By clicking “Accept”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View our Privacy Policy for more information.

Hindrances to Crypto Travel Rule Adoption: Insights from Notabene's 2023 Report

Lesa Moné
Lesa Moné
July 24, 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

Each year, as part of our comprehensive State of Crypto Travel Rule Compliance survey, Financial Institutions (FIs) and Virtual Asset Service Providers (VASPs) share their main hurdles in adopting the Travel Rule. This article presents notable shifts in the top challenges, providing valuable insights into the evolving landscape of Travel Rule compliance.

Our 2023 report findings underscore the complexities of Travel Rule compliance; these insights amplify the necessity for a harmonized, global approach to compliance, primarily to address interoperability issues and the identification of counterparty VASPs. Learn more below.

Lack of technical resources becomes the main barrier to compliance

‘Lack of technical resources has emerged as the top hindrance to Travel Rule adoption, overtaking 'legal uncertainty' and 'sunrise period effects', which rank second and third, respectively.

Figure 1: Key finding #4 from Notabene’s 2023 State of Crypto Travel Rule Compliance Report

The percentage of VASPs that chose this response as their top roadblock has risen from 23% in 2022 to 27% in 2023. This increase may be due to VASPs having difficulty managing multiple data flows and integrating with various protocols, highlighting the challenge of protocol interoperability for widespread adoption of the Travel Rule. 

Additionally, 72.46% of respondents who identified a lack of technical resources as their primary obstacle to Travel Rule compliance had a personnel headcount below 100, which could also indicate resource allocation challenges. [1]

2. Financial Institutions face more technical hurdles in comparison to crypto businesses

When looking deeper into the data, ‘lack of technical resources’ is the top obstacle for Financial Institutions (FIs), with 45% of respondents citing this issue compared to 27% for crypto businesses. [2]

Figure 2: Key finding #10 from Notabene’s 2023 State of Crypto Travel Rule Compliance Report

The results showcase that FIs tend to take a stricter approach to compliance, with fewer variations in compliance stages. The shortage of resources may not be limited to compliance but may reflect a broader shortage and allocation of resources for launching digital asset products.

3. Legal uncertainty and sunrise period effects remain in the top three hindrances to compliance

'Legal uncertainty,' which the survey defined as ‘being unclear on what is required to comply fully with the Travel Rule,’ was the reported top hindrance to Travel Rule adoption in 2022, but it has fallen to second place in 2023. While it suggests a positive trend, regulators still need to set clear expectations for Travel Rule compliance and make more progress in reducing this hindrance further. ‘Sunrise period effects’ was cited by 19% of respondents as their greatest compliance challenge, highlighting the need for more information and guidance on this issue. [1] You can learn more about the sunrise period and its impact on VASPs and FIs in Chapter 5 of Notabene's 2023 State of Crypto Travel Rule Compliance Report.

4. Rising concern: data privacy

Data privacy has witnessed a noteworthy rise in concern, moving from last place in 2022 to becoming the fourth largest obstacle to Travel Rule adoption (from 4% to 12%) in 2023. (Figure 1) Survey results also revealed that more than half of the respondents do not enforce a counterparty due diligence process before sending a Travel Rule transfer. This is a concerning trend, as a key part of the due diligence process is to assess the data protection capabilities of counterparty VASPs, a process that is critical to mitigating these risks.

Figure 3: Key finding #9 from Notabene’s 2023 State of Crypto Travel Rule Compliance Report


The FATF outlines alternative procedures—including the possibility of not sending user information—when there are reasonable doubts about counterparty VASPs' data protection practices. [4] Yet, more recent regulatory guidelines, like Hong Kong’s SFC, specifically recommend that Travel Rule solutions “protect the submitted information from unauthorized access using a strong encryption algorithm to encrypt the information during the data submission.” [3] 

Notabene uses decentralized identifiers for a privacy-conscious implementation of the Travel Rule. To learn more, dive into our SAFE PII technology that uses encryption, secure escrow methods, and self-managed encryption keys for robust personal data protection. 

5. VASPs call for a global unified approach in Travel Rule communication and reachability

We asked respondents to anonymously share their opinions on the existing Travel Rule protocols in the market and the most relevant criteria for assessing their suitability. We share the common feedback divided by themes below.

Figure 4: Key finding #5 from Notabene's 2023 State of Crypto Travel Rule Compliance Report

6. Lack of Interoperability

One of the most common themes from the responses was the need for a unified global approach to reachability and transmitting Travel Rule messages. Nearly a quarter of the survey respondents (24%) cited interoperability as a current blocker for compliance. In comparison, 20% expressed concern that the availability of “too many” protocols on the market was causing fragmentation and confusion over their needs.*

VASPs and the FATF emphasize how crucial it is for protocols to communicate with one another. The FATF calls on the

“...industry to accelerate efforts to strengthen solutions that are global, and can accommodate nuances in requirements across jurisdictions, in line with the expectations of the FATF Standards.” [5]

7. Lack of Counterparty VASP Identification

Another common theme was the lack of a universal method for identifying counterparties. Unlike wire transfers, there is no standard method for tying a blockchain address to a specific counterparty. This creates a challenge in assessing transaction obligations and identifying the counterparty that needs to receive the required Travel Rule information. Chapter 5 of our report expands upon this topic.

8. Non-compliance with FATF Standards

Finally, nearly 10% of the respondents expressed concern that protocols are not compliant with the original FATF Travel Rule proposal. This key finding underscores the need for the industry to continue collaborating on common issues and for the private sector to develop global technological tools that can accommodate nuances across jurisdictions.

References

*In the context of Travel Rule solutions, interoperability refers to VASPs’ ability to communicate and exchange data with counterparty VASPs using multiple messaging protocols. Interoperability is essential because if VASPs are limited to exchanging information only with VASPs using the same messaging protocol, they’ll be cut off from exchanging information in a compliant manner with VASPs using different protocols.

[1] Notabene (2023). The State of Crypto Travel Rule Compliance Report, page 30

[2] Notabene (2023). The State of Crypto Travel Rule Compliance Report, page 40

[3] FATF (2021). Updated Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers, page 85, paragraph 291)

[4] Hong Kong Securities and Futures Commission (2023) AML/CTF Guideline for SFC-licensed VASPs, page 169, paragraph 12.12.2

[5] FATF (2022). Targeted Update on Implementation of the FATF Standards on Virtual Assets/VASPs, page 18, paragraph 29.

FAQs