The regulatory move was initiated in the UK by the Financial Conduct Authority (FCA) and developed by the United Nations’ Financial Action Task Force (FATF) in June 2019. 

After guidance was released for traders in mid-August, the rules have now officially been enacted.

Under the rule, virtual asset service providers operating in the UK are required to collect, verify and share information regarding crypto-asset transfers made on their platforms. While these measures are poised to fight money laundering, some aspects have proven controversial among industry experts. 

Primarily, the standard for firms to identify the names of people behind transactions is hotly contested, since many self-custodied wallets aren’t hosted by any regulated provider. 

Another issue UK industry leaders have pointed out is the new rule looks to glean data with overseas customers from countries which may not have the travel rule in effect. 

Many countries don’t, according to a recent FATF survey, more than half of the 151 responding jurisdictions have taken no steps in implementing the travel rule, and 75% of international jurisdictions are not compliant or only partially compliant with the rules. In June, the FATF called the failure for a more robust adoption of the rule a “serious concern.”

“The fact that somewhere it’s enforced and in other places it’s not enforced.. [so] how do you get players in your jurisdiction where you want to enforce it to be compliant [when] the counterparties they need to deal with are not compliant?” told Ilya Brovin, chief growth officer from Sumsub to CoinDesk. 

As it stands, only 35 jurisdictions have passed legislation on the new rule, however in many places it has not taken effect. Notably, the European Union won’t bring the legislation into force until 2024. 

Even among jurisdictions where the rule is implemented, there are discrepancies in how it is carried out. For example, in Canada they must note the beneficiaries’ postal codes where the UK does not, creating a quandary when transferring between the two countries. 

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If the inbound payment originates from a person or entity from a jurisdiction without the rule, service providers must conduct a “risk-based assessment,” to determine whether or not to release the crypto assets.

The rule demonstrates the delicate balance a nation must take with emerging technologies between being tolerant and open to innovation, and regulating activity to keep the sector safe. 

Despite large crypto hubs leaving the UK due to regulatory battles such as Binance and PayPal, the fact remains that £19 billion worth of crypto was sent from illicit addresses last year, up 68% from the year before, according to Chainalysis. 

As it stands, many large markets have adopted the rule such as: the United States, Germany, Japan, Singapore, Switzerland, Canada, South Africa, the Netherlands, and Estonia.