Crypto Travel Rule Compliance: Challenges and Opportunities for VASPs

‍
‍

Since its inception, cryptocurrency and blockchain technology have continually enabled transactions between people and businesses. Still, a lack of regulation and nonexistent links to the traditional finance industry has prevented mainstream adoption. Complying with the Financial Action Task Force’s (FATF) crypto Travel Rule presents the industry’s most significant opportunity to cross into the mainstream. However, gearing up for compliance can feel like an immense burden. 

To become regulatory compliant, virtual asset service providers (VASPs) must carry out several processes at the same time:

• Changing product flows.
• Introducing new compliance frameworks.
• Adding alterations to back-end and customer-facing UX screens and APIs. 
• Hiring additional staff/training current staff to implement the tools to achieve Travel Rule compliance. 

Firms are struggling with compliance, as the FATF highlighted during its second 12-month review of its revised standards on VAs and VASPs; less than half of the surveyed jurisdictions had introduced the necessary legislation to implement their revised standards. 

Below we list the challenges and opportunities VASPs face when implementing the FATF’s Crypto Travel Rule and share how Notabene can help companies comply. 

‍

1. The Sunrise issue/loss of business

CoinMarketCap reports that 500+ cryptocurrency exchanges worldwide collectively trade trillions of dollars worth of cryptocurrency daily. If a custodian starts to require Travel Rule data alongside transactions, will these exchanges be able to do business with crypto businesses that don’t currently have compliance solutions? This inconsistency in compliance results in jurisdictions sitting at various stages of implementation. 

‍

2. Murky regulatory guidelines 

There is a lack of understanding regarding applying FATF’s Travel Rule, mainly due to clouded regulatory instruction. Specific regulatory bodies, such as the Monetary Authority of Singapore, have presented locally registered VASPs with outlined crypto-related AML requirements and precise enforcement dates. In contrast, FATF reports that many jurisdictions “still require major or moderate improvements on R.15, with improvements particularly needed on assessing ML/TF risks and the application of AML/CTF preventative measures.”

3. Unknown compliance costs

In most cases, implementing the Travel Rule requires VASPs to change funding, withdrawal, and transfer functionality that is fundamental to their businesses. Compliance will require back-end changes and modification of customer-facing UX screens and APIs. Also, because of the new KYC requirements for crypto-to-crypto exchanges, many VASPs will have to implement the rule from scratch, adding friction and cost to their business operations.

‍

Compliance opportunities for the crypto industry

Travel Rule compliance brings the following benefits to VASPs: 

1. Enhanced regulatory clarity

Over the years, one of the biggest challenges of crypto exchange has been the lack of regulatory clarity. Unclear regulations have been particularly problematic for cryptocurrency exchanges outside the leading global financial centers. Exchanges and FIs in under-regulated jurisdictions have had problems directly with regulators and indirectly through the loss of financial partners. The FATF guidelines for VAs force local regulators to take a stance. Regulators are required to either create a roadmap for a regulatory framework for VASPs or, unfortunately, outright ban crypto transactions. While the second option is troublesome, well-thought-out legal frameworks from the United States, Switzerland, South Africa, Singapore, and other countries provide an excellent example to more risk-averse regulators.

‍

Learn how Luno Singapore met Travel Rule Regulations using Notabene.

‍

2. Access to banking

The inability to prove a good source of client funds has been cited as the primary reason traditional banks will not open bank accounts for crypto businesses. It was simply too risky for them to touch customers touching crypto. The Travel Rule explicitly solves this problem by using the same rules banks must obey. The most successful crypto businesses have invested copious amounts of time convincing their banking connections that they have outstanding quality KYC and AML policies. Solving the Travel Rule for VASPs and performing strong counterparty VASP due diligence will help further reduce this risk. Furthermore, reducing counterparty risk is another excellent reason to implement the Travel Rule before local regulators require it.

‍

3. Improved fiat on/off ramps globally

Compliance leads to better banking access, which enhances access to local payment systems worldwide. This alone could drastically improve the adoption of cryptocurrencies and could make the innovations in the DeFi space available to a much broader class of untapped users worldwide.

‍

4. Crypto and DeFi could become the rails for future FinTechs

Most FinTechs today differentiate themselves by improving UX, onboarding, and finding new use cases for what are, in essence, the same products the traditional financial industry has offered for years. Having Travel Rule support and leveraging more blockchain-specific KYC/AML tools will allow FinTechs to adopt many new DeFi products. These new products will provide cutting-edge avenues to differentiate themselves from incumbent financial services.

‍

5. Lower regulatory risk means easier access for institutional investors.

Institutional investors worldwide are actively looking into adding crypto as a new asset class. Lack of regulatory certainty has been one of the most significant issues holding them back from broader investment in the space. Blockchain analytics tools have helped lower crypto AML risk, but unlocking counterparty identification and verification through the Travel Rule will help open the asset class to institutional investors. Compliance with the FATF’s Travel Rule itself will enable cryptocurrency users the ability to complete transactions with one another and access banking facilities that were previously inaccessible.

‍

How can Notabene help companies with Travel Rule compliance?

Notabene’s Travel Rule compliance platform has been market-tested, third-party validated, and long-implemented by leading industry VASPs. Companies such as Luno, Bitso, Crypto.com, Bitstamp, and others leverage our software to manage real-time regulatory and counterparty risk in virtual asset transactions. Additionally, we strive to educate compliance teams on the nuances of Travel Rule compliance, enabling VASPs to expand their businesses internationally and demonstrate trust and credibility within the Fintech industry. 

‍

 The next article discusses AML frameworks in the context of VAs.