Global Digital Finance (GDF), the cryptoassets and digital finance industry membership body, is warning that potential plans proposed by the US Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve to amend the Travel Rule threshold for funds transfer that begin or end outside the United States from $3,000 to $250, could negatively impact financial inclusion, increase compliance costs needlessly, and be counter-productive.
It also says there has been a lack of rigorous cost-benefit analysis around the potential change, particularly in relation to virtual currencies.
Lawrence Wintermeyer, Executive Co-Chair GDF said: “We propose that implementation of the proposed rule be suspended until a full cost-benefit analysis can be undertaken, taking into account the likely impact on financial inclusion as well as the consequences thereof, and a more comprehensive estimate of the costs of complying with the proposed rule.” The body has outlined its reasons below for its view on lowering the travel rule threshold.
Lowering the Travel Rule threshold will negatively impact financial inclusion
GDF argues the proposed rule change will increase the record-keeping burden for financial institutions and money services businesses that serve low-income individuals who tend to transfer amounts in a range between the proposed and current thresholds. GDF says this will impact millions who would find it increasingly difficult to comply with customer information provisions and the related record-keeping provisions attendant to the Travel Rule and increase the burden and friction faced by individuals reliant on safe, secure and formal remittance channels.
It says the potential negative impact of the proposed rule on the convertible virtual currency (CVC) sector is of particular concern. CVCs present a transformative opportunity to expand financial inclusion by providing a viable alternative to payment products and services that are currently inaccessible or unreasonably costly to access for large segments of society.
It adds that remittances (and international payments more broadly) are increasingly being facilitated via these channels given the cost and time efficiencies afforded to many who are challenged to do so through traditional money services business/money transfer operator (MSB/MTO), existing banking/payment rails and alternative fiat-based payments channels.
Lowering the Travel Rule threshold could be counter-productive
GDF says that in addition to the negative social impact of reduced financial inclusion, there is a risk that affected individuals will seek out alternative, unregulated remittance channels, thus bolstering the viability of unregulated money services businesses and decreasing the transparency of remittances and payments made at low-value thresholds, which would ultimately reduce the overall effectiveness of the AML/CFT regime.
Lowering the Travel Rule Threshold will increase compliance cost
GDF says the proposed rule change will inevitably lead to an increase in compliance costs for affected businesses. In particular, the obligation imposed by the Travel Rule to verify that the sender information is correct, seems likely to result in a significant increase in the proportion of customers that money services businesses will be required to introduce. The resultant increase in costs could cause some money services businesses to cease offering cross-border remittances, reducing competition and potentially further raising the barriers for consumers to access these services, and driving more consumers towards unregulated remittance channels.
According to analysis published by blockchain analytics firm Ciphertrace, lowering the Travel Rule threshold to $250 will drastically increase (by at least 250%) the number of CVC transactions that are subject to the Travel Rule, potentially triggering more than one million compliance events.
Additionally, there are a number of CVC business models (e.g. a VASP processing CVC payments for merchants) where the typical transaction value is below $3,000 and, therefore, do not trigger the Travel Rule requirements.
Reducing the threshold will result in a steep change in the cost of compliance incurred by these VASPs, likely changing the economics of such business models.
A lack of rigorous cost-benefit analysis, particularly in relation to virtual currencies
GDF argues it appears that the data analysis performed regarding the potential Travel Rule change relates solely to transfers and transmittals of funds other than virtual currencies and it failed to consider any data specific to virtual currencies. It says a more comprehensive assessment of the impact of the change needs to be conducted.
Jeff Bandman, GDF Board Member and the Founding Director of LabCFTC said: “What concerns me most is the complete lack of data analysis to support moving the threshold to $250 for virtual currencies. There is none. Zero. A cost-benefit analysis should be evidence-based. They haven’t used any data specific to virtual currencies to justify this.”
Meanwhile, Amit Sharma, GDF AML Working Group Co-Chair and CEO FinClusive added: “A fundamental concern is that this proposed change will have significant negative impacts for the millions who rely on small-dollar remittances and are increasingly looking to VASP channels. The consequences to financial exclusion must be considered before changes like these are imposed to this growing sector.”
