Crypto Travel Rule 101

What is AML and how does it apply to Crypto (anti money laundering)?

Money laundering is a global issue, affecting both fiat currency and cryptocurrencies. To combat the financing of criminal activity, regulatory bodies have rushed to enact stringent anti-money laundering (AML) legislation to prevent money laundering via cryptocurrency exchanges and custodian services.

AML frameworks have been enacted with measurable differences in each jurisdiction. Due to the inherently global nature of crypto transactions, crypto companies now tasked with complying with AML legislation fear that they will run into complexity and end-user friction.

This page dives into Crypto AML efforts and how Notabene’s crypto compliance software helps companies tackle these novel challenges.

What does AML in crypto mean?

Anti-money laundering (AML) for cryptocurrencies refers to the laws, rules, and policies to prevent criminals from turning unlawfully obtained cryptocurrency into cash.

AML crypto - anti money laundering - Notabene

What are the AML requirements for cryptocurrency?

The Financial Action Task Force (FATF) establishes global standards for anti-money laundering legislation. In 2014, the FATF published cryptocurrency AML guidance, and policymakers in FATF member jurisdictions acted rapidly. FinCEN, the European Commission, and dozens of other regulatory organizations have codified most of FATF’s cryptocurrency AML recommendations into law.

The onus is then placed on cryptocurrency exchanges, stablecoin issuers, and, on a case-by-case basis, some DeFi protocols and NFT marketplaces, defined as virtual asset service providers (VASPs) by the FATF. As we advance, VASP’s Compliance Officers must mandate know-your-customer (KYC) checks and regularly monitor transactions for suspicious activity, to thwart nefarious transactions that could be linked to money laundering and terrorist financing.

Additionally, VASPs must report suspicious activity to relevant regulators and agencies, who then analyze the flow of funds and trace unlawful activities to real-world identifiers using various tools, including blockchain analysis.

Do cryptocurrency transactions constitute a higher money laundering risk?

Although there are several AML/CTF concerns linked with cryptocurrencies and virtual assets, the following are the most significant:

The FATF released a report in June 2014, Virtual Currencies Key Definitions and Potential AML/CFT Risks, highlighting the following areas of concern with cryptocurrencies:

What is a KYC process in crypto?

KYC programs typically consist of three components: identification of customers, due diligence, and ongoing monitoring.

  1. Customer Identification (CIP)
    A customer identification program, or ‘CIP,’ verifies that the customer is who they claim to be by utilizing reliable and independent data. Verification information may include:The client’s legal name.Date of birth.Address.Verifying documentation such as a driver’s license or passport.Business licenses and articles of incorporation are frequently required of enterprise customers.
  2. Customer Due Diligence (CDD)
    Customer Due Diligence, abbreviated as ‘CDD,’ is a new client or business relationship risk assessment. Financial service providers assign risk ratings to accounts based on background checks, customer surveys, and reviews of the client transaction history.
  3. Continuous Monitoring 
    Continuous monitoring is constantly reviewing transactions for signs of criminal activity. When suspicious activity is discovered, VASPs are required to file Suspicious Activity Reports (SARs) with FinCEN or other appropriate law enforcement agencies. 

Is there money laundering in crypto transactions?

According to a 2022 report from the leading blockchain analytics company Chainalysis, criminals laundered $8.6 billion in cryptocurrency in 2021, a 30% increase over the previous year. The report says, “while billions of dollars worth of cryptocurrency are transferred annually from illicit addresses, the majority of it ends up at a surprisingly small number of services, many of which appear to be purpose-built for money laundering.” 

(Source: Chainalysis)

Since 2017, cybercriminals have laundered over $33 billion in cryptocurrency, the majority of which has moved to centralized exchanges. By comparison, the United Nations Office on Drugs and Crime estimates that between $800 billion and $2 trillion in fiat currency is laundered annually — up to 5% of global GDP.

How does the Crypto Travel Rule relate to AML efforts?

Travel Rule compliance is an integral part of anti-money laundering efforts.

The Travel Rule for Crypto Assets mandates VASPs to send, receive, and sanction screen customer personal information alongside a crypto transaction over a particular threshold.

(Source: Notabene)

Many exchanges now have AML/CFT processes to identify and screen their own customers for sanctions as part of onboarding and ongoing customer due diligence. This prevents sanctioned users from directly initiating transactions.

However, FATF’s Crypto Travel Rule now requires institutions to receive and sanction screen the counterparty VASP’s customer information and perform due diligence on the counterparty VASP. With this information, VASPs choose to accept or reject the transaction.

Unlike financial institutions, the crypto industry does not have a network to connect to counterparties to perform Travel Rule. Thus, crypto exchanges today require a robust Travel Rule solution to perform proper counterparty risk mitigation and be able to identify or block a transaction with a sanctioned individual or entity. 

As virtual currency transactions become more widespread, requiring an extra step for VASPs to verify the beneficiary of transactions becomes more critical. Therefore, Travel Rule compliance has become a fundamental requirement as cryptocurrencies expand and reshape the global financial network.

How can Notabene help?

(Notabene's end-to-end Crypto Travel Rule solution illustrated)

Notabene’s next-generation crypto regulatory compliance software enables VASPs to pinpoint the counterparty VASP and beneficiary customer to a transaction, collect mandated customer identification information, and screen the beneficiary all pre-transaction, with minimal friction to the user and compliance team. Notabene then routes the compliant data transfer to any counterparty globally, no matter their compliance status.

Financial institutions and crypto exchanges using Notabene leverage our Rules Engine to set risk-based rules according to the mandates of their local jurisdictions and their risk appetite to automate compliance transfers to white-listed exchanges with proper AML procedures. 

Our clients streamline compliance at scale, saving time and money to focus on the most suspicious transactions. Additionally, their end-users benefit from knowing that their transactions are safe, trusted, regulated, and compliant and will not be routed to sanctioned individuals. 

Additionally, Notabene’s state-of-the-art compliance software includes powerful integrations for transaction monitoring and VASP due diligence.

Book a demo today.

FAQ

Crypto AML

What is crypto AML (anti-money laundering)?

Anti-money laundering (AML) for cryptocurrencies refers to the laws, regulations, and policies to deter criminals from converting illegally obtained cryptocurrency to cash.

Why is crypto AML important?

The inherent anonymity of cryptocurrency transactions enables cybercriminals to send nefarious transactions. A lack of identification and verification checks on the source and destination of funds - with no names, account numbers, checks on the source or destination of funds, or historical records of transactions, there is a genuine risk of fraud. 

What are the advantages of crypto AML?

Complying with crypto AML regulations can mitigate money laundering and terrorist financing risks. AML-compliant crypto exchanges build trust and transparency with their customers, lower the risk of financial crime, and help to stabilize the crypto market. 

Why choose Notabene for crypto compliance?

Notabene’s next-generation crypto regulatory compliance software enables VASPs to pinpoint the counterparty VASP and beneficiary customer to a transaction, collect mandated customer identification information, and screen the beneficiary all pre-transaction, with minimal friction to the user and compliance team. Notabene then routes the compliant data transfer to any counterparty globally, no matter their compliance status.

Financial institutions and crypto exchanges using Notabene leverage our Rules Engine to set risk-based rules according to the mandates of their local jurisdictions and their risk appetite to automate compliance transfers to white-listed exchanges with proper AML procedures. Our clients streamline compliance at scale, saving time and money to focus on the most suspicious transactions.

Additionally, their end-users benefit from knowing that their transactions are safe, trusted, regulated, and compliant and will not be routed to sanctioned individuals. Additionally, Notabene’s state-of-the-art compliance software includes powerful integrations for transaction monitoring and VASP due diligence. Book a demo today.