2022: A Year in Crypto Regulatory Compliance with Notabene

The Crypto Industry’s Trust Deficit and the Need for Stronger Security Measures in 2023

With the massive influx of new users entering the crypto space in 2021 and the first half of 2022, exchanges rushed to launch new and innovative products as they competed for users. However, rapid launches of products outpaced internal efforts to build risk controls and proper security practices. This year tested trust with the downfall of Three Arrows Capital, Celsius Network, and FTX, among others. This whirlwind showed us that we still have ways to manage counterparty risks and build trust in cryptocurrency transactions. During the latter part of the year, consumer and investor trust in the industry dwindled as scrutiny from regulators grew.

The shaken trust in the crypto industry did not slow down financial institutions’ roadmaps, with the likes of Bank of New York Mellon, State Street, and Fidelity Digital Assets launching digital asset custody or trading platforms.

Overall, this year saw both crypto-native companies and financial institutions realizing that a substantial competitive advantage lies in providing secure and safe crypto transactions and have invested in building proper security and risk controls. We foresee companies investing more and more resources to ensure transactions go to trusted parties in 2023. We suspect many of these will emerge from the crypto winter as crypto champions. 

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Regulatory enforcement is here.

The Russia-Ukraine conflict sparked a significant movement among governments to impose sanctions on Russian individuals and entities. As the world watched, the crypto industry waited with bated breath to see if sanctioned individuals would use cryptocurrencies to evade fiat sanctions. The war became a key catalyst for the enforcement of crypto regulations, with jurisdictions like Estonia implementing the Travel Rule 17 days into the conflict and setting the enforcement date just three months behind on June 15th, 2022, creating the fastest turnaround for Travel Rule enforcement in history. 

Travel Rule compliance is a critical method for transaction risk mitigation, allowing crypto exchanges to identify and block transactions to potentially sanctioned actors. As pointed out in FATF’s Targeted Update on Implementation of FATF’s Standards on VAs and VASPs, published on June 30th, the industry has made significant progress on implementing the travel rule, but there are still many shortcomings. In particular, FATF expects local regulators to move quicker on enforcement and reducing jurisdictional arbitrage. It also has asked the crypto industry to work on interoperability. 

As the regulator’s patience wanes, 2023 will be crucial in rolling out Travel Rule compliance. At Notabene, we have seen momentum rise globally among VASPs to comply with the travel rule and put in place real-time risk assessments of transactions, regardless if the counterparty wallet is hosted or self-hosted. Given this momentum, upcoming regulatory enforcement dates, and the volume of VASPs getting ready today to comply, we predict 70-80% of the industry to go live with implementing the Travel Rule. 

In 2023, regulators will likely implement strict regulations to address consumer protection and transaction identification. We foresee a continued focus on sanctions and implementing beneficial ownership rules in the US, which is part of FinCEN’s AMLA 2020. Furthermore, we also anticipate more enforcement actions to be taken against crypto companies that have inadequate controls.

As we prepare for an eventful year in crypto regulation, we share a few of our company highlights from 2022. Notabene’s 2022 highlights: Rapid network growth, increased transaction volumes, and new features and improvements:

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1. Notabene’s transaction volume grew 90x in 2022

Transaction volumes through our Travel Rule solution have risen 90x since December 2021. With a network today of 800+ VASPs, Notabene Network members can send or receive transfers through Notabene, using more than 130 asset types. Our simple integration process and excellent customer support ensured that even small and medium-sized companies could meet strict deadlines.

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2. Onboarded 200+ customers to the Sunrise Plan

Our customers’ success is essential; they cannot successfully comply if their counterparties do not have the necessary tools to respond to their data transfer requests. To solve reachability issues during the travel rule sunrise period, we launched the Sunrise Plan to allow all VASPs–not only Notabene members–to respond to pending Travel Rule transactions at no cost. This plan provides compliance officers with access to our compliance dashboard, allowing them to set up automated compliance workflows and use our integrations with blockchain analytics and sanctions screening providers. 

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3. Delivered new features launches, integrations, and improvements

Compliant VASPs rely on several RegTech solutions to make confident, comprehensive, and well-informed decisions to manage their AML/CFT risk. Throughout 2022, we launched the following components to make Travel Rule compliance scalable and frictionless.

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4. Launched SafePII - the industry’s-first end-to-end encrypted escrow service for safe Travel Rule transactions

Data security and privacy for end users remain one of Notabene’s core values. To protect the personally identifiable information of our client’s customers en route to their transaction counterparty, we’ve introduced three encrypted escrowed PII communication routes to our advanced security infrastructure.

SafePII is a pioneering feature that enables VASPs to securely exchange encrypted personally identifiable information with counterparties while simultaneously managing their encryption keys. This innovative solution is the first of its kind in the industry.

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5. Awarded 60+ certificates to participants in our inaugural Travel Rule Training program

Implementing compliance processes and internal controls is crucial for launching compliance with the Travel Rule. As this is a new challenge for Compliance Officers in the crypto industry, we have created the Notabene Travel Rule Training Program to equip our customers with the necessary knowledge and skills to meet this mandate. We’re delighted to share that we’ve issued over 60 certificates for completing the training. 

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In the Training program, participants explore different Travel Rule scenarios to gain a deeper understanding of Travel Rule compliance. During the bespoke testing cohort, they practice sending and receiving Travel Rule transfers under the advisory of our Regulatory and Customer Success teams. Keep your eyes peeled in 2023 as we expand this program! 

6. Published the industry’s first State of Travel Rule Compliance Report

Furthering our mission to assist businesses in navigating the changing regulatory landscape for cryptocurrencies, we surveyed compliance officers globally to gauge compliance readiness and understand the main pitfalls of implementing the Travel Rule in the crypto and financial services industries. 

The survey responses informed an industry-first study, The State of Crypto Travel Rule Compliance Report 2022. The Financial Action Task Force cited our report in its recent Targeted Update on Implementation of the FATF Standards on VAs and VASPs.

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If you would like to add insight to our upcoming State of Crypto Travel Rule Compliance Report 2023, please reach out to [email protected].

7. Hired amazing talent 

We added vital positions to critical support roles to keep up with our rapid growth and increased focus on the industry. The Notabene Team grew from 17 to 33 this year, including our first Regulatory and Compliance hire, Lana Schwartzman. 

Additionally, our team members racked up many accomplishments this year. NYC Fintech Women recognized Notabene co-founder and COO Alice Nawfal on their 2022 list of Inspiring Females in Fintech. Legal Engineer Catarina Veloso was selected to join the European Banking Authority’s AML Working Group. Lana Schwartzman, Head of Regulatory & Compliance, was nominated for Women in Tech’s Rising Star of the Year. Company-wise, Notabene took home the “Best Solution in Travel Rule Compliance” award at Regulation Asia’s 5th Annual Awards for Excellence. The Financial Conduct Authority (FCA) accepted our Travel Rule solution into the Regulatory Sandbox initiative.

Thank you for joining us on this journey. We can’t wait to see what’s in store for 2023!

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Yours,

The Notabene team.