On 28 October 2024 the Isle of Man implemented the Travel Rule (Transfer of Virtual Assets) Code 2024— marking a pivotal moment for businesses providing Virtual Asset services from the island. The Code, which mandates the collection and transfer of specific information relating to Virtual Asset transactions, introduces the requirements as set out by the Financial Action Task Force’s (FATF) Recommendation 16, commonly known as the Travel Rule, into the island's regulatory framework aligning it with international standards.
The Isle of Man's current Regulatory Framework and the introduction of VASP's
The Isle of Man introduced the concept of Virtual Assets into its regulatory framework in 2015 with the addition of the Convertible Virtual Currency (CVC) Activity definition In the Proceeds of Crime Act and the inclusion of businesses carrying out CVC activities within the remit of the Designated Businesses (Registration and Oversight) Act 2015. Under the Designated Businesses Act, businesses undertaking CVC activities must register with the Isle of Man Financial Services Authority and adhere to AML/CFT regulations, particularly the AML/CFT Code of 2019.
The above regulatory framework remains in place despite two separate public consultations exploring the possibility of creating a full licence category for certain Virtual Asset activities. However, in paving the way for the Travel Rule Code, certain amendments to existing regulations, one of which relates specifically to how the Isle of Man defines Virtual Asset businesses, needed to be made.
As of 25 October 2024, the existing, broad, and somewhat unique, CVC definition has been replaced by the more commonly used Virtual Asset Service Provider or VASP definition, with five specific categories of VASP activities namely:
Participation in and provision of financial services related to an issuer’s offer and/or sale of a Virtual Asset.
A natural or legal person falls within the definition of a VASP if it undertakes any of the above activities by way of business on behalf of, or for another natural or legal person.
The new definition provides some clarity concerning activities undertaken by a VASP and also aligns the Isle of Man with the terminology used by the FATF in Recommendation 16.
The Travel Rule Code itself also includes a new definition for an intermediary VASP or iVASP which constitutes a VASP that provides services to another VASP and not directly to any underlying parties to a Virtual Asset transaction.
Understanding the Isle of Man’s Travel Rule Code
The Travel Rule Code follows the key principles in the FATF’s Recommendation 16, requiring VASPs to share information about the originator and beneficiary of Virtual Asset transfers and retain such information for potential review by authorities.
In the case of an Isle of Man registered VASP receiving Virtual Assets, the Travel Rule Code stipulates the requirement to have effective risk-based policies and procedures in place for identifying any deficiencies in specified information provided and taking steps to remediate such deficiency or make an internal disclosure.
It is important to note that not all Virtual Asset transfers fall within the scope of the Travel Rule Code. Specific exclusions would be:
Notably, the Travel Rule Code does make reference to instances where an Isle of Man VASP facilitates an unhosted wallet transfer. In these instances, the Isle of Man VASP is required to request specified information directly from its client. Positively, the Travel Rule Code does not try to prevent the use of or interaction with unhosted wallets though an effective means of proving ownership and control of unhosted wallets can still be problematic which increases the risks associated with these transactions.
Other notable points within the Travel Rule Code include:
Conclusion
The introduction of the Travel Rule Code 2024 is an example of the Isle of Man continuing to take proactive measures in meeting its international obligations and reducing the facilitation of money laundering, terrorist financing, and proliferation financing.
Despite best efforts by local regulators, the effective implementation of the Travel Rule is not a simplistic matter, with significant operational, financial, and regulatory compliance considerations. The global speed of adoption and different interpretations of Recommendation 16 further complicate matters where inconsistency of its implementation may result in Isle of Man VASPs having significant difficulty in meeting their local regulatory obligations where counterparties are located in jurisdictions which do not yet have equivalent regulations in place.
The Travel Rule as it applies to VASPs will undoubtedly continue to evolve and develop as global adoption increases and the Virtual Asset sector starts to mature. It is however very important that VASPs operating the Isle of Man are aware of their obligations under the Travel Rule Code 2024 as applied alongside the AML/CFT Code of 2019 and that active steps are taken to ensure compliance with those obligations.
How Suntera Digital Can Help
For further information on this topic or to discuss how Suntera Digital’s services may align with your needs, please feel free to get in touch using Kyle's details below. For more details on our core corporate services for digital businesses , please visit the Suntera Digital overview page.
Key Contact:
.jpg?width=204&height=148&name=Kyle%20Brits%20_%20Profile%20(April%202023).jpg)
Kyle Brits
HEAD OF FINTECH AND VIRTUAL ASSETS, SUNTERA DIGITAL
