The Crypto Travel Rule, as mandated by the Financial Action Task Force (FATF), requires Virtual Asset Service Providers (VASPs) to share specific information for transactions over a certain threshold. 

However, the staggered implementation timelines, known as the "Sunrise Period," pose significant compliance challenges across the globe. This blog dives into these challenges and offers strategies for VASPs navigating this difficult time.

Understanding the Sunrise Issue

The Sunrise Period refers to the timeframe during which the Travel Rule is not uniformly implemented across jurisdictions. This period is fraught with challenges as VASPs in different regions are subject to varying compliance timelines. As of the latest FATF updates in June 2023, many jurisdictions have yet to fully implement the Travel Rule, leading to a patchwork of compliance standards worldwide.

Challenges Faced by VASPs During the Sunrise Period

VASPs face significant hurdles during the Sunrise Period due to the practical difficulties encountered in the data transfer process required by the Travel Rule. 

Let's break down these challenges into three main areas:

1. Difficulty Sending a Travel Rule Data Transfer
   Compliance with the Travel Rule necessitates that the originator VASP collects and transmits information about both the originator and the beneficiary to the beneficiary VASP. However, uneven implementation across jurisdictions means that many beneficiary VASPs are not yet equipped to receive and protect this information adequately. 
   
   This gap in compliance capabilities can leave the originating VASP unable to fulfill its core obligations, significantly impacting transaction flows. Recent survey results highlight a shift towards stricter compliance enforcement, with the percentage of VASPs that do not allow withdrawals unless a Travel Rule message can be transmitted to the beneficiary VASP nearly tripling from 8% last year to 23% this year.
   
   
2. Difficulty Receiving a Travel Rule Data Transfer
   The challenges are not only limited to sending information. If the originator VASP has not started transmitting Travel Rule data, the beneficiary VASP faces significant barriers in assessing the information about the originator, which is crucial for completing the transaction in a compliant manner. Depending on the regulatory approach of the country in question, the beneficiary VASP might need to restrict access to these transactions. Such restrictions can have a substantial operational impact on business. 
   
   Furthermore, it's noteworthy that a significant 37% of survey respondents reported that they did not receive any Travel Rule information for a substantial number of transactions, illustrating the scale of this issue.
   
   
3. Difficulty Screening the Transaction’s Counterparty
   The Sunrise Issue also complicates the screening process of the transaction’s counterparty. Typically, an originator VASP would verify the beneficiary's information provided by their customer before attempting to transmit this data. However, without confirmation from the beneficiary VASP that the information is accurate, the originator cannot be sure of its validity. This uncertainty makes the screening results unreliable and the transactions risky. 
   
   Likewise, beneficiary VASPs face challenges when they receive deposits without the required originator information. This scenario makes it easier for illicit actors to exploit the system by using inaccurate counterparty information to bypass VASP screening processes.
   

These challenges underline the intricate difficulties that arise from the staggered implementation of the Travel Rule across different jurisdictions. They not only affect the efficiency of transaction processes but also raise significant compliance and operational risks for VASPs operating internationally.

Regulatory Landscape and Progress

Although the FATF sets the global standards, it does not enforce them directly. Instead, it relies on member countries to implement these standards within their jurisdictions. The FATF continues to issue guidance and monitor progress, but many countries lag behind in their implementation efforts. Specific examples from countries like South Korea, Japan, and the UK illustrate the diverse approaches to implementing the Travel Rule, each with its own set of challenges and solutions.

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Approaches to Sunrise Issue Challenges 

In this section, we discuss what can be done about the challenges arising from the Sunrise Issue, initiatives that are already in place at various stakeholder levels, and which stakeholders are best positioned to drive solutions to this issue.

The FATF

The FATF’s mandate is to set recommendations that are, themselves, not legally binding. The FATF relies on member jurisdictions to incorporate these recommendations and enforce the Travel Rule for VASPs within the jurisdiction’s regulatory ambit. Thus, the FATF is not in a position to resolve the Sunrise Issue challenges. 

Nonetheless, the FATF uses a number of methods to encourage national regulators and the private sector to action:

1. The FATF has issued a number of guidance documents aimed at helping regulators and VASPs navigate a path toward Travel Rule adoption and tackle some of the more challenging aspects thereof. We’ve highlighted some of these guidance instruments in Chapter 1, which can serve as a very useful tool for stakeholders at all levels. The FATF has also formed the Virtual Assets Contact Group (VACG), which will continue to conduct outreach and provide assistance to low-capacity jurisdictions to encourage their compliance with the Travel Rule.
   
   
2. The FATF has continued to monitor and report progress of Travel Rule adoption. In the FATF’s June 2023 Targeted Update, the FATF reiterated that jurisdictions have made insufficient progress and thus calls on regulators to urgently implement the Travel Rule. [1]
   
   
3. Perhaps the most effective method is the FATF-maintained call-to-action and increased monitoring lists, where it identifies jurisdictions with weak measures to combat AML/CTF. These lists are publicly available and are updated three times a year following the FATF’s review and mutual assessments of jurisdictions. 

   
   For counties on the call-to-action list, the FATF calls on jurisdictions to apply enhanced due diligence (EDD), and in the most serious cases, to apply countermeasures to protect the international financial system from the ongoing money laundering, terrorist financing, and proliferation of financing risks that emanate from the flagged countries. 
   
   The increased monitoring list includes countries that are actively working with the FATF to address money laundering/ terrorist financing deficiencies. Alignment with the FATF’s guidelines on VAs and VASPs, including enforcement of the Travel Rule, is expected to become increasingly relevant for the assessment of a country’s regimes to counter money laundering, terrorist financing, and proliferation of financing risks.

Regulators

The most effective way to resolve the Sunrise Issue challenges is with a swift implementation of the FATF’s requirements.

When implementing the Travel Rule, national regulators are the ones to determine how their Travel Rule framework will address the Sunrise Issue. According to data that the FATF shared in its June 2023 Targeted Update, 11 of 62 jurisdictions that have implemented the Travel Rule or are in the process of doing so have allowed a grace period for Travel Rule compliance, during which there are exemptions or flexibility in how VASPs are expected to comply in order to mitigate the effects of the Sunrise Issue [2]. 

Additionally, some jurisdictions expressly qualify how domestic VASPs can interact with foreign counterparts. 

For example:

• Regulators in South Korea acknowledge that overseas VASPs may not yet be required or prepared to comply with the Travel Rule. To deal with this, the South Korean framework allows Korean VASPs to facilitate transactions with overseas VASPs only when the Korean VASP is able to confirm that the customer is sending funds to an account held in their own name and that the money laundering/terrorism financing risks are low. (Financial Services Commission, 2022).
• In Japan, if the transaction counterparty is located in a region without Travel Rule enforcement, Japanese VASPs have no obligation to share PII. In these cases, Japanese VASPs are still required to collect and retain information about the counterparty and assess money laundering/terrorist financing risks. 
• In the U.K., an FCA statement establishes that when a beneficiary VASP is located in a jurisdiction non-compliant with the Travel Rule, the originator U.K. VASP is still required to collect and retain information about the counterparty and assess money laundering/
  terrorist financing risks but may proceed with the transaction without transmitting the information. Additionally, when a U.K. VASP receives a transaction without the required Travel Rule information, the U.K. framework allows the VASP to make a risk-based determination on whether to make the VA available to the beneficiary, taking into account the status of Travel Rule regulations in the jurisdiction where the originator VASP operates. 
  
  Learn more about the Japanese and British regulatory frameworks in Chapter 2 of the 2024 State of Crypto Travel Rule Compliance Report.

Joint Industry Initiatives

Joint industry initiates also play a role in resolving the Sunrise Issue.
Many industry working groups that operate on a national level, like the CryptoUK Travel Rule Working Group, have successfully engaged with national regulators to encourage the implementation of proportionate measures to mitigate the negative effects of the Sunrise Issue.
Groups like these should continue engaging with VASPs and regulators to encourage rapid implementation. 

Travel Rule Solutions

Similar to joint industry initiatives, Travel Rule solutions like Notabene’s SafeTransact can play a role in resolving the Sunrise Issue by increasing policymakers’ awareness of the problems and proposing creative solutions that facilitate VASPs’ operations during this period.

With these challenges in mind, Notabene launched the SAFE Implementation phases. This step-by-step onboarding program is designed to help our clients navigate the intricacies of Travel Rule compliance efficiently, particularly throughout the Sunrise Period. Throughout their journey using the SAFE Implementation phases, VASPs can gather valuable analytics that they can use to create a clear roadmap toward achieving full compliance. 

Additionally, Notabene offers a free SafeTransact-Rise plan tailored for VASPs that are not yet required to comply with the Travel Rule but wish to avoid being cut off from compliant transaction flows. The SafeTransact-Rise plan allows VASPs to receive and respond to Travel Rule
transfers, with no technical integration effort required.

VASPs

When trying to mitigate the challenges identified above, VASPs tend to take a variety of approaches. These approaches depend largely on what national mandates require or, when these frameworks are silent, what risk-based practices begin to emerge to compensate. 

We uncovered some of these practices in this year’s survey, which are listed below by order of popularity:

In withdrawals:

• 40% of the VASPs surveyed report taking a risk-based approach to determine whether or not to allow a transaction when they are unable to send Travel Rule information to the beneficiary VASP.
• 23% percent of the VASPs surveyed currently do not permit transactions unless they are able to send Travel Rule information.
• 19% of the VASPs surveyed allow their customers to transact, irrespective of whether they are able to send Travel Rule information.
• Only 3% of the surveyed VASPs only proceed with the withdrawal provided that the information can be sent to the beneficiary VASP and a response is received.

In deposits:

• 30% take a risk-based approach to determine whether or not to make a deposit available to the end customer in cases when the required Travel Rule message is not received from the originator VASP.
• Upon detecting a deposit without information/with missing information, some respondents send a request to provide missing information to the originator VASP. In the case the information is not provided, 21% return the funds and 10% opt to collect the information from their end customer.
• Of respondents, 19% allow customers to receive deposits regardless of whether the required Travel Rule information was received.
• 20% of respondents report taking other approaches. By way of example, one respondent reported allowing their customers a grace period before enforcing blockers. Others report only allowing first-party deposits and requiring their customer to demonstrate they control the source wallet.
  

These results indicate that a majority of VASPs currently adopt a risk-based approach to compliance limitations. However, stricter approaches are gaining popularity, possibly because of growing regulatory pressure. Notably, 23% of the surveyed VASPs currently prohibit transactions unless they can send Travel Rule information, and a similar percentage (21%) returns funds unless the required Travel Rule information is received.

2024 Status Check 

At present, some solutions are available to mitigate some of the friction caused by the Sunrise Issue, but its negative impact continues to severely affect VASPs in jurisdictions with Travel Rule obligations. While there is work that can be done by stakeholders at all levels, the power to solve
the Sunrise Issue ultimately lies with national regulators and policymakers in jurisdictions that have not yet introduced Travel Rule legislation/regulation. These regulators need to urgently implement
and operationalize the Travel Rule through effective supervision and enforcement action, using the available FATF resources and in consultation with the industry.

Conclusion

The Sunrise Issue remains a formidable challenge in the path to global Travel Rule compliance. By understanding the complexities involved, staying engaged with regulatory developments, and employing flexible technological solutions, VASPs can navigate this evolving landscape more effectively. As the industry continues to mature, collaborative efforts and adaptive strategies will be key to overcoming these hurdles.

This article explores the intricacies of the crypto Travel Rule, which is not merely an information exchange mechanism but also a powerful tool that companies can use to mitigate pre-transaction risks (including sanctions risks) and unlock new opportunities. We explore the rule’s purpose, objectives, and core components: VASP identification, due diligence, transaction qualification, information collection, and pre-transaction counterparty risk assessment.

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The Crypto Travel Rule: A Shield Against Illicit Activities

The Travel Rule presents a robust safeguard against money laundering, fraud, and other illicit activities within the cryptocurrency landscape. Introducing stringent information exchange requirements creates a powerful barrier against criminals seeking to obscure the origin of their funds. However, it is essential to understand that the Travel Rule transcends mere data transmission. When executed effectively, the Travel Rule enables virtual asset service providers (VASPs) to stop potentially illicit transactions before they are created on the blockchain, significantly reducing VASP’s overall risk and exposure to sanctions — a pivotal development for the crypto industry.

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Pre-Transaction Travel Rule Implementation: A Defensive Tactic

Crypto transactions are immediate and irrevocable, a sharp contrast to traditional SWIFT payments, where settlements occur at scheduled intervals during the day, allowing beneficiaries time to request fund withholdings in the case of discrepancies, such as a mismatched beneficiary name. In crypto transactions, it’s essential that VASPs exchange information before settling the underlying transaction. Once funds are transferred, remediation becomes operationally burdensome — and in some cases, the risk may already have entered the VASPs’ spheres. 

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A pre-transaction implementation of the Travel Rule ensures that VASPs can perform critical risk assessments like beneficiary name matching and sanctions screening before receiving funds and, depending on their systems, before releasing funds to the end customer.

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The Travel Rule: Bridging the Gap Between Crypto Transactions and Real-World Entities

In addition to being a powerful counterparty risk mitigation tool, the Travel Rule is an indispensable infrastructure layer for crypto transactions because it establishes a connection between crypto activities and real-life individuals and entities.

Bridging this gap is essential for three reasons:

• Enhancing sanction controls: Before implementing the Travel Rule, VASPs conducted transactions with minimal information about their counterparties, leaving them vulnerable to potential risks. Now, the Travel Rule is a catalyst for reconstructing trust within the crypto space by enhancing sanction controls and counterparty risk management.
  
  
• Enabling new use cases: The Travel Rule opens the door to novel crypto transaction applications previously hindered by the lack of traceability. Traceability is crucial for several use cases (e.g., for accounting purposes) and paves the way for broader adoption of crypto payments and transactions.
  
  
• Preventing fraud: Fraud is a pervasive issue in crypto, and the Travel Rule addresses this problem by fostering collaboration among VASPs. This collaborative effort allows VASPs to verify the parties involved in a transaction collectively. For instance, if Alice initiates a transaction and informs her VASP that the funds are destined for her friend Bob’s account with another VASP, the beneficiary VASP can raise a red flag if the funds are actually being received by Daniel, a fraudster who has deceived Alice. 

‍Ultimately, when strategically implemented as a pre-transaction risk mitigation tool, the Travel Rule boosts the security of crypto transactions and opens up new horizons for the industry that could redefine how we interact with digital assets. 

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The Travel Rule is a robust safeguard against money laundering, fraud, and other illicit activities within the cryptocurrency landscape. By fostering a culture of proactive compliance and collaborative risk management, VASPs can unlock new dimensions of trust and operational excellence.

In February 2023, the Financial Action Task Force (FATF) Plenary observed a significant gap in the implementation of its revised Recommendation 15 in what concerns virtual assets (VAs) and virtual asset service providers (VASPs). Despite the October 2018 revision aimed at integrating and extending measures such as the Travel Rule to VAs and VASPs, numerous countries had not yet implemented these updated requirements.

To address this, the Plenary outlined a roadmap aimed at fortifying the implementation of FATF Standards concerning VAs and VASPs. This roadmap included conducting a comprehensive assessment of implementation levels across the global network. Today, the fruition of this commitment comes to light. 

After a 12-month process of collecting and evaluating relevant information, the FATF published a report on the Status of implementation of Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity. 

This report features a detailed table evaluating various jurisdictions on key components such as:

• Risk assessment pertaining to VAs and VASPs
• Prohibition of VAs and VASPs
• Enacted legislation mandating VASP registration/licensing and application of AML/CTF controls
• Operational registration/licensing of VASPs
• Supervisory inspections on VASPs
• Enforcement/supervisory actions against VASPs
• Implementation of Travel Rule legislation

The jurisdictions under scrutiny include all FATF members and 20 non-FATF member jurisdictions deemed as hosting materially important VASP activities due to meeting the following criteria:

• Trading volume exceeding 0.25% of global trading and/or
• Having over 1 million users of virtual assets.

The evaluation published today is based on the responses provided by jurisdictions to the FATF's 2023 self-reported survey, which have been updated between January and March 2024. The FATF emphasizes that while informative, this data does not substitute a mutual evaluation or follow-up assessment of countries' compliance with Recommendation 15 as it has not been subject to a detailed analysis as per the FATF methodology. 

Three Key Insights from FATF’s Global Evaluation of Virtual Asset Regulation 

The data shared by the FATF provides three significant insights into how jurisdictions with materially important VASP activity are managing the sector:

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1. There has been an impressive progress on Travel Rule legislation
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Nearly 89% of jurisdictions with materially important VASP activity have either enacted or are in the process of enacting Travel Rule legislation. Only Australia, Iceland, Russia, South Africa, Ukraine, and Vietnam have yet to initiate this process.

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2. More than 90% of jurisdiction implement regulatory measures

Over 90% of jurisdictions with materially important VASP activity have implemented crucial measures to regulate and supervise VAs and VASPs. 91.2% conducted a risk assessment covering VAs and VASPs, while 90.7% enacted legislation mandating VASPs' registration or licensing and compliance with AML/CTF requirements. Similarly, 90.7% conducted supervisory inspections on VASPs.

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3. Only three jurisdictions prohibit virtual assets

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Only three jurisdictions with materially important VASP activity have explicitly prohibited VAs and VASPs: China, Egypt, and Saudi Arabia. 

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Goals of FATF’s Global Evaluation

The publication of this report serves three primary objectives:

• Enable the FATF network to assist jurisdictions with materially important VASP activity in regulating and supervising VASP activity;
• Encourage jurisdictions with materially important VASP activity to promptly implement Recommendation 15;
• Aid regulators and the private sector in discerning the status of Recommendation 15 implementation by jurisdictions with materially important VASP activity.

This last objective is particularly pertinent to Travel Rule compliance, especially in cross-border transactions involving VASPs based in jurisdictions not yet enforcing Travel Rule requirements (the Sunrise Issue).

For instance, in the United Kingdom, the Financial Conduct Authority (FCA) issued a communication on August 17, 2023, outlining more flexible obligations for UK VASPs when transacting with counterparts from jurisdictions without enforced Travel Rule requirements. The operationalization of this FCA guidance hinges on understanding the status of Travel Rule implementation in the counterparty's jurisdiction—a task now greatly facilitated by this new resource published by the FATF.

A Roadmap to Move Forward With

In conclusion, the release of FATF's report on the Status of implementation of Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity marks a significant milestone: insights into the global landscape of crypto regulations shed light on the progress made and areas requiring further attention.

The findings underscore a collective commitment among jurisdictions with materially important VASP activity to enhance regulatory frameworks and compliance measures. Notably, the majority have taken decisive steps towards implementing Travel Rule requirements and strengthening supervision over VAs and VASPs. 

Moving forward, the objectives outlined in the report serve as a roadmap for continued collaboration and improvement towards a more robust and secure ecosystem for virtual assets.

Throughout 2023, the landscape of Travel Rule compliance was marked by a series of developments, from regulatory updates to strategic shifts in countries’ crypto stances. This article provides a comprehensive view of key milestones and strategic changes in various countries, underlining the year's pivotal role in shaping global Travel Rule compliance standards.

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An Overview of Key Crypto Travel Rule Milestones and Developments in 2023

NEW YORK, SINGAPORE, LONDON - March 12, 2024

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- Notabene, the leader in pre-transaction decision-making and Travel Rule compliance solutions, today released its third annual State of Crypto Travel Rule Compliance Report 2024. This year's findings highlight a remarkable compliance milestone: 96% of surveyed financial and crypto institutions are now compliant or on the path to compliance this year, showcasing significant industry-wide progress.

Based on a survey of 70 leading institutions worldwide, the report reveals a substantial increase in regulatory diligence and a commitment to the Travel Rule—an anti-money laundering framework introduced by the Financial Action Task Force (FATF) to virtual asset service providers (VASPs) in 2019. This framework aims to bolster transparency and security in crypto transactions. Notable findings from the report include a 187.5% surge in firms restricting non-compliant transactions and a significant leap in due diligence practices, with 64% of entities now verifying counterparties before transacting.

Pelle Braendgaard, CEO of Notabene, reflects on the progress, stating, "The industry is making great strides towards enhanced security and regulatory compliance. Embracing the insights from the latest State of Crypto Travel Rule Compliance Report will further drive our collective progress towards a unified financial ecosystem."

The report also uncovered that significant challenges, such as protocol interoperability, remain despite these advancements. A significant portion of respondents identified the lack of protocol interoperability as their primary hurdle to full compliance. Additionally, 37% reported never having received a Travel Rule message,  further highlighting interoperability issues. Full compliance for the 37% of VASPs that have not received any Travel Rule messages could bring a significant and potentially disproportionate impact on business, as it would require them not to accept any deposits.

The report offers actionable insights for navigating the complexities of global compliance, advocating for flexible regulatory frameworks and improved technology solution interoperability.

For an in-depth analysis and recommendations, access the complete report on notabene.id.

-ENDS-

For media inquiries or further information about Notabene and Shift Markets, please contact: [email protected]

About Notabene:

Notabene developed the crypto industry's only pre-transaction decision-making platform, enabling customers to identify and stop high-risk activity before it occurs. With a focus on security, privacy, and user experience, Notabene's multi-source data and software enables real-time decision-making, counterparty sanctions screening, self-hosted wallet identification, and more. SOC-2 security certified and trusted by over 100 companies, Notabene operates globally with headquarters in New York, and presence in Switzerland, Singapore, Germany, and the United Kingdom.

Companies like Copper, Luno, Crypto.com and Bitstamp leverage our  SafeTransact platform for Travel Rule compliance, tailored to their needs and aligned with global and local regulations. Our platform builds trust in virtual asset transactions to foster financial growth with minimized risk.

Get started today; sign up for our free SafeTransact Rise plan to respond to regulated transactions for free using the world's largest VASP Network. 

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In the past year, the crypto compliance landscape has seen remarkable developments, leading to the widespread adoption of Travel Rule compliance. By the end of 2024, the Travel Rule is expected to see mass adoption, but not without bringing its operational complexities. This article explores critical trends and introduces Notabene's solutions to these evolving regulations.

Global Adoption: Setting the Stage for Universal Compliance

The past year has marked a significant shift towards regulatory alignment on a global scale. The United Kingdom, with the third highest transaction volume worldwide, adopted the Travel Rule, meaning that the regulation will cover a substantial volume of global transactions.

The European Union, through the Transfer of Funds Regulation, has set a new precedent, standardizing crypto Travel Rule requirements across its 27 member states. In the Asia-Pacific region, countries like Hong Kong and the United Aarab Emirates (UAE) have integrated Travel Rule compliance into their crypto business licensing frameworks. Eighty VASPs are currently looking to establish their presence in Hong Kong, and 1000 firms have applied to register under Dubai’s Virtual Asset Regulatory Authority. Given their substantial crypto asset transactions, India and Japan's adoption of the Travel Rule underscores the global momentum towards standardized regulatory practices. Their compliance is particularly noteworthy given the combined $300 billion in crypto assets received. ^[1]

The momentum extends with the Transfer of Funds Regulation coming into effect on December 30, 2024. We expect the Travel Rule to broaden its reach to regions like Latin America, South Africa, Taiwan, Australia, and Qatar. Additionally, Notabene’s “State of Crypto Travel Rule Compliance Report 2024" revealed a strong industry drive towards compliance, with 96% of virtual asset service providers (VASPs) aiming to meet the requirements by year-end, highlighting the critical nature of compliance for business continuity and the potential risks for non-compliant VASPs.

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The Multi-Jurisdictional Compliance Challenge

Operating across various regulatory jurisdictions presents unique challenges. Global VASPs must take a nuanced approach to maintain operational fluidity while adhering to diverse regional regulatory implementations. Our yearly report reveals that nearly half of the businesses surveyed navigate Travel Rule obligations in multiple jurisdictions, significantly increasing the complexity of compliance efforts. 

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Further, 65% of respondents highlighted a "multi-jurisdictional roll-out" as a critical success factor for their Travel Rule solutions.

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Streamlining Compliance with Notabene's Multi-Jurisdictional Tool

Notabene offers tailored solutions to ease the complexities of multi-jurisdictional compliance. Our Multi-Jurisdictional Compliance Tool simplifies the management of compliance obligations across different countries, enabling businesses to integrate new jurisdictions into their operational frameworks with just one click, gain comprehensive insights, and redirect transactions efficiently.

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Tackling Self-Hosted Wallet Compliance

The Financial Action's Task Force (FATF's) updated guidance now extend the Travel Rule to include self-hosted wallets, requiring businesses to identify and, in some cases, verify the owners. The EU's upcoming Markets in Crypto-Assets Regulation (MiCA) will further enforce this, mandating self-hosted wallet verification for transactions over 1,000 EUR.

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Trend Analysis: How VASPs Are Navigating Self-Hosted Wallet Compliance

Our findings indicate a global trend towards mandatory wallet ownership verification, with 66% of companies implementing restrictions on self-hosted wallet transactions. A notable 33% of companies mandate first-party transactions. This means that a third of the businesses surveyed only allow transactions where customers can directly demonstrate control over their wallet addresses.

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Enhanced Self-Hosted Wallet Verification: SafeConnect

In response to evolving compliance needs, Notabene has enhanced its SafeConnect tool for self-hosted wallet verification. The latest update introduces Bitcoin Wallet Ownership Proofs and improved capabilities for Ethereum wallets, streamlining the verification process while maintaining transactional ease.

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Looking Ahead: Ensuring Compliance in the Evolving Regulatory Landscape

As the regulatory landscape continues to evolve, it underscores the need for robust and scalable Travel Rule compliance solutions. Notabene's tailored solutions offer businesses the tools they need to navigate these changes with confidence. Take the first step towards securing your business's future in the evolving crypto landscape. 

As regulations evolve, so do the challenges. Global VASPs increasingly finding themselves at the crossroads of Travel Rule compliance, a task that becomes more daunting as they expand across various jurisdictions. 

The goal of maintaining a global presence while adhering to local regulations is more critical than ever. In response to these evolving demands, Notabene offers a comprehensive Multi-Jurisdictional Compliance tool designed to simplify the management and expansion of VASPs' jurisdictional reach with ease.
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Understanding the Multi-Jurisdictional Compliance Landscape

The landscape of Travel Rule compliance is rapidly changing, with a significant uptick in VASPs that are subject to Travel Rule obligations in more than one country. According to our State of Crypto Travel Rule Compliance Report 2024, nearly 50% of VASPs are now navigating the complexities of multi-jurisdictional compliance, marking a 104% increase from the previous year. Further, our survey highlighted that 65% of respondents name ‘multi-jurisdictional rollout’ as their top two factors as they search for Travel Rule compliance solutions, underscoring the growing importance of adaptable and extensive compliance frameworks in today's global market.

Navigating the Challenges of Global Travel Rule Compliance

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VASPs operating across multiple jurisdictions encounter a myriad of challenges, including:

• ‍Diverse Compliance Requirements: Each jurisdiction comes with its own set of compliance mandates, from specific Personal Identifiable Information (PII) requirements to varying approaches to self-hosted wallet transactions. This diversity necessitates a bespoke compliance strategy for each jurisdiction, adding layers of complexity to global operations.
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• Customized Implementation Needs: Expanding into new jurisdictions isn't just about scaling operations; it involves intricate technical implementations, operational adjustments, and comprehensive local staff training to ensure seamless integration into the existing compliance framework.
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• Complex Organizational Structures: VASPs often operate within complex organizational frameworks, ranging from centralized, nested structures under a single parent entity to independent, un-nested setups that allow for autonomy. Some combine these models to accommodate intricate compliance and operational needs, further complicating the implementation of global compliance strategies.
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• Accurate Transaction Routing: Ensuring that transactions are correctly associated with the appropriate jurisdiction adds another layer of complexity. This is particularly crucial, as accurately identifying transaction counterparts is the essential first step for Travel Rule compliance. Currently, VASPs utilize a combination of blockchain analytics, customer input, and other discoverability methods to navigate this challenge. However, these methods have limitations, such as the inability of blockchain analytics to pinpoint specific legal entities and the reliance on potentially uninformed end customers for crucial transaction details.

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Introducing Notabene's Multi-Entity Support Tool

Notabene introduces the Multi-Jurisdictional Support tool, designed specifically for global VASPs to manage multiple entities and transactions across jurisdictions effortlessly. 


Simplified Jurisdiction Activation and Management

Activating a new jurisdiction is as straightforward as accessing the Notabene dashboard and selecting "activate new jurisdiction." This action seamlessly integrates the specific regulatory requirements of the new jurisdiction into the entity's operations, ensuring compliance with minimal effort.


Deep Regulatory Insight and Automated Compliance

Notabene's platform is enriched with insights from active engagement with regulators and industry experts, ensuring a standardized approach to compliance. With regulatory requirements from over 23 jurisdictions encoded, VASPs can confidently expand their global operations, knowing they are in compliance with local laws.


Flexible Organizational Structuring

The tool accommodates various organizational structures, allowing companies to reflect their real-world setup within the platform:

• Nested Structure: For centralized management, entities can be organized hierarchically within a parent entity.
• Un-nested Structure: Entities can operate independently, providing autonomy and customization.
• Mixed Structure: A combination of nested and un-nested entities supports complex compliance needs.
• Single and Multiple Group Options: Entities can be streamlined under a single group or divided among multiple groups to facilitate the management of diverse business units or subsidiaries.

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Streamlined Transaction Routing

Notabene's Multi-Jurisdictional Support tool ensures transactions are automatically allocated to the correct entity, enhancing compliance with local regulatory reporting requirements. Our solution allows the Beneficiary VASP, best positioned to identify the receiving entity, to redirect Travel Rule transfers automatically to the relevant entity. This not only speeds up the pre-authorization of transactions but ensures their accurate delivery, relieving the Originator VASP of the burden of discovery.

Moreover, beneficiary VASPs with multiple entities can allocate deposit transfers automatically with our transaction redirect feature, allowing each entity to manage Travel Rule records tied to their deposits. This facilitates compliance demonstration to auditors and supervisors at the entity level.

Failure to redirect transfers correctly may result in loss of transaction volume for Beneficiary VASPs, as stricter due diligence obligations demand precise identification of transacting parties. Hence, Originator VASPs may hesitate to share Travel Rule information when the specific legal entity is unknown.

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Elevate Your Compliance Strategy Today

Prepare your global company for success with Notabene's Multi-Jurisdictional Support tool. For existing customers, please designate a Group Admin to unlock these features. New customers will be guided through this process automatically.

As Travel Rule regulations expand to include more counterparty types, customers engaging in non-custodial need a reliable method to verify self-hosted wallet ownership.

SafeConnect, a flagship offering from Notabene, is stepping up to meet this demand by extending its self-hosted wallet verification capabilities to include Bitcoin wallet verification, aiding virtual asset service providers (VASPs) in compliance with various wallet counterparty types. 

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Aligning with Regulatory Developments

In its October 2021 guidance, the Financial Action Task Force (FATF) broadened the Travel Rule's scope to include transactions between VASPs and self-hosted wallets. This extension necessitates collecting and sometimes verifying information about the self-hosted wallet's owner by VASPs. 

Further, the forthcoming Transfer of Funds Regulation in Europe, taking effect this December, stipulates that for transactions exceeding 1,000 EUR, crypto-asset service providers must verify the ownership or control of the self-hosted address by the client conducting the transaction. VASPs facilitating self-hosted wallet transactions in all 27 EU member states must have a solution to verify wallet ownership of the broadest range of self-hosted wallets possible. 

Introducing Bitcoin Wallet Verification Proofs

Our self-hosted wallet verification tool, SafeConnect, enables customers to verify self-hosted wallet ownership on 200+ Ethereum-based wallets. Today, we expand its capabilities to facilitate Bitcoin wallet verification. Previously focused on Ethereum proofs, SafeConnect now transcends this boundary to embrace Bitcoin verification, accommodating a broader spectrum of digital assets. This enhancement is crucial, considering the FATF's emphasis on accommodating all virtual asset types and the TFR's requirement for rigorous verification processes for significant transactions.

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How it works

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• Customers connect their Ledger or Trezor hardware wallets to SafeConnect.
• SafeConnect automatically searches for the Bitcoin address associated with the transaction.
• Once the address is found, the customer will be are prompted to sign a wallet ownership verification message on their device.
• SafeConnect verifies the signature's authenticity and marks the transaction as ready to send.
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Improving the Ethereum Proofs

This update also brings enhancements for seamless Ethereum-based wallet proofs. We’re scaling up to support over 300 Web3 wallets and extending our services to more than 10 EVM-based networks. This expansion will significantly broaden our ability to support Ethereum-based wallet ownership proofs.
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How to Get Started

Current customers have access to these updates by updating to the latest version of SafeConnect. Other interested parties can book a demo with our team. 

Are you grappling with the complexities of the Travel Rule in your jurisdiction? You may be a consultant aiding financial institutions in achieving compliance with recent AML regulations. Given its significant impact on their operations, the necessity of a deep understanding of Travel Rule compliance cannot be overstated. This understanding is vital for maintaining regulatory compliance and the smooth operation of financial institutions.

The increasing frequency of Travel Rule deadlines has amplified the urgency for this knowledge. Moreover, regulators are mandating that Virtual Asset Service Providers (VASPs) establish robust Travel Rule frameworks as a precondition for obtaining operational licenses. This landscape highlights the critical need for specialized and comprehensive education in Travel Rule compliance.

We proudly present the Notabene Travel Rule Fundamentals Certification (NB-TRFC) program to address this need. Designed to infuse your organization with our deep expertise in the Travel Rule, this program equips you with the necessary knowledge and skills for seamless compliance. Our certification course offers a structured path to mastering Travel Rule compliance, providing a strategic advantage in the rapidly evolving industry.

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Introducing the NB-TRFC Program

The NB-TRFC program is a carefully designed educational journey aimed at making you an authority in Travel Rule compliance. You can expect:

• Tailored Content: Our curriculum focuses on the distinct regulatory landscapes of the Americas, Europe, the Middle East, Africa (EMEA), and the Asia-Pacific (APAC) regions.
• Holistic Approach: The program consists of three specialized courses, ensuring you gain a comprehensive understanding of every facet of Travel Rule compliance.

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Exploring the NB-TRFC Program

You have two options: enroll in the free Foundation course or the paid full program, which would provide you with a professional certification. Your educational journey is meticulously planned to provide an in-depth understanding of the Travel Rule, tailored to the region of your choice. The program includes:

1. Foundation Course: Start your compliance journey with the "Travel Rule—Foundations Course." This module simplifies the Travel Rule's historical context and current implications, laying the groundwork for more advanced strategies.
2. Advanced Compliance: Take your expertise to the next level with the "Travel Rule—Advanced Course." This part focuses on complex compliance scenarios, from Anti-Money Laundering checks to transaction monitoring.
3. Jurisdictional Focus: Conclude with a "Jurisdictional Deep Dive" course in the Americas, APAC, or EMEA region. This section will give you a playbook for localized compliance, highlighting key regulatory nuances in specific markets.
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Who Should Enroll?

This program is perfect for compliance officers and professionals, regulators, advisory professionals, legal advisors, and financial professionals in the crypto industry. Whether you're a beginner or an experienced professional, the courses offer both foundational and advanced insights.  It is a great way to certify not only yourself and your team!  

How to Get Started

Ready to become a certified expert in Travel Rule compliance? Visit our academy website for details on enrollment, course schedules, and pricing. Take the first step in your certification journey today!

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Disclaimer

This certification program is for educational purposes only. It does not constitute legal, financial, investment, or any other advice. The digital asset space is dynamic, and some information may become outdated as the industry progresses.

In November 2023, the European Banking Authority (EBA) unveiled a Consultation Paper on the proposed Travel Rule Guidelines, marking a significant step in the evolution of EU financial regulation. This initiative addresses the growing need for clear regulatory frameworks as digital finance transforms the landscape of global transactions.

The EBA presented its proposed Travel Rule Guidelines as a direct response to the mandate outlined in Article 36 of the Transfer of Funds Regulation, which empowered the authority to issue guidelines to Crypto Asset Service Providers (CASPs), aiming to guide entities on how to comply with some of its requirements. 

This article explores the key takeaways of the EBA’s Travel Rule Guidelines and provides enriching insights from Notabene’s presentation at the EBA’s public hearing. 

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Key Takeaways from the EBA’s Consultation on Travel Rule Guidelines

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1. CASPs must consider interoperability when selecting a messaging protocol

The EBA emphasizes the need for interoperability among protocols used for transmitting Travel Rule information. The EBA advises CASPs to choose messaging protocols that are robust and interoperable, capable of seamless communication across various systems, and in line with industry standards. This approach aims to mitigate data integration challenges and enhance the efficiency of adhering to regulatory mandates.

“When choosing the messaging protocol, CASPs and ICASPs should ensure that the protocol’s architectures are sufficiently robust to enable the seamless and interoperable transmission of the required information by:
a. evaluating the protocol’s interoperability features to ensure it can seamlessly communicate with other systems, both within and outside CASPs and ICASPs;
b. considering the compatibility with existing industry standards, protocols, and blockchain networks to facilitate integration; and
c. assessing data integration and data reliability.”

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Notabene’s commentary:

During the EBA’s public hearing, we praised the EBA for recommending interoperability assessments promoting open and interoperable communication standards. This concept aligns with the FATF calling for more interoperability in tools and with surveyed VASPs calling for a global unified approach in travel rule communication and reachability in response to Notabene’s 2023 State of Travel Rule Survey. 

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2. Deposits can only be accepted if the received information allows unambiguous identification of all parties involved in the transaction

The EBA outlined the procedures CASPs should implement to manage transfers lacking the required information.

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The EBA’s Guidelines for Addressing Missing Information in a Crypto Transaction

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Let’s break this down step by step.

Step 1: First, upon detecting missing information, the beneficiary CASP can either straightaway reject/return the transfer or request missing information from the prior CASP in the chain. 
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Where the crypto-asset service provider of the beneficiary becomes aware that the information referred to in Article 14(1) or (2), or in Article 15, is missing or incomplete, that crypto-asset service provider shall, on a risk-sensitive basis and without undue delay:
(a) reject the transfer or return the transferred crypto-assets to the originator’s crypto-asset account; or
(b) request the required information on the originator and the beneficiary before making the crypto-assets available to the beneficiary.

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Decision Flowchart for Handling Missing Information in Crypto Transfers per the EBA

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Step 2: If the beneficiary CASP decides to ask for missing information, it should set a reasonable deadline by which the information should be provided. Transfers within the Union require the information to be provided within three working days, while transfers outside the Union have a deadline of 5 working days. If more than two parties are involved in the transfer flow or at least one CASP is based outside of the EU, the deadline extends to up to 5 working days. Additionally, if a CASP requests information from a prior CASP in the transfer chain, it must notify the prior CASP of the transfer’s suspension due to missing or incomplete information.

Step 3: If the beneficiary CASP asks for missing information and the previous CASP fails to provide it, the beneficiary CASP:

• may only consider accepting the deposit if both the originator and beneficiary are unambiguously identified and
• must evaluate the future treatment of the previous CASP, ICASP, or self-hosted address in the transfer chain for AML/CFT compliance purposes

Where a CASP becomes aware that required information is missing, incomplete or provided using inadmissible characters during the transfer and executes the transfer, based on all relevant risks, and provided that the condition in paragraph 50 is not met, it should document the reason for executing that transfer and, in line with its risk-based policies and procedures, consider the future treatment of the prior CASP or self-hosted address in the transfer chain for AML/ CFT compliance purposes.
Where the payer, payee, originator, or beneficiary cannot be unambiguously identified due to missing or incomplete information or information provided using inadmissible characters, the CASP should not execute the transfer.

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Decision Path for Missing Information Response in Crypto Transfers per the EBA

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Step 4: In cases where a CASP consistently fails to provide the required Travel Rule information, specific actions are mandated for the beneficiary CASP. Initially, steps such as issuing warnings and setting deadlines must be taken to address the issue. If the required information is still not provided despite these measures, the provider has the authority to reject, restrict, or terminate the transaction per established procedures. Additionally, it is required that the beneficiary CASP reports such failures and the steps taken to the competent authority responsible for monitoring compliance with AML/CTF regulations. This ensures accountability and regulatory oversight in addressing non-compliance issues within the crypto-asset service industry.

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Notabene’s commentary:

During the public hearing, Notabene challenged the strict rejection of deposits when the identity of the parties cannot be unambiguously confirmed, proposing a nuanced approach based on risk assessment, particularly in transactions with jurisdictions not yet enforcing the Travel Rule.

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3. The EBA provided guidelines for verifying ownership or control of self-hosted wallets in transactions over 1,000 EUR

As established in the TFR, if a crypto-asset transfer is made to/from a self-hosted address, the originator or beneficiary CASP must gather and retain specific information, ensuring the transfer can be tracked individually. If the transfer exceeds EUR 1,000, additional measures must be taken to verify whether the address belongs to the originator or beneficiary. These measures are further specified in the proposed EBA guidelines, which state that the verification should be conducted using at least two suitable methods:

• Advanced analytical tools
• Unattended verifications 
• Attended verification 
• Sending of a predefined amount set by the CASP from and to the self-hosted address to the CASP’s account
• Signing of a specific message in the account and wallet software, which can be done through the key associated with the transfer
• Requesting the customer to digitally sign a specific message into the account and wallet software with the key corresponding to that address
• Other suitable technical means

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The guidelines from the EBA appear to introduce the possibility of accepting transactions from third-party self-hosted wallets, a detail not explicitly outlined in the TFR text, which primarily focuses on verifying whether the CASP’s own customer maintains control over the self-hosted wallet. 

Where the self-hosted address is owned or controlled by a third person instead of the CASP customer, the CASP should, in addition to applying the verification requirement in accordance with Article 14 (5) or Article 16 (2) of Regulation (EU) 2023/1113, apply mitigating measures commensurate with the risks identified as per Article 19a of Directive (EU) 2015/849

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Notabene’s commentary:

During the public hearing, Notabene suggested that using more than one method for wallet ownership verification should not be required as a rule but recommended only for cases where it proves necessary. We also sought clarification on the treatment of third-party self-hosted wallet transactions.

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4. The status of Travel Rule enforcement in the counterparty jurisdiction is a relevant risk factor

The TFR specifies that the beneficiary CASP must establish procedures to detect whether the required Travel Rule information was provided. In turn, the proposed EBA guidelines elaborate on the monitoring process, highlighting the need for beneficiary CASPs to develop policies and procedures for determining which transfers require pre-transfer or post-transfer monitoring. This involves assessing various risk factors, including the regulatory treatment in the counterparty’s jurisdiction, in particular, the Travel Rule implementation status. 

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Notabene’s commentary:

Understanding the global status of Travel Rule requirements is thus crucial for a comprehensive Travel Rule policy. Notabene offers valuable resources in this regard, including information on our website and our annual State of Crypto Travel Rule Compliance Report, which features a detailed chart presenting a comprehensive overview of global Travel Rule adoption, including enforcement status in each jurisdiction, compliance thresholds, and obligations related to self-hosted wallets. These are valuable resources for CASPs in establishing procedures aligned with EBA guidelines.  

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What's next?

As the European Union ramps up for its Travel Rule enforcement deadline, the EBA’s proposed Travel Rule Guidelines stand as a pivotal development for CASPs and the broader digital finance ecosystem. These guidelines aim to enhance transparency and security in crypto-asset transactions and reflect a collaborative effort to adapt to the digital age’s complexities.

Notabene’s insightful contributions during the public hearing and the industry’s collective feedback underscore the importance of a unified approach to regulatory compliance. As we approach the public consultation deadline and anticipate the final guidelines, it’s crucial for stakeholders to remain engaged and proactive in shaping a regulatory environment that supports innovation while safeguarding integrity.

The EBA’s guidelines will undoubtedly play a crucial role in harmonizing practices across Europe, setting a precedent for global regulatory coherence in the digital finance realm. As we mark our calendars for the key dates leading up to the TFR enforcement, let’s continue to foster dialogue and collaboration, ensuring that the future of trusted crypto transfers is secure, transparent, and inclusive.

As we kick start the new year, we recognize that 2023 was undeniably a pivotal chapter in the ongoing narrative of crypto compliance. Last year, the space witnessed unprecedented transformations, surmounting challenges, and celebrated key milestones that underscore the industry's commitment to maturity, responsibility, and global cooperation. The challenges faced, lessons learned, and strides made in the pursuit of regulatory clarity have set the stage for a promising future. 

As Notabene's Head of Regulatory and Compliance, and with my background as a Crypto Compliance Officer, my excitement for what lies ahead is palpable. In this piece, I'll revisit some of the standout trends and milestones of 2023 and offer a glimpse into my predictions for the year ahead. 

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Global Crypto Regulatory Developments in 2023

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Regulatory Maturity and Global Alignment

2023 marked a turning point as regulatory bodies worldwide exhibited a growing understanding of the crypto landscape. Major jurisdictions refined existing frameworks and introduced comprehensive regulations, paving the way for a more mature and structured industry that will continue to support various use cases.

Global regulatory progress in 2023: key regional developments

Commitment in Key Regions: The United Kingdom, Hong Kong, United Arab Emirates, India, Japan, and the EU demonstrated a commitment to fostering a secure and transparent crypto ecosystem.

• Hong Kong: The Securities and Futures Commission (SFC) implemented a regulatory framework for crypto exchanges, where licensed virtual asset portfolio managers are subject to the same regulatory standards as traditional securities firms.
• The UAE: The Dubai Multi Commodities Centre (DMCC) introduced a comprehensive regulatory framework for businesses engaged in crypto-related activities.
• India: Showed an increased interest in blockchain and digital assets; explored the possibilities of a central bank digital currency (CBDC) and developed crypto regulations.
• Japan: Introduced a licensing system for cryptocurrency exchanges overseen by the Financial Services Agency (FSA).

Notabene's Industry Impact: Showcased dedication to building a regulatory framework to address anti-money laundering (AML) concerns and facilitating secure cross-border transactions, with a significant increase in transaction volume in the Notabene system.

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Travel Rule Implementation Gained Traction

2023 marked a significant leap forward in Travel Rule implementation. Inspired by FATF guidelines, jurisdictions worldwide have made substantial progress enforcing this essential measure. According to a recent report by Price Waterhouse Cooper, 42 countries have engaged in discussions or enacted cryptocurrency regulations and laws in 2023. These efforts primarily concentrate on four central areas: regulating stablecoins, ensuring compliance with the travel rule, providing clear guidelines for licensing and listings, and developing comprehensive frameworks for cryptocurrency.

Global emphasis on Travel Rule

Across the globe, regulators highlighted the importance of Travel Rule. 

• The UAE: VARA and ADGM emphasize the need for policies and steps related to the Travel Rule for provisional licenses. 
• Hong Kong: the Securities and Futures Commission (SFC) adopted a descriptive approach, outlining specific due diligence requirements for Virtual Asset Service Providers (VASPs). 
• Japan: the amendment to the Act on Prevention of Transfer of Criminal Proceeds (APTCP) amendment established more straightforward Travel Rule obligations for VASPs, contributing to a more defined regulatory landscape.  
• The EU’s revised Travel Rule Framework (TFR) introduced Travel Rule requirements for Crypto Asset Service Providers (CASPs), ensuring harmonization across all 27 member states.

2023 Travel Rule enforcement dates

• February 7, 2023 —  Dubai
• June 1, 2023 — Hong Kong
• June 1, 2023 —  Japan
• September 1, 2023 — United Kingdom

Heightened transparency and cross-border collaboration

These moves have not only heightened transparency but have also laid the groundwork for effective cross-border collaboration. As the latest addition to crypto AML regulations, Travel Rule compliance uniquely offers VASPs transaction-level insights into counterparties, and sanctions. This insight enables VASPs to detect whether clients send transactions to sanctioned entities, wallets, or jurisdictions. Properly implemented, Travel Rule compliance empowers VASPs to halt potential illicit transactions before they are recorded on the blockchain, thereby reducing overall risk exposure and avoiding operational challenges.

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Interoperability Challenges Were Addressed

The industry has made significant progress in addressing the interoperability challenges obstructing seamless collaboration between disparate networks and closed systems. Standardization and collaborative initiatives bridged the gaps, fostering a more interconnected and compliant ecosystem.

Key developments in interoperability:

• IVMS102 Updates: The industry's efforts in updating the IVMS102 standard have been noteworthy. IVMS102 is crucial in standardizing messaging formats across different systems, facilitating smoother information exchange, and reducing complexities in multi-system interactions. This standard is critical in ensuring that different platforms can effectively communicate and transact with one another.
• TRP and TRISA Collaboration: The integration of TRP, a decentralized peer-to-peer Travel Rule protocol, with TRISA, is a significant stride forward. VASPs using TRP can effortlessly exchange compliant data with those using TRISA. This marks a monumental step in global compliance and security enhancement.
• Notabene's SafeGateway Solution: Notabene introduced SafeGateway, a noteworthy innovation enhancing Travel Rule compliance. It facilitates seamless interactions between VASPs across various protocols, enabling a unified compliance strategy and efficient access to counterparties, thus simplifying regulatory adherence. This development has been a focal point in Notabene's contributions to the FATF’s Virtual Asset Contact Group discussions.

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Technological Advancements in Compliance Tools‍

Did someone say AI?

The rapid evolution of compliance technologies has been a standout feature of the year. Companies have harnessed blockchain analytics, artificial intelligence, and machine learning to develop sophisticated tools. These tools are used for monitoring, reporting, and ensuring adherence to regulatory requirements and transparency for crypto compliance, as demonstrated by the cross-chain investigation tools that blockchain analytics companies can offer.

2024 Projections for Crypto Regulation: Key Trends to Watch

So, what’s on my crystal ball for 2024 projections? Here are a few themes. 

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Heightened Scrutiny on Source of Funds Controls

Recent geopolitical events, particularly the Russia-Ukraine conflict, have intensified the focus on sanctions compliance in cryptocurrency transactions. This shift has led to increased regulatory pressure on Virtual Asset Service Providers (VASPs) to monitor the sources of funds more rigorously. Compliance with the Travel Rule plays a pivotal role here, as it empowers Beneficiary VASPs with clear records of fund sources, aiding in mitigating sanctions risks.

• UK Regulations: In the UK, beneficiary VASPs must return funds to the originator if there are discrepancies or missing Travel Rule information, ensuring tighter control and transparency.
• UAE Guidelines: The UAE's Virtual Assets Regulatory Authority requires Beneficiary VASPs to collect and retain detailed information about the originator and beneficiary for transactions exceeding AED 3,500.
• Hong Kong's Approach: A similar emphasis on the verification of fund sources is also observed in Hong Kong.

However, the success of Travel Rule compliance, particularly in deposits, largely hinges on the cooperation of Originator VASPs. Challenges such as the Sunrise Issue and limitations in protocol interoperability present obstacles to effective collaboration and compliance.

Amplified Focus on Custody of Customer Funds

In response to recent fund misappropriation and mismanagement incidents, regulators worldwide are moving towards stricter rules for the custody of customer funds. This shift is particularly evident in the growing requirement for a clear separation between exchange services and the custody of funds, emphasizing the importance of safeguarding investor assets.

Examples of funds segregation regulations:

• Canadian Regulations: The Canadian Securities Administrators have mandated crypto exchanges to segregate user funds and use appropriately qualified custodians to hold them.
• US SEC's Proposal: In the United States, the Securities and Exchange Commission (SEC) has proposed expanding and enhancing the role of qualified custodians to ensure safer custody of investor funds by investment advisors.
• Taiwan's Approach: Taiwan’s financial regulators are considering similar requirements for exchanges to segregate customer funds.
• Japan's Precedent: Japan already has a requirement for the separation of customer funds, a policy that contributed to mitigating the local impact of the FTX collapse.

These examples indicate a global trend towards more robust and transparent practices in the custody of customer funds within the crypto industry, reflecting a move towards increased protection for investors and stakeholders.

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Intensified Emphasis on Stablecoin Regulation

Stablecoin regulatory action will continue to increase in 2024. In 2023, various countries and financial bodies were actively working on regulatory frameworks to address stablecoin issuance and usage within their jurisdictions. These regulations may require stablecoin issuers to adhere to specific reserve and reporting requirements. 

In 2023, several countries and organizations advanced their stablecoin regulations:

• Hong Kong Regulators Push for Stablecoin Guidelines - Regulators in Hong Kong began looking to establish guiding principles for stablecoins before the end of 2023.
• The Biden administration in the U.S. proposed stablecoin regulation and the possibility of a digital dollar⁠
• Japan passed regulations allowing investors to trade using certain stablecoins 

• The U.S. House Committee published a draft stablecoin bill⁠ 3
• The Bank of England released stablecoin regulations due to take effect in 2024⁠ 

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Widespread Adoption of the Travel Rule

In 2024, we expect a significant surge in the global adoption of the Travel Rule. As more jurisdictions recognize its importance, we anticipate a large comprehensive network of compliant VASPs that will begin seamlessly exchanging information, fostering a safer and more transparent crypto environment. 

Key movements to mobilize compliance in 2024 include the EU's Transfer of Funds regulation, which will unify Travel Rule across EU nations, and LATAM's alignment efforts, highlighted by the Central Bank of Brazil's recent crypto consultations.

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Emergence of Unified Global Regulatory Frameworks

The upcoming year is set to witness the evolution of the groundwork laid in 2023 into more extensive, globally aligned regulatory frameworks and the development of more structured and transparent regulatory approaches. This development is expected to streamline cross-border regulatory processes, simplify compliance for crypto businesses, and create a more equitable playing field.

EU's regulatory advances

The EU has made significant strides with the introduction of the Regulation on Markets in Crypto-Assets (MiCA) and the revised Transfer of Funds Regulation (TFR). MiCA establishes a comprehensive framework for diverse crypto assets and service providers, aiming to balance investor protection, financial stability, and innovation. The revised TFR uniformly applies Travel Rule requirements across all EU member states, replacing the previously varied national approaches with a consistent compliance timeline.

UK's holistic approach

In a similar vein, the UK has embraced a comprehensive approach to crypto regulation. In 2023, HM Treasury issued significant updates on several regulatory fronts:

• Future financial service regime for cryptoassets, addressing the early stages of regulating DeFi activities and the regulatory treatment of staking.
• Management strategies for the failure of systemic Digital Settlement Asset firms.
• Plans to regulate fiat-backed stablecoins, with a goal to introduce related legislation by early 2024.

The UK's early and successful implementation of Travel Rule requirements, preceding the EU, highlights a growing trend towards transactional transparency. This development is leading to an increasing market preference for compliant transaction flows in the crypto sector.

These advancements in the EU and UK point to a trend towards more organized and transparent regulatory environments in the crypto industry, with a focus on protecting investors and encouraging innovation.

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Blurring Boundaries: Crypto Will Meet Traditional Finance 

The integration between the crypto industry and traditional financial sectors is projected to deepen further. 2024 is poised to be a year where we see heightened collaborative efforts leading to innovative financial products that bridge the gap between conventional and decentralized systems. This will be exciting! 

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Enhanced Privacy Measures

As the crypto industry continues to mature, a concerted focus on balancing regulatory compliance with user privacy is expected. We anticipate the  emergence of new privacy-centric technologies and protocols, offering enhanced confidentiality while maintaining adherence to regulatory standards.

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Crypto and Compliance Education: A Continuing Focus

Education and awareness programs will remain at the forefront of industry initiatives. As more users join the crypto space, understanding the importance of compliance and responsible practices will become paramount. Expect to see a surge in educational initiatives aimed at users, businesses, and regulators alike. Watch this space.

As we venture into 2024, the industry's commitment to responsible innovation, regulatory adherence, and collaborative growth will shape a future where digital assets seamlessly coexist with traditional finance, offering a dynamic and secure landscape for all stakeholders.

Here's to a year of continued evolution, progress, and positive disruption in the ever-evolving world of crypto compliance.

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P.S. When Lambo??

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Lana Schwartzman

As 2024 begins, we at Notabene reflect on a year of substantial milestones from the previous year. 2023 was a turning point, with regulatory clarity in financial hubs like the UK and Hong Kong and an industry-wide push toward trust-building key drivers to its recovery and widespread global adoption.

Of the 42 countries advancing crypto-focused regulations this year, the Financial Action Task Force’s (FATF) Travel Rule was the leading focus area, with 40 countries engaged in passing it as a requirement or having already done so. Virtual asset service providers (VASPs) globally welcome regulatory clarity as they expand their geographical operations.

This is a major inflection point for the industry, with those building trustworthy and compliant businesses best situated to succeed in 2024 and beyond. With Travel Rule compliance now a core requirement for VASP-to-VASP interactions, we have seen a substantial uptick in ‘compliant’ volumes, VASPs, asset types, and jurisdictions.

Notabene has risen to the challenge, improving transaction processing for custodial and non-custodial transactions, automating real-time transaction compliance, broadening our network and service offerings, and reinforcing our leadership in crypto pre-transaction decision-making.

Here’s a look back at some of the key highlights that defined Notabene’s 2023.

Processed Over $43 Billion in Transaction Volume Through SafeTransact

Our monthly transaction volume impressively increased by 760% year-over-year, reaching more than $9 billion. In 2023 alone, SafeTransact processed over $43 billion, significantly expanding our operational scale and impact. This remarkable volume underscores the global crypto community's trust and reliance on our platform. These figures mark a major milestone for Notabene, reflecting the growing adoption of compliant crypto transactions. Additionally, this volume originates from 70+ active VASPs, showing a diverse and non-dependent pattern on any single major VASP.

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Expanded Reach to 24 Originator Jurisdictions and More Than 63 Beneficiary Jurisdictions

Over the past year, there has been a significant surge in the number of jurisdictions involved in sending and receiving Travel Rule data transfers. The number of originator jurisdictions has soared by 118%, jumping from 11 in 2022 to 24 now. Simultaneously, beneficiary jurisdictions have increased by 16%, rising from 54 to 63. The top 5 originator jurisdictions by volume are the UK, Gibraltar, USA, Singapore, and Switzerland. This expansion signals considerable progress towards extensive global coverage and indicates an escalating urgency among counterparty responses. Importantly, it powerfully underscores the widespread, cross-global impact of cryptocurrency transactions.

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Identified Over 880,000 Self-Hosted Wallet Transactions

We've significantly expanded our services by supporting over 200 types of self-hosted wallets. Our user-friendly pop-up interface, SafeConnect, which efficiently identifies, collects, and verifies counterparty information using cryptographically signed messages, has successfully identified transactions involving more than 880,000 non-custodial wallets. This metric reinforces our commitment to managing and mitigating counterparty risk in crypto transactions beyond fulfilling Travel Rule transmission obligations in VASP-to-VASP transactions.

Supported Transactions in 350 Diverse Virtual Assets, a 162% increase

End-users transacted with 350 diverse asset types, up 162% from 2022. This growth demonstrates clients using more of our Notabene Network’s capabilities, which support over 10,000 asset types. It is also a testament to the expansion of secure crypto transactions to a broader range of crypto assets.

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Increased Customer Base to Over 120

Our customer community reached an impressive milestone of 120 members, including tier-one banks, custodians, fiat on/off ramps, and global exchanges, demonstrating the increasing trust and reliance on Notabene’s services.

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Launched Pivotal Features Like SAFE Implementation, SafeGateway, and Network Discoverability

In 2023, Notabene enhanced SafeTransact’s platform capabilities through significant features: SAFE Implementation, SafeGateway, and Network Discoverability, alongside numerous supporting enhancements. 

• SAFE Implementation streamlines Travel Rule compliance through a four-phase, rapid setup process, facilitating a smooth transition to full compliance.
• SafeGateway tackles the interoperability challenges of the Travel Rule by facilitating VASP-to-VASP interaction across protocols. 
• Network Discoverability addresses the challenge of identifying counterparties in transactions, offering a privacy-focused solution for VASPs to automatically recognize blockchain addresses, thus bolstering transaction security and efficiency.

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Achieved a 86% Transfer Match Rate

SafeTransact demonstrated remarkable efficiency, with 86% of transfers successfully reaching counterparties. This achievement highlights the platform’s noteworthy reachability rates despite the persistent fragmentation on the protocol level.

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Continued Our Award-Winning streak 

We continued our award-winning streak, receiving multiple accolades, including Regulation Asia’s “Best Travel Rule Compliance Solution” award for the second consecutive year. Further, several of our teammates—Lana Schwarzman, Alice Nawfal, Catarina Veloso, and Abi Bryant Spolar, were longlisted for Wirex’s 2023 Women in Crypto Power List.

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Introduced a Fully Integrated Solution to Process Travel Rule-Compliant Transactions with Fireblocks

This year, Notabene and Fireblocks launched a fully integrated solution for Travel Rule compliance in crypto transactions. This collaboration combines Notabene’s pre-transaction decision-making and Fireblocks’ platform for real-time compliance and adherence to global standards. Integrated into Fireblocks’ Compliance Suite, alongside Chainalysis and Elliptic partnerships, our joint offering delivers holistic pre-transaction risk management and close alignment between Travel Rule flows and transaction settlement. Learn more.

Surpassed All Six of FATF’s Travel Rule Solution Guidelines

In June 2023, the Financial Action Task Force (FATF) released an updated framework for Travel Rule compliance. Notabene’s SafeTransact meets these standards, offering advanced pre-transaction information sharing, thorough counterparty identification and due diligence, and handling varying Travel Rule requirements (i.e., compliance thresholds and scope of required information) across multiple jurisdictions. Notabene’s detailed guide highlights its commitment to surpassing regulatory requirements in the crypto sector. Download the guide for more insights. 

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Presented at the FATF Virtual Asset Contact Group

In December, Notabene made a third appearance at the FATF Virtual Asset Contact Group. This year, our Regulatory and Compliance team discussed challenges in meeting FATF standards, positive policy changes, and critical focuses for Travel Rule implementation. The team urged swift adoption of Travel Rule requirements, stressed phased implementation for VASPs, and called for private sector collaboration to tackle interoperability challenges.

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Completed Two Successful Test Rounds in the UK FCA’s Regulatory Sandbox

Notabene participated in the UK Financial Conduct Authority’s (FCA) Regulatory Sandbox, conducting two testnet rounds with firms like Ramp Network, Bitstamp, Wirex, CoinPass, Altalix, Hidden Road, Bitpanda Custody, Uphold and Zodia Markets. These testnets addressed new Travel Rule regulations effective in the region and offered insights into compliance challenges and solutions.

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Successfully Guided 12 UK Clients to Meet the September 1st Travel Rule Compliance Deadline

Notabene assisted 12 UK customers in successfully implementing the Travel Rule. This milestone event acknowledged the considerable efforts in preparing for the UK Travel Rule Go-Live. It was a chance for customers and industry leaders to connect, building a solid community among VASPs in the UK. 

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More than 65 Companies Participated in Our Second Annual Analysis of Private Sector Compliance 

Over 65 financial institutions and crypto companies participated in our second State of Crypto Travel Rule Compliance survey. We had the opportunity to share the outcomes with FATF members during the plenary session, providing key insights on Travel Rule compliance and regulatory developments from the industry's only private-sector study on Travel Rule compliance. 

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Shipped 4 Consultation Responses; 50+ Educational Pieces

In 2023, Notabene's Regulatory and Compliance team was instrumental in shaping the cryptocurrency regulatory landscape. They actively engaged in four significant public consultations across various regions, focusing on critical aspects of crypto regulation:

• In Hong Kong, they advocated for updates to the SFC Travel Rule Guidelines.
• In the United Kingdom, they collaborated CryptoUK to provide feedback on the JMLSG Guidelines' sunrise issue.
• In Australia, they submitted comprehensive responses to the Attorney General on the national crypto regulatory framework.
• For the European Union, they addressed the Anti-Money Laundering Regulation (AMLR) through INATBA, concentrating on resolving over-compliance in VASP due diligence and the conflict between the Transfer of Funds Regulation (TFR) and AMLR.

Additionally, the team attended 7 webinars and created over 50 informative pieces, including blogs, articles, and web pages. They also developed more than 15 jurisdiction-specific resources, with a keen focus on key areas like the UK and Hong Kong, with relevant changes and updates. Complementing these efforts, the Notabene team participated in over 40 industry events in 2023. 

As we bid farewell to a transformative year, we at Notabene are grateful for the opportunities and challenges that we encountered on our journey. Each milestone and innovation has reinforced our commitment to driving the crypto regulatory landscape forward. We eagerly anticipate what 2024 holds, ready to embrace new possibilities and continue our mission of providing secure, compliant, and innovative crypto transaction solutions. Here’s to a promising future and continued success!

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Yours,

The Notabene team.