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6 Reasons VASPs are Investing in Travel Rule Solutions Right Now

Lesa Moné
Lesa Moné
August 25, 2023
Lesa, Head of Content at Notabene, combines her deep B2B crypto and SaaS experience to deliver impactful insights for clients, fostering Notabene's reputation as a thought leader in the crypto regulatory tech space.
Table of Contents
Summary

The world of crypto compliance has seen rapid changes over the past year. Since the Financial Action Task Force (FATF) extended Travel Rule compliance for crypto custodians, global events and pivotal moments have rapidly propelled Virtual Asset Service Providers (VASPs) from mere contemplation to active implementation of these AML compliance measures.

But what's genuinely fueling this accelerated adoption? Join us as we explore the primary motivations prompting VASPs to invest in Travel Rule solutions.

The Six Reasons Pushing VASPs to Find Crypto Compliance Solutions:

1. Upcoming enforcement deadlines

As deadlines approach, VASPs run out of time to develop a cohesive compliance strategy, test direct integration into various protocols, and evaluate end-to-end solutions. Integrating and testing different protocols slows down the path toward Travel Rule compliance, with Compliance Officers spending upward of 18 months trialing protocols to fit the company’s specific needs.

Additionally, Exchanges registered in a jurisdiction where the Travel Rule is already enforced: US, Singapore, Switzerland, Philippines, South Korea, Germany, Canada, Indonesia, Malaysia, Gibraltar, Estonia, Dubai, Liechtenstein, Malta, Portugal, Japan, Hong Hong, the United Kingdom, as well as exchanges that send a large volume of transactions to VASPs in those jurisdictions, must roll out Travel Rule compliance as soon as possible.

2. Business preservation and transaction assurance

As more and more VASPs become compliant with the Travel Rule, the expectation for their counterparty VASPs to receive travel rule information and respond reciprocally is growing. If the counterparty VASP does not participate in travel rule flows, it's becoming increasingly likely that compliant VASPs will simply stop transacting with them. Proactive compliance is paramount to avoid business and, more specifically, transaction slowdowns. Additionally, per FATF guidance, VASPs can now restrict transactions with non-compliant counterparts. 

Notabene’s State of Crypto Travel Rule Compliance Report, 2023, pg 37

Our 2023 State of Crypto Travel Rule Compliance Report highlights that about 61% of respondents enforce transaction restrictions with non-cooperative counterparties: 8% need a Travel Rule message sent to the beneficiary VASP, 41% employ a risk-based approach, and 12% await a response from the Beneficiary VASP. Non-responsive counterparties risk losing transactions from compliant VASPs, making this a critical reason for VASPs to invest in compliance solutions.

3. Stakeholder demand

VASPs are rolling out Travel Rule solutions quickly to meet the demand from their banking partners, auditors, institutional customers, and other business stakeholders.

It is now a standard expectation for VASPs to be travel rule compliant when applying for new banking partners, getting audited, or establishing other business relationships. Demonstrating compliance with the Travel Rule improves a VASP's likelihood of passing the due diligence requirements to establish solid banking relationships. By including the Travel Rule in their compliance stacks, VASPs demonstrate their risk management strategies to auditors, align with industry standards, and meet regulatory expectations, bolstering their reputation as trusted market participants.

4. Increased regulatory scrutiny due to sanctions

The Russia-Ukraine war accelerated crypto Travel Rule compliance.  Financial regulators have implemented fresh sanctions against Russian organizations and persons in response to the crisis between Russia and Ukraine. Although it is unknown to what extent sanctioned parties may turn to crypto, VASPs worldwide have acted upon the increased imperative to comply with sanctions obligations. Without crypto Travel Rule compliance, VASPs can—often unknowingly—facilitate transactions with sanctioned counterparties. Transactions associated with entities like Garantex, Bizlatzo, or any other sanctioned crypto service pose a substantial compliance risk for businesses in the U.S. and other jurisdictions, with potential fines and criminal charges as consequences.

Therefore, it's crucial for VASPs to be able to discern whether their clients are sending transactions to sanctioned entities, wallets, or jurisdictions. This can only be achieved by diligently implementing Travel Rule compliance, which enables transaction-level counterparty and sanction insight.

5. To benefit from an incremental Travel Rule adoption

Forward-thinking VASPs are strategically using a phased rollout to their advantage. Ahead of their regulatory timelines, they are getting started with collecting the necessary counterparty data, putting in place the systems, and easing into the travel rule. This puts them in a great place to be ready without excessive strain on resources and with minimized impact on their customers.

Source: Notabene’s State of Crypto Travel Rule Compliance Report, 2023, pg 36  

Thanks to industry advocacy, some regulators are warming up to this staged approach to compliance. Recent surveys highlight an increasing preference for this phased approach: 31% in the current year, up from 18% in 2022.

6. To gain a competitive edge

It goes without saying: regulated financial products distinctly outshine their unregulated counterparts by offering numerous advantages. Advantages include crucial investor protection, stringent legal compliance, unwavering financial stability, improved market confidence, effective dispute resolution mechanisms, and indispensable consumer safeguards. Additionally, crypto compliance ensures safer transactions, strengthens trust, and strategically positions VASPs as reputable market players for enhanced growth and reach.

How Notabene Addresses the Six Reasons VASPs Are Considering Travel Rule Solutions

1. Notabene’s multi-jurisdictional approach facilitates seamless onboarding for VASPs across various jurisdictions

With imminent deadlines, globally-operating VASPs confront the challenge of staggered Travel Rule enforcement across their jurisdictions. This leaves them scrambling to craft a unified compliance strategy in each location, integrate protocols for each entity, and assess comprehensive solutions. 

For example, a VASP located across three jurisdictions may need a Money Services Business (MSB) license in the United States in Canada, a Digital Payment Token (DPT) license in Singapore, and a license from the Federal Financial Supervisory Authority (BaFin) in Germany—each with distinct compliance requirements.

Notabene's SafeTransact

Notabene's SafeTransact provides a streamlined solution tailored for global businesses, offering support across 20+ jurisdictions and counting. VASPs choose us to expedite their Travel Rule compliance with multiple regions. Additionally, VASPs can leverage our SAFE Implementation program; VASPs can seamlessly integrate and fast-track their regulatory adherence, ensuring business continuity and regulatory alignment. Learn more below.

2. SafeTransact Rise: Notabene’s answer to business preservation and transaction assurance

Our customers’ success is our primary goal, and we understand that without responses to their Travel Rule transactions, our VASPs may not be able to achieve full compliance. Recognizing that many businesses may not have the tools to handle these responses, we offer SafeTransact Rise - a complimentary Sunrise Plan that provides transaction beneficiaries access to our comprehensive Travel Rule compliance dashboard to respond to unlimited inbound messages, as well as and send up to USD 10k in outgoing transactions. While on our platform, Compliance Officers can test out setting up safe, automated compliance workflows and utilize award-winning partnerships with blockchain analytics and sanctions screening providers.

3. Demonstrating Travel Rule compliance readiness with Notabene's SafeTransact

When implemented correctly—pre-transaction settlement— Travel Rule compliance equips VASPs with detailed insights into transactional counterparties and allows VASPs to ascertain if clients transact with sanctioned entities, wallets, or regions.

As the industry’s only pre-transaction decision-making platform, Notabene's SafeTransact preemptively identifies and halts high-risk activity before reaching the exchange. Our platform offers a comprehensive view of crypto transactions, allowing users to automate real-time decisions, screen counterparties for sanctions, recognize self-hosted wallets, and ensure seamless global Travel Rule compliance following international regulations.

Additionally, VASPs use our reporting tools to demonstrate their Travel Rule compliance programs, including verified data about their transactions, counterparties, and VASPs’ steps to build robust compliance measures.

4. Set rules to automatically stop transactions to sanctioned actors

Our customers can effectively identify sanctioned counterparties and block ensuing transactions by performing the following checks before the transaction occurs: 

  1. Identifying counterparty VASP
  2. Performing VASP due diligence
  3. Identifying and sanction screening counterparty customers 
  4. Monitoring wallet risk scores
Features clients can use to block transactions with sanctioned parties (Source: Notabene).

To automate this process, customers head to the Rules Engine to encode their risk-based rules to restrict incoming or outgoing Travel Rule data transfers with VASPs that do not meet their diligence criteria. This step also allows them to identify and block suspicious transactions at scale. By tying this mechanism into the transaction flow, this functionality boosts transaction efficiency and provides Compliance Officers with robust tools to mitigate AML-related risks effectively.

Notabene's Rules Engine allows ou to set comprehensive controls to perform AML-related counterparty risk mitigation effectively.

5. SAFE Implementation phases: benefit from a comfortable Travel Rule adoption

We advocate for a phased, data-driven approach to Travel Rule implementation. Our SAFE Implementation process offers Notabene clients a tailored pathway to compliance based on their business needs. Customers can meet regulatory guidelines and evolve their own risk-based approach and needs over time - with the first phase requiring less than a week with only minimal technical integration. Furthermore, as part of the implementation phases, Notabene's SafeTransact platform provides industry-unique support for multiple legal entities, allowing VASPs to easily expand into multiple jurisdictions without worrying about complex legal and compliance issues. Our goal with SAFE Implementation is to make a comfortable Travel Rule technical rollout so VASPs can focus on other matters, such as incorporating new compliance requirements into their business workflows.

Learn more about SAFE Implementation

6. Notabene: competitive edge through specialized Travel Rule training & solutions

Due to its novelty and operational intricacies, fully harnessing the advantages of Travel Rule compliance requires learning a new set of rules. For the latest training on this regulation, Notabene offers a Travel Rule Compliance Certification, equipping Compliance Officers with the tools they need to succeed in 2023 and beyond.

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