“Money laundering” and “Terrorist Crimes” are most of the time initiated with the help of cryptocurrency transactions that could be performed anonymously, which help the users to hide their identity. To stop the malicious activities, there is a rule declared by the regulatory authorities which is the “ Crypto Travel Rule”. With the help of this rule, users can be revealed in case of performing malicious activities. To know more about this rule let’s deep dive into the article!
What's the Crypto 'Travel Rule,' and What Does It Mean for You?
The crypto "Travel Rules" are a kind of rule declared by the regulatory authority such as Financial Crimes Enforcement (FinCEN) in the United States and the Financial Conduct Authority (FCA) in the United Kingdom. In these rules for each user that is underlying the crypto technologies with the aim to utilize the crypto or blockchain services, the very first step which is taken by all those services is to take the complete detail of their utilizers or users. This information includes user name, national identity, and any government document (passport, driving license, or other). All this information is taken by the Decentralized Exchanges (DEX), Centralized Exchanges (CEX), and Decentralized Finance (DeFi) and the purpose behind knowing all about their customers. Later on, they provide an extra level of security and defend against malicious activities (such as Money Laundering, Terrorist Financing ) to their customers by using such information.
The Travel Rule is similar to the rules and regulations that apply in traditional financial systems such as banks. Here, the main difference between the traditional financial system and the cryptocurrency financial system is that in the traditional you need to submit all your details to the bank, on the other hand in the cryptocurrency financial system you need to submit your information to reputable crypto exchanges.
Like all traditional financial services, there are also law enforcement agencies that enforce the regulations on cryptocurrency businesses. If I talk about traditional financial services which are regulated by the jurisdiction according to their own rules and regulations. Banks in this country are subject to Financial Conduct Authority (FCA) regulation, just like in the United Kingdom. On the other hand, cryptocurrency businesses are regulated by the FinCEN and FCA as I discussed above.
The main objectives of the Crypto Travel Rule are to prevent the financing of terrorism and money laundering.. According to this rule, the user cannot perform even a single transaction without revealing its true identity to the cryptocurrency businesses. Through this, it can be tracked and monitored in case of malicious activities. However, in Bitcoin cryptocurrency, each transaction can be performed anonymously or without revealing their personal identity.
Bitcoin transactions are pseudonymous which means each transaction is stored on the distributed ledger and the user's identity cannot be revealed directly. But here, the users can be tracked through the exchange that they are using to perform transactions. Because each transaction required KYC/AML (Know Your Customer/Anti-Money Laundering) verification.
Overall, Crypto Travel Rules are declared by regulatory authorities such as FinCEN and FCA. This kind of rule is enforced on each crypto business to keep the proper record of their client. So that in case of any malicious activity performed by using any exchange or other crypto business can be detected and revealed. And if any crypto business doesn’t follow the crypto travel rules will be fined by the regulatory authority and in some cases may be shut down permanently.