2024 Travel Rule Compliance: Key Implementation Challenges for VASPs

This article provides an in-depth look at virtual asset service providers' (VASPs) current implementation challenges as they navigate the Travel Rule.

Based on the results from Notabene's 2024 State of Crypto Travel Rule Compliance survey, we explore how crypto businesses and financial institutions are preparing to meet these regulatory requirements. Download the report here to gain deeper insights.

Protocol Interoperability Emerges as the Top Hurdle to Travel Rule Adoption

Each year, we explore the evolving challenges of implementing the Travel Rule. This year, the lack of interoperability between different protocols has become the foremost challenge, as 34% of respondents highlighted. This underscores the growing necessity for standardized communication to ensure effective compliance with the Travel Rule across various platforms. 

Interestingly, despite identifying interoperability as a major hurdle, 67% of respondents reported not using more than one Travel Rule protocol. This suggests that the impracticality of integrating multiple protocols outweighs the compliance limitations that arise from the lack of protocol interoperability.

Additionally, respondents were asked about their companies’ responses to Travel Rule transfers from other VASPs. Notably, 37% of respondents indicated that they had not received such requests. The lack of incoming Travel Rule transfers points to a fragmented approach to compliance, where many VASPs continue to operate in isolation due to the lack of interoperability.

The survey results highlight a crucial industry dilemma: counterparties may not be using the same Travel Rule protocol and thus may be unaware of Travel Rule requests from others, contributing to significant compliance challenges in deposit flows. This is why it is imperative to address interoperability—to improve compliance and unlock the full transaction potential by ensuring seamless industry-wide communication. This topic is further explored in Chapter 5, Section 5 of the Report.

The Sunrise Issue’s Negative Impact Jumps 74%

The prominence of the Sunrise Issue as a barrier to adopting the Travel Rule has escalated, moving from the third to the second most significant challenge. This marks a 74% increase from the previous year’s findings. Despite expectations that last year’s surge in Travel Rule adoption would mitigate the Sunrise Issue, the opposite has occurred. The rise in adoption has been offset by increasing regulatory demands, leading to more stringent compliance measures.

Even though more VASPs are adhering to the Travel Rule, theoretically easing the Sunrise Issue, regulatory standards have tightened. Previously, VASPs had more leeway in handling non-compliant counterparties, with only 8% opting not to execute transactions when unable to transmit Travel Rule information. Currently, although more VASPs are compliant and able to exchange information, the flexibility in dealing with non-compliant counterparts has diminished. The number of VASPs halting transactions when unable to send a Travel Rule data transfer has nearly tripled this year.

Overcoming the Sunrise Issue requires a universal agreement on implementing the Travel Rule. Without swift and broad enforcement, the negative impacts of the Sunrise Issue are likely to grow due to increased regulatory scrutiny and enforcement in compliant regions. This issue is further examined in Chapter 5, Section 1. The “Regulatory/legal uncertainty” hurdle has shifted to the third position at 16%, marking a measurable decline from its second-place standing of 22% in 2023.

This shift suggests that increased regulatory clarity has eased some hindrances, as evidenced by developments like the U.K. Travel Rule implementation and the definition of the EU Travel Rule framework with the publication of the TFR. However, though this stride forward signals progress, this hurdle still places in the top three, underscoring the need for continued efforts to comprehensively address the clarity of the regulatory guidelines, with the goal of moving it out of the top three.

In the 2023 survey, VASPs highlighted "Lack of technical resources" as the primary hurdle to Travel Rule adoption (at 27%). However, in 2024, the percentage of those citing it as their top concern decreased dramatically to 3%, a staggering 89% decrease. Such a change in position indicates that the challenges relating to this obstacle have been alleviated, possibly due to the increased business commitment to Travel Rule implementation. It could be argued that the rising regulatory urgency fostered an alignment between compliance needs and business objectives. As reported by nearly half of the respondents (47%), Travel Rule adherence has evolved into a prerequisite for obtaining a license to operate in new markets. This is true in pivotal crypto hubs like Hong Kong and the United Arab Emirates, as explored in Chapter 2, Section 1 of the 2024 State of Crypto Travel Rule Compliance Report.

Moreover, Travel Rule adherence plays an increasingly vital role in the due diligence processes of banks and financial institutions—when assessing VASPs for core financial services, such as bank accounts—and regulators and auditors, as further explored on page 56 of the report.

Nearly Half of All Respondents Face Travel Rule Obligations in Multiple Jurisdictions

Last year’s survey results uncovered the global nature of Travel Rule compliance; this year’s findings further support this. A notable finding is that 47% of respondents are now subject to the Travel Rule in multiple jurisdictions, which represents a substantial increase of approximately 104% compared with last year’s 23%. This surge underscores the growing complexity of complying with the Travel Rule on a global scale, as it requires adherence to different regulatory standards across jurisdictions.

A closer examination of the respondents required to comply across multiple jurisdictions reveals a substantial concentration within specific jurisdictions:

• 33% have a presence in the United Kingdom,
• 27% in the United States, and
• 21% in Singapore.

  This emphasizes the global significance of these key jurisdictions and underscores the urgency of adopting sensible regulatory policies that facilitate seamless cross-border transactions.

Cross-Border Compliance Emerges As a Key Concern

Additionally, as part of the survey, participants were given the option to rank the importance of factors contributing to the success of their Travel Rule solution. The findings indicate that 65% identified “multi-jurisdictional roll-out” among their top two priorities, with 23% ranking it as their primary concern. This trend underscores the significance of cross-border compliance with the Travel Rule.

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This data highlights the industry’s potential for improved efficiency through a unified and cohesive strategy to navigate diverse regulatory requirements across regions.