CIMA announces July implementation of Travel Rule for VASPs
Paul Byles explains the FATF’s ‘Travel Rule’ and what CIMA’s recent announcement means for Virtual Asset Service Providers in the Cayman Islands.
Gearing up for an active VASP regime
Virtual Asset Service Providers (VASPs) such as cryptocurrency exchanges, trading platforms or custodians in the Cayman Islands will soon be required to formalise their identification and record keeping practices for the transfer of virtual assets, after the Cayman Islands Monetary Authority (CIMA) announced the implementation of the Financial Action Task Force’s (FATF) Travel Rule.
CIMA has said that PART XA of the Anti-Money Laundering (Amendment) (No. 2) Regulations, 2020 will become effective from July 1, 2022. This includes rules based on FATF Recommendation 16, that originating VASPs must obtain and hold accurate information for the originator and beneficiary for virtual asset transfers. The regulations apply where transfers are made either in fiat currency or virtual assets, by traditional wire transfer or virtually between VASPs.
The Travel Rule
The application of the FATF’s wire transfer requirements to virtual assets is widely known as the Travel Rule, which essentially requires providers of virtual assets to collect and share customer data for transactions above a certain threshold. Last year, during its annual review on the progress of crypto regulation, the FATF said that only 58 of its 128 reporting countries had implemented its revised standards, including the Travel Rule, some two years after the FATF had said it would be taking over AML compliance in the crypto sector.
Cayman’s updated AML regulations outline all the new requirements for VASPs in the jurisdiction, including identification, verification and record keeping practices. With the new rules set to apply from July, all registered VASPs and those in the process of registration are required to advise CIMA as to how they will comply with the Travel Rule by March 31, 2022. This submission should include details of their compliance arrangements, relevant policies and procedures and technology tools. Furthermore, as new applicants prepare for registration or to be licensed under the VASP regime, information on compliance protocols with the Travel Rule provisions should now be included as a matter of course,
What does regulation mean for digitisation & Cayman?
Sensible regulation of the crypto space is not something that should concern jurisdictions building infrastructure for digital finance, nor innovators in the rapidly growing $1.5 trillion crypto industry, with Web 3, DeFi and the Metaverse being among the hottest areas of development. Regulation is of course the pathway towards faster global adoption as it will likely provide developers with confidence to build projects and invest. The FATF’s Travel Rule is not especially radical either. It is consistent with the organisation’s risk-based approach, requiring countries to establish rules for crypto companies to adhere to in order to prevent criminals using the financial architecture for illicit purposes.
The important issue for virtual asset providers is that the regulation does not stifle innovation. The Cayman Islands, with the combination of progressive, technology-neutral regulation and the success of the Internet Park at Cayman Enterprise City, is well placed these innovative developments to succeed.
As with regulatory standards in any area, it remains key that new rules are fair and maintain a level playing field across IFCs and onshore jurisdictions. Risks continue to emerge in this area and the FATF has sharpened its focus on providers that market themselves as being decentralised but in effect are not.
The many successes in the digital space are accompanied by examples of the risk exposure, with the recent hack of leading NFT platform OpenSea highlighting some of the gaps that authorities are trying to fill.
What Next?
CIMA has taken a positive step in implementing the FATF Travel Rule and can further differentiate itself as a premier jurisdiction for digital innovation. Next steps for the VASPS operating in the Cayman Islands is to fully understand their obligations under the regulations and to implement the required procedures into their existing AML/CFT policies and procedures.
Contact us to discuss how we can help you meet the deadline to be ready on 1st July 2022.
About the author:
Paul Byles
Paul Byles is Director of FTS, which provides regulatory consulting services. He is a former director of Deloitte Cayman Islands and former Head of Policy at the Cayman Islands Monetary Authority. His regulatory and risk management experience includes serving as the draftsman for the original Anti Money Laundering Guidance notes while at CIMA as well as researching. He is well known for development of AML policies and procedures and has acquired significant knowledgeable on the Cayman Islands’ regulatory framework for Virtual Asset Service Providers (VASP).
Paul is one of the founders of Digital Cayman, the newly established industry wide representative body for the tech sector in the Cayman Islands. In 2017, Paul founded the Cayman Islands Digital Economy Conference (CYDEC) which focuses each year on bringing international speakers and updates on topics such as blockchain, cybersecurity, fintech, reg tech, and virtual assets among other tech topics.
Read Paul’s full bio here.
