TL;DR:
- The "sunrise issue" refers to the period when the Travel Rule is not in effect across jurisdictions, causing difficulties for virtual asset service providers (VASPs) trying to comply with the rule.
- The Financial Action Task Force (FATF) has suggested measures that VASPs can implement to comply with Travel Rule requirements regardless of the stages of compliance at which their counterparties operate.
- The sunrise issue has a negative business impact on VASPs, with some suspending transactions until they are ready to comply with the Travel Rule.
- VASPs can mitigate the negative business impact of the sunrise issue by proactively starting to comply with the Travel Rule as soon as possible.
- VASPs can securely respond to unlimited Travel Rule data transactions with Notabene's free Sunrise Plan, regardless of enforcement dates.
The Travel Rule, like the sun, rises at different times around the world. The “sunrise issue” refers to the period during which the Travel Rule is not in full effect across jurisdictions, which causes various stages of implementation.
Complying with the Travel Rule during this period of inconsistent implementation is particularly difficult for VASPs, as crypto transactions are inherently borderless and international.
Currently, a growing number of VASPs are receiving requests for travel rule data transfers before they have Travel Rule solutions in place. Additionally, VASPs based in countries where the Travel Rule is already in force struggle to maintain business relationships with those in countries where the Travel Rule is not yet enforced.
As FATF’s Travel Rule guidelines state that VASPs can require Travel Rule compliance from beneficiaries located in jurisdictions where the regulation is not yet in force, it is imperative that their counterparties take a proactive approach to compliance.
How is the sunrise period currently affecting VASPs?
In October 2021, Notabene conducted an industry-first comprehensive survey and subsequent report on the global state of Travel Rule compliance. Twenty-five percent of respondents named the sunrise period as one of the top hindrances to complying with the Travel Rule.
To learn more about how the sunrise period is affecting VASPs, visit Chapter 3 of Notabene’s 2022 State of Crypto Travel Rule Compliance Report.
What is the FATF’s stance on the Crypto Travel Rule’s “sunrise issue”?
The FATF recognizes the compliance hindrances that the sunrise period brings. To mitigate risks during this period, the FATF suggests several measures that VASPs can implement to comply with Travel Rule requirements regardless of the stages of compliance at which their counterparties operate.
In its updated guidance, FATF states:
Regardless of the regulation in a certain country, a VASP may implement robust control measures to comply with the travel rule requirements. Examples include VASPs restricting VA transfers to within their customer base (i.e., internal transfers of VAs within the same VASP), only allowing confirmed first-party transfers outside of their customer base (i.e., the originator and the beneficiary are confirmed to be the same person) and enhanced monitoring of transactions. (Emphasis added) (FATF 2021, p. 64, para 201)
What is the business impact of the Crypto Travel Rule’s “sunrise issue?”
VASPs are feeling the negative business impact of the sunrise issue. Ultimately, companies on both sides of the equation could be negatively affected when compliant VASPs restrict transactions with noncompliant VASPs. Of the 56 surveyed VASPs, 11% reported suspending transactions until they are ready to comply with the Travel Rule. (Notabene 2022, p. 23)
How can VASPs mitigate the negative business impact of the Crypto Travel Rule’s “sunrise issue”?
To mitigate the negative business impact on the industry and sustain the international nature of the crypto industry, VASPs could take a proactive approach and start complying as soon as possible, regardless of the stage of adoption of the Travel Rule in the jurisdiction where they are based.
The image below illustrates that survey respondents were in vastly different stages of implementing the Travel Rule. At the time of the report, the majority aimed to be fully compliant in Q3/Q4 2021 or Q1/Q2 2022.
From the policymaker's perspective, it is essential to provide regulated VASPs with a clear framework for Travel Rule compliance, as this will potentially allow for a staged approach, as suggested by the FATF. (FATF 2021 pg. 64, para 200.)
VASPs in jurisdictions that do not provide a clear path toward Travel Rule compliance will ultimately find it difficult to interact with compliant VASPs, which, in turn, will result in the jurisdictions becoming less competitive venues for crypto businesses.
How does Notabene solve the Crypto Travel Rule’s “sunrise issue?”
Our minimal-integration Travel Rule solution helps VASPs in any jurisdiction ease into compliance at their own pace.
VASPs can sign up for our free Sunrise Plan and send compliant Travel Rule transactions to any counterparty–regardless of their compliance status, today. Once signed up, VASPs can receive and respond to unlimited Travel Rule data transfers and send outgoing transactions up to USD 10K.
