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The European Parliament, in a bold move during April 2023, passed the Transfer of Funds Regulation (TFR), a crucial step in implementing the Financial Action Task Force’s (FATF) renowned “Travel Rule” throughout the European Union (EU). Brace for impact, as this regulation ensures complete transparency when it comes to transactions involving fiat currencies or even cryptocurrencies. 

What exactly does this mean for the EU’s financial landscape?  

The TFR expands the reach of the “Travel Rule” to include Crypto Asset Service Providers (CASPs), leaving no room for evasion. This implies that CASPs must now adhere to the same transparency requirements that traditional financial institutions have been obligated to follow for years. The regulation casts its wide net over a range of entities, encompassing Payment Service Providers (PSPs), which encompasses financial institutions and individuals providing payment services, CASPs themselves, and intermediaries involved in fund transfers. 

Which transactions fall under the TFR’s watchful eye? 

The regulation covers a variety of transfers, such as those involving funds in any currency, transfers of crypto-assets, electronic money tokens utilised for electronic transfers with payment cards, electronic money, mobile phones, as well as transactions involving crypto ATMs or self-hosted wallets, if CASPs are involved. 

 While FATF Recommendation 16 previously stipulated that transactions exceeding €1000 must adhere to the Travel Rule, the TFR takes a more stringent approach, encompassing all fund transfers and crypto transfers regardless of amount. However, PSPs and CASPs only need to verify information for transactions exceeding €1000. 

 It’s worth noting that the TFR even encompasses transactions surpassing €1000 originating from self-hosted wallets, those privately owned by individuals holding crypto assets, but only when they involve interactions with hosted wallets managed by CASPs. 

 Let’s explore the information that must “travel” alongside each transfer 

Originator information consists of the name of the originator, the originator’s distributed ledger address or crypto-asset account number, the originator’s address including the country, official personal document number or date and place of birth, the current Legal Entity Identifier (LEI) or any other equivalent official identifier. 

On the other hand, beneficiary information must include the name of the beneficiary, the beneficiary’s distributed ledger address, the beneficiary’s account number (if applicable), and the current LEI or any other equivalent official identifier. 

Exceptions exist within the TFR. The regulation does not apply to fund transfers where the payer withdraws cash from their own payment account, transfers involving payments to authorities for taxes, fines, or other levies, or when both the payer and the payee are payment service providers acting on their own behalf. Additionally, certain exemptions within the crypto realm include transfers of crypto assets where both the originator and beneficiary are crypto-asset service providers acting on their own behalf or person-to-person transfers of crypto-assets conducted without the involvement of a crypto-asset service provider. 

What happens if a PSP fails to comply with the Transfer of Funds Regulation? 

For the competent authorities will establish sanctions and measures for those who breach the regulation’s requirements. Compliance is not optional. 

When can we expect the TFR to become effective? 

As soon as this forthcoming regulation, superseding the previous EU2015/847 regulation, is published in the Official Journal of the European Union, it will become effective within 20 days. This means that it will be compulsory and enforceable throughout all EU member states. 

With the TFR in full force, the EU is demonstrating its unwavering commitment to combat money laundering and terrorism financing head-on. Prepare for a new era of financial transparency, where the Travel Rule becomes an integral part of the EU’s arsenal against illicit activities.