Since day one, crypto and blockchain technology have been about enabling permissionless transactions between people and businesses. Many of us in the industry have built incredible products to make crypto accessible to the wider audience. However, the primary stumbling block for wider adoption always pointed back poor ties to the traditional financial industry, primarily due to the lack of a regulatory framework.
The industry is now at a turning point. FATF's new global framework and, in particular, the Travel Rule itself, is the biggest opportunity crypto has had for crossing the chasm into mass adoption.
Once your company implements the Travel Rule, it will make it much easier for you, as a virtual asset service provider (VASP), to do business with traditional financial institutions and by extension commerce with non-crypto businesses.
Outside of a few major jurisdictions such as the US, Switzerland, and Singapore, most countries have not prioritized regulating or understanding the technology and its benefits.
This has been particularly problematic for exchanges outside of the main global financial centers, who have had problems both directly with regulators and indirectly through the loss of financial partners.
Notabene co-founders, Pelle and Andres, have both had to shut their early Bitcoin businesses down because of this exact problem in Kenya and Chile.
This also affects countries with strong regulation, where interacting with unregulated institutions has always been a risky grey area.
The new 2019 FATF guidelines for Virtual Assets forces local regulators to take a stance. They are required to either create a roadmap for a regulatory framework for VASPs or, unfortunately, outright ban them. Of course, the second option is problematic, but there are already well-thought-out legal frameworks from countries like the US, Switzerland, South Africa, South Korea, and Singapore. They will hopefully provide a good example to more risk-averse regulators.
For several years, we have heard from traditional banks that the primary reason they would not open bank accounts for crypto businesses was the inability to prove a reliable source of client funds. It was simply too risky for them to engage with customers holding crypto.
The new Travel Rule specifically solves this problem. It enables crypto businesses to fully participate in the global financial system by bringing them to the same level of accountability that the traditional financial institutions already adhere to. This finally allows crypto businesses to be treated seriously by the financial industry as a whole.
The most successful crypto businesses have invested a lot of time and money in convincing their banking connections that they have very strict KYC and AML policies in places.
Solving the Travel Rule by performing strong due diligence on partner VASPs will help crypto businesses reduce this risk and become trusted partners for traditional financial companies. This is also a great opportunity to start implementing the Travel Rule before your jurisdiction requires you to do so.
With better access to banking comes much better access to local payment systems around the world. This alone could really improve the adoption of cryptocurrencies as well as bring whole new classes of untapped users around the world to the innovations in the DeFi space.
Most FinTechs today differentiate themselves by improving UX and on-boarding and finding new use-cases for what is, in essence, the same products the traditional financial industry has offered for years.
As crypto products become regulated, with Travel Rule adoption and more thorough blockchain specific KYC/AML, fintech will look to adopt many of the new products coming out of the DeFi space. This will help them add new revenue opportunities and find better ways to differentiate themselves from incumbent financial services.
Institutional investors from around the world are actively looking at adding crypto as a new asset class. Lack of regulatory certainty has been one of the largest issues holding them back from wider investment in the space.
Blockchain analytics tools have already helped lower the risk of dealing with crypto assets, but through our conversations with institutional investors, we have learned that new regulations like the Travel Rule will really help open up the asset class to them.
We believe this will help increase the demand for cryptocurrencies. It will also improve liquidity and demand in the DeFi space.
It is paramount for both new and existing businesses in the crypto space to understand more about how the Travel Rule affects your business.