013.

The agencies acknowledged that there has been concern that the Travel Rule would not apply to crypto transactions because cryptocurrency is not considered money by the Uniform Commercial Code (UCC). In order to circumvent this, the new rule would define money in order to clarify that both payment orders and transmittal orders include any instructions by the sender to transmit CVC, or any digital asset having legal tender status, to a recipient.

Under the current recordkeeping and Travel Rule regulations, financial organizations must collect, retain and transmit certain pieces of information related to funds transfers and transmittals over $3,000. This proposed rule lowers the applicable threshold to $250 for international transactions; however, domestic transactions would remain at $3,000. While this may be seen as a positive for the industry, it will be necessary to update policies, procedures, operational processes and/or systems to accommodate the changes.

The rule itself is in line with the Financial Action Task Force (FATF) and their work performed around global exchanges that require registration with local Financial Intelligence Units (FIU) and deploy the technology and processes necessary for sharing information during the transmittal process. The crypto industry began with little regulation, evolving into a medium for money launderers, fraudsters and terrorist financiers. Criminals leverage digital assets to transmit funds to most any destination anonymously.

Virtual assets, such as Bitcoin, make payments easier, faster and cheaper. Moreover, they provide an alternative to transmitting tender without having to access legacy financial products with safeguards in place that monitor and detect illicit activities. with the constant changes in guidance and procedures to process funds, it’s important to refresh our methodologies and risk assessments of this particular financial channel.

What are the factors that increase a virtual asset’s risk?

  • Value moving into and out of a fiat currency
    • If you aren’t familiar, fiat money is a currency established as money, usually by government regulation, that does not have any fundamental value: The only value it retains is the worth given to it between the parties engaging with the exchange, who agree on its value. A deck of cards could be used for tender if both parties agree that it has value to them.
  • Anonymity using technologies not familiar or fully regulated in the financial system
  • Non-face-to-face activities
  • Connections with high-risk jurisdictions
  • Availability of virtual value

Humans haven’t always used a cash-based economy; historically, they bartered. Townships were built on the premise that services were exchanged in place of money: A baker would provide bread to the blacksmith, who in turn would provide shoes for the baker’s horses. The cave dweller gave berries and fruits secured from the forest to the hunter in exchange for pelts to keep his family warm in the winter. But we sometimes forget about our history and the evolution of our financial system. I use a cellphone to pay for 80% of my items today. I don’t use coins; they can go away, for all I care. The other 20%? Credit card. I don’t carry cash anymore unless I visit a flea market.  

That’s why FinCEN and the Federal Reserve ask for comments, as someone may have a novel solution or original perspective that should be raised for consideration. While some may perceive the Travel Rule as an unnecessary hardship, others see it as further protection of our financial system. As for me, I view it as another small step in our financial evolution, fully expecting the financial system to change even further as our society continues to evolve.  

Lou Holtz, Notre Dame’s football coach for 11 seasons, stated, “In this world you’re either growing or you’re dying, so get in motion and grow.”  

Comments on this Federal Reserve and FinCEN proposal must be submitted on or before Nov. 27, 2020.

RSM CONTRIBUTORS


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