Thread by @BlockchainforEU

#MiCA was not the only proposal completed last week, as 🇪🇺 institutions also finalised the Transfers-of-Funds Regulation (TFR).

The #TFR is meant to implement the @FATFWatch's #travelrule for transfers of #cryptoassets in the EU.

As always, check our 🧵for details:

1/18

First, a bit of #context:

The original Transfers-of-Funds Regulation was established in 2015 and introduced the requirement for financial institutions to accompany each #transfer of funds with verified information about the originator and beneficiary of the transfer.

2/18

As part of its 2020 Action Plan on preventing #moneylaundering and #terrorism financing, the @EU_Commission put forward a legislative proposal for a recast of the original #TFR text with the main objective of expanding traceability requirements to crypto-assets.

3/18

This was also a reaction to the @FATFWatch's updated "Recommendation 16" on Wire Transfers and "Recommendation 15" on Virtual Assets, which required jurisdictions to update their AML/CTF laws to implement the #travelrule on transfers of #cryptoassets.

4/18

The @FATFWatch recommendations stated that regulated entities should be required to collect & verify the information of originators & beneficiaries of #cryptoassets transfers between two regulated entities, so between two Crypto-Assets-Service-Providers (#CASPs).

5/18

However, they also clarified that this info should NOT be #verified for #cryptoassets transactions between a regulated entity (a #CASP) and a non-regulated entity (a self-hosted #wallet), meaning these requirements should be imposed only with respect to their own customer.

6/18

In the 🇪🇺, the discussion on the implementation of the FATF #travelrule showed a strong divide between the co-legislators on how to approach self-hosted wallets, initially referred to as '#unhosted wallets'.

While the @EUCouncil mostly sticked to the FAFT approach...

7/18

... the @Europarl_EN pushed strongly for the introduction of #verification requirements for ❗ALL transfers❗ with self-hosted wallets, which would have forced #CASPs to somehow verify the information provided by their user who wished to transact with a #selfhostedwallet.

8/18

Thanks also to the engagement with 🇪🇺 institutions, which highlighted the consequences this would have had for the key role self-hosted wallets play to access #Web3, the negotiations ended with an agreement that better reflects the #riskbased approach of the @FATFWatch.

9/18

🔷 Main highlights of the #TFR 🔷

▶️Scope

-All CASPs (as defined by #MiCA) become obliged entities.

-#CryptoATMs are in scope.

-P2P transfers are out!

-Only transfers where a #CASP is involved are in scope.

-#NFTs are not subject to the #travelrule.

10/18

▶️Transfer of assets between #CASPs

- #TravelRule applies to ALL transactions between #CASPs.

- CASPs to collect & store info on the originator & beneficiary of transfers, transmitted in #GDPR-compliant way.

-Verification only part of own #customerduediligence process

11/18

▶️Transfer between #CASPs and user's own self-hosted #wallet

-Users of CASPs transferring <1000EUR to their own wallet - no need to verify ownership of wallet.

-For transfers >1000EUR to user's own wallet - CASP needs a #proofofownership (for the first transfer).

12/18

▶️Transfer of assets between CASP and a third-party #selfhostedwallet

-#Risk-based approach - CASP needs to have internal policies and procedures to identify and assess ML/TF risks associated with transfer.

-IF there is a risk identified with the transfer, then...

13/18

... the CASP must take #riskbased measures to either:

(a) verify the identity behind the #wallet;

(b) require additional info on #origin and destination of transfer;

(c) conduct #enhanced ongoing monitoring of those transactions (e.g. using #blockchain analytic tools).

14/18

📖 Guidelines

Withing 18 months from the #TFR entry into force, the @EBA_News will specify which risk-mitigating measures, internal policies and procedures #CASPs can take when they have identified a risk with a transfer to self-hosted #wallets.

15/18

🌪️ Mixers

The @EBA_News will also clarify #risk factors to be taken into account by CASPs when transacting with non-regulated entities, with particular attention to "technologies that favor anonymity" such as #privacy wallets, #mixers or #tumblers.

16/18

⏭️Next steps (1/2)

Q1 2023 - Entry into force

Q3 2024 - Application date, together with #MiCA

↪️ 1 year after entry into force of #AML Regulation - Update of TFR in light of new AML Rules

Q1 2027 - #TFR Review

17/18

⏭️Next steps (2/2)

Q3 2024 - @EU_Commission assessment of need for extra risk-mitigating measures on transfers with #selfhostedwallets

Q2 2022 - Commission + @EBA_News risk assessment of transfers with self-hosted wallets or CASPs in third countries

18/end