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.
Notabene's 2023 compliance report reveals that VASPs increasingly adopt a phased approach to Travel Rule compliance, transitioning gradually.
VASPs choose this strategy due to challenges such as the sunrise period, signaling compliance intentions to regulators, and meeting local enforcement deadlines.
Notabene outlines four stages of compliance: Spark, Amplify, Foundation, and Elevate, each addressing specific compliance aspects.
Survey data shows a contrast in compliance strategies between financial institutions (FIs) and crypto businesses, with crypto businesses more likely to adopt a phased approach.
The Rising Trend of a Phased Approach to Crypto Travel Rule Compliance: Insights from Notabene's 2023 Report
Notabene's 2023 State of Crypto Travel Rule Compliance Report revealed a trend: Virtual Asset Service Providers (VASPs) are adopting a phased approach to fulfilling Travel Rule compliance obligations. This means they are gradually transitioning from non-compliance to compliance, taking measured steps toward ‘full compliance.’  This nuanced insight is often missed in industry surveys, yet deserves attention as it reflects VASPs' practical and mindful strategy to adhere to the Travel Rule.
What is a Phased Approach to Travel Rule Compliance?
A “phased approach” is a strategy that VASPs used to progressively meet their full compliance obligations, taking into account the impact on their users and business. To become regulatory compliant, VASPs must carry out several processes simultaneously. These range from modifying product offerings, implementing new compliance frameworks, updating the user interfaces and APIs their customers interact with, and much more. The situation gets even more complex if the VASP operates in multiple jurisdictions.
Results from our compliance survey showed that rather than making a sudden leap from non-compliance to full compliance, VASPs are progressively rolling out their compliance initiatives in phases. This year, the adoption of a phased compliance strategy has risen to 31%, up from 18% in 2022 (Figure 2). This indicates an increasing acceptance of the phased compliance methodology among VASPs. Further details can be found in the sections below.
Why are VASPs Embracing a Phased Approach to Travel Rule Compliance?
Reported reasons VASPs opt for a phased approach to Travel Rule compliance include:
The Sunrise period: Fully complying with the Travel Rule during sunrise is particularly difficult for VASPs, as crypto is inherently borderless and international. VASPs based in countries where the Travel Rule is already being enforced will have a hard time being fully compliant; in some instances, they may not be able to send or get a response to a Travel Rule transfer from their counterparty VASP because this counterparty may be based in a jurisdiction where the Travel Rule is not yet enforced.
Signaling compliance to regulators: Having a clear and well-structured Travel Rule implementation program is appreciated by financial regulators. This approach allows VASPs to refine their processes on their path to full compliance.
Meeting local Travel Rule enforcement dates: If a VASP is registered in a jurisdiction with upcoming deadlines, they have to prove compliance whether or not their counterparties are compliant.
Diving into the staged approach to Travel Rule compliance
Notabene's yearly State of Crypto Travel Rule report shows a growing intent to adopt the Travel Rule in the cryptocurrency industry, with most VASPs targeting complete compliance by 2023, as evidenced by the data in Figure 1.
Understanding the meaning of ‘Full Compliance’
The industry's ambition to comply by the end of 2023 underscores its commitment to regulatory alignment and sets 2023 to become the year of Travel Rule adoption. Interestingly, the survey exposes a stark 109% rise in compliance claims, with 20% of respondents now identifying as 'fully compliant,' a significant increase from 13% in 2022. (Figure 1) However, pre-transaction fulfillment has only seen a 50% increase, suggesting some confusion around the interpretation of 'full compliance.' (Figure 1)
The Phased Approach to Compliance Gains Traction
The survey highlights that 19% of VASPs are responding to inbound Travel Rule transfers, even if they aren't initiating their own, and 12% are fulfilling Travel Rule obligations post-settlement. (Figure 2) These actions are viewed as early compliance stages. Moreover, when asked to describe their company's current stance on Travel Rule requirements, only 3% selected "Idle" as their response. This response signifies a substantial 75% decrease from the 2022 survey, pointing to a progressive demystification of Travel Rule compliance within the industry.
Financial Institutions vs. Crypto Businesses Staged Compliance Approach
Survey data reveals a significant contrast between financial institutions (FIs) and crypto businesses in their compliance strategies for the Travel Rule. The approach taken by FIs appears more binary: they are predominantly either fully compliant (36%) or not complying at all (36%). A noteworthy 27% of FIs are at an intermediate stage, only responding to inbound Travel Rule transfers. (Figure 3) This may be attributed to their support for crypto deposits without accommodating crypto withdrawals.
Crypto businesses, on the other hand, present a more diverse spectrum of compliance stages, with 48% opting for a phased approach. (Figure 3) This could stem from many of these businesses being operational before FATF’s Recommendation 16 extended its reach to their sector.
FI’s, having likely operated under FinCEN’s original Travel Rule, mandated in 1996, may only need to implement the technology to support Travel Rule compliance for their crypto transactions. This stark difference in approach underscores the unique challenges VASPs and FIs face in their compliance journey. Consider reading about the top Travel Rule compliance hindrances in 2023 for more on these challenges.
Notabene's Phased Approach to Travel Rule Compliance: The SAFE Implementation Phases
To aid VASPs and FIs in their compliance journey, Notabene recently introduced the SAFE Implementation phases. This tiered, customizable approach simplifies compliance, equips customers with valuable analytics, and creates a tailored path based on specific business needs.
The SAFE phases offer the following benefits:
Minimized Disruption: This phased integration of technical infrastructure mitigates risks and reduces disruption
Regulatory Navigation: It allows sufficient time to understand the technical, operational, and procedural aspects of the Travel Rule.
Continuous Improvement: The iterative nature of our method encourages constant learning and adaptation.
Comprehensive Support: Notabene's Customer Success team provides extensive training and dedicated support.
Regulatory Confidence: This gradual strategy demonstrates a commitment to regulatory compliance, cultivating trust with regulators.
The SAFE Implementation paves a reliable route toward Travel Rule compliance by emphasizing regulatory deadlines and leveraging data for informed decisions, risk mitigation, and user experience enhancement.
A Breakdown of the SAFE Implementation Phases
Notabene's phased approach for VASPs' Travel Rule compliance comprises four distinct stages, each addressing specific aspects of the adoption process. The phases are:
Spark: VASPs prepare to send transactions by collecting counterparty VASP data through due diligence, assessing the degree of customer input required for a comprehensive Travel Rule message.
Amplify: VASPs commence compliance to the greatest extent possible without customer collaboration, sharing originator information with counterparts, and responding to incoming Travel Rule transfers.
Foundation: VASPs expand compliance by acquiring beneficiary information, conducting sanctions screening, and applying proper AML/CTF controls before transmission to the beneficiary VASP. This stage is standard during the sunrise period.
Elevate: VASPs utilize verified originator and beneficiary data for informed pre-transaction decisions on both withdrawals and deposits. This phase is fully achievable in a post-sunrise period.
Mapping the 2023 State of Crypto Travel Rule Compliance Survey Data to the Safe Implementation Phases
Data from figure 2 suggests that most VASPs are still in the early stages of compliance, like the Spark and Amplify phases. A considerable number are complying to the best of their ability within the constraints of the sunrise period, aligning with the Foundation stage. Only a minority have achieved full Travel Rule compliance (Elevate.)
Here's a more detailed breakdown:
VASPs that reported non-compliance with travel rule obligations (34.8%) or post-settlement compliance (11.6%) and those allowing transactions without a Travel Rule message sent to the beneficiary VASP (37.3%) are in compliance stages akin to the Spark or Amplify phases.
VASPs fulfilling Travel Rule obligations before blockchain transaction settlement (20.3%) but not awaiting a beneficiary VASP response to process the transaction (22%) or proceeding if no response is received within a specific timeframe (14%) are likely in a compliance stage similar to the Foundation phase.
A small portion of VASPs (12% that reported disallowing a transaction unless a beneficiary VASP response is received) would qualify as being in the Elevate stage.
For a unique look into the Travel Rule compliance journey from the perspective of Notabene’s Customer Success team, head over to our next blog post. In "Overcoming Crypto Compliance Challenges: Notabene's SAFE Implementation Phases in Action," Notabene’s Global Head of Customer Success, Abigail Bryant Spolar, offers valuable insights drawn from her extensive experience guiding VASPs
* Notabene defines “fully-compliant” as Travel Rule obligations are fulfilled before the settlement of corresponding blockchain transactions.
 Our State of Crypto Travel Rule Compliance survey defined “fully-compliant” as Travel Rule obligations are fulfilled before the settlement of corresponding blockchain transactions.
 The survey defined “Idle” as all transactions suspended until we are ready to comply with the Travel Rule.
Key to a Successful Travel Rule Program: A Gradual Rollout