The Financial Intelligence Centre (FIC) of South Africa has recently published a preliminary directive urging crypto-asset service providers to adhere to the Financial Action Task Force’s (FATF) travel rule. Despite this push to implement FATF’s Recommendation 16, prominent voices in South Africa’s crypto industry raise concerns over potential obstacles that might impede an efficient application of the regulation.

The FIC’s Documentation and Its Effect on CASP Operations
Touched upon in the FIC's recent announcement is a drafted directive focusing on the integration of FATF’s travel rule within accountable crypto-asset service providers (CASPs). Notably, stakeholders like Valr have expressed apprehension regarding the numerous factors that could hinder the seamless implementation of the travel rule, as put forth by the FIC.
In his correspondence with Bitcoin.com News, Farzam Ehsani, Valr’s co-founder and CEO, identified the specified minimum quantum required for crypto asset transfers as one of the potential hindrances to meet the regulation. Furthermore, he highlighted matters concerning the oversight or regulation of CASPs’ engagements with unhosted wallets and the inconsistencies in the global adherence to the travel rule as plausible challenges that may impede successful enactment in South Africa.

Aside from detailing the responsibilities of CASPs or initiators of crypto asset transactions, the FIC’s Preliminary Directive 9 also delineates the requisite guidelines and protocols to be followed when managing unhosted wallets. These operational frameworks must be integrated into the risk management and compliance schemes developed by CASPs, as per Section 42 of the FIC Act’s stipulations.

Enforcement of the Travel Rule and Its Ramifications on End-Users
Moreover, Ehsani has underscored that the enforcement of this recommendation may result in escalated fees or expenses for users. He articulated his concerns, stating:
“It is also broadly worrying that the implementation of the Travel Rule could significantly heighten the compliance costs for CASPs, expenses that eventually trickle down to end-users. Lastly, the FIC must implement a substantial grandfathering period to allow CASPs sufficient time to align with the directives.”

The co-founder of Valr argued that the incorporation of FATF’s Recommendation 16 might lead certain users to transition towards decentralized finance (defi) protocols. He noted that these protocols pose a challenge for enforcing the travel rule, suggesting a necessity for regulators to carefully consider the implications of any new regulatory frameworks.

As per the Financial Intelligence Centre (FIC), the preliminary directive is slated to be deemed effective upon its publication in the Government Gazette. Subsequent to this release, South African CASPs failing to comply with the provisions outlined in the directive will be subject to “administrative sanctions in line with Section 45C of the FIC Act.”