What is the Sunrise Issue of the Crypto Travel Rule?
- The "sunrise issue" of the Crypto Travel Rule refers to the staggered global enforcement, leading to various stages of compliance among VASPs and subsequent challenges.
- Compliant VASPs face significant challenges when dealing with non-compliant counterparts, including difficulties in data transfer, identifying counterparty VASPs, and managing counterparty risk.
- Data from Notabene's 2023 State of Crypto Travel Rule Compliance Report reveals a range of compliance stages among VASPs, with many taking a phased approach to the Travel Rule.
- FATF suggests robust control measures to mitigate risks during the sunrise period. The ultimate solution is the broad and rapid introduction of the Travel Rule across all jurisdictions.
- VASPs can mitigate the negative business impact of the sunrise issue by proactively starting to comply with the Travel Rule as soon as possible.
- Notabene's SAFE Implementation offers a phased approach to Travel Rule compliance, which minimizes operational risks, simplifying compliance, and offers guidance for VASPs navigating the sunrise issue.
The Travel Rule, like the sun, rises at different times around the world. Navigating the “sunrise issue” - the period where Travel Rule enforcement is staggered globally - presents unique challenges for Virtual Asset Service Providers (VASPs).
Given the borderless nature of crypto transactions, achieving full compliance becomes a complex task for VASPs, particularly those operating in jurisdictions where the Travel Rule is already enforced. They may face hurdles in executing or receiving responses to Travel Rule transfers from counterparts in locations where enforcement is still pending.
VASPs often grapple with premature requests for Travel Rule data transfers before implementing compliance measures. Those in early-enforcing countries may also find maintaining business relationships with counterparts in late-enforcing nations challenging. As FATF guidelines allow VASPs to require Travel Rule compliance even from jurisdictions where the rule is yet to be enforced, a proactive approach to compliance is crucial for all involved parties.
How is the sunrise period currently affecting VASPs?
The sunrise period remains one of the top three hindrances to complying with the Travel Rule, as reported by our survey respondents.
As demonstrated in Chapter 2 of Notabene’s 2023 State of Crypto Travel Rule Compliance Report, many VASPs claim to be compliant but are not fulfilling the required pre-transaction obligations”; VASPs are in different stages of compliance: a substantial percentage (34.8%) are not yet complying at all.
Those that are complying are in different phases - some comply pre-transaction (20.3%), others post-transaction (11.6%), and some currently respond to Travel Rule transfers but are not yet sending (18.8%).
The above data shows that during the sunrise period, VASPs take a phased approach to compliance with Travel Rule obligations. Rather than jumping from not complying to being fully compliant, VASPs go through different stages, making a smoother and more successful rollout.
What are the main challenges that compliant VASPs face when transacting with non-compliant VASPs?
Three main challenges that compliant VASPs face when transacting with non-compliant VASPs are as follows:
- Complying with the obligation to send a Travel Rule data transfer:
If a Beneficiary VASP is unprepared for Travel Rule transfers, Originator VASPs may struggle to meet the core obligation of sending the required originator and beneficiary information with each transaction. Depending on a VASP's policies and local regulations, they might not process a transaction in these scenarios.
However, most VASPs remain flexible, with 41.2% taking a risk-based approach to transactions if a Travel Rule message can't be sent, 37.3% allowing transactions regardless, and 7.8% disallowing transactions to proceed unless a Travel Rule message can be sent to the beneficiary VASP.
- Identifying the counterparty VASP and managing counterparty risk: Without a confirmation of correct counterparty identification, the initiating VASP may need to rely on third-party data, like blockchain analytics, to decide whether to proceed with the transaction, potentially risking interaction with sanctioned VASPs.
- Effective sanction screening/risk management on counterparty customer: Without a response or a Travel Rule message from a non-compliant VASP, the compliant VASP lacks verified information about the counterparty customer. This significantly impedes effective sanction screening and risk management processes.
As previously mentioned, most VASPs today still transact even without receiving a response from the beneficiary VASP confirming that they correctly identified the counterparty to that transaction and verifying the identity of the counterparty end customer.
12% of VASPs only allow a transaction if they receive a response from the beneficiary VASP. The rest either do not wait for a response (22%), proceed in case they have not received a response within a specific timeframe (14%), or do not connect Travel Rule and transaction flows at all (52%) (see key finding 8 in chapter 2).
Ultimately, these challenges may result in the compliant VASP not being able to transact with counterparties that do not engage in Travel Rule flows. This is already the case for a minority of VASPs, as mentioned above.
To learn more about how the sunrise period affects VASPs, download Notabene’s 2023 State of Crypto Travel Rule Compliance Report.
What is the FATF’s stance on the Crypto Travel Rule’s “sunrise issue”?
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.
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) [1]
In its Targeted Update published in June 2022, FATF recognizes the compliance hindrances of the sunrise period and highlights how different jurisdictions have been approaching those issues. [2]
However, FATF now pushes for a broad and rapid introduction of Travel Rule requirements as the ultimate solution to the sunrise issue:
Going forward, broad and rapid introduction of the Travel Rule can reduce the scale of the sunrise issues and provide additional incentives for industry to accelerate compliance. [3]
What is the business impact of the Crypto Travel Rule’s “sunrise issue?”
Ultimately, the phenomenon of compliant VASPs restricting transactions with noncompliant VASPs carries a negative business impact for both sides. This impact is already being felt by 7.8% of the respondent VASPs, who have reported that they only allow transactions if they can send a Travel Rule message to the beneficiary VASP. It also impacts another 12% of VASPs that only allow a transaction if they receive a response from the beneficiary VASP (see key finding 4).
To mitigate the negative business impact on the industry and sustain the international nature of the crypto, 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 survey responses show that VASPs are currently in very different implementation stages. However, the majority aim to be fully compliant in 2023 (see key finding 1).
From the policymaker's perspective, it is essential to provide regulated VASPs with a clear framework for compliance with the Travel Rule, [4] VASPs in jurisdictions that do not provide a clear path toward Travel Rule compliance will ultimately face difficulties in interacting 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?”
Notabene has introduced a phased approach for Travel Rule implementation to assist VASPs seeking to simplify compliance and manage the "sunrise issue."
SAFE Implementation phases minimize operational risk and provide analytics to guide users through the Travel Rule rollout. This strategy allows customers to meet regulatory guidelines while tailoring their risk-based approach over time.
Notabene's SafeTransact platform provides industry-unique support for multiple legal entities, facilitating seamless expansion into multiple jurisdictions without the headache of legal and compliance issues.
Notably, the first phase requires minimal technical integration and can be completed within a week.
To assist businesses in navigating Travel Rule compliance, Notabene offers a free SafeTransact-Rise plan. This plan requires no integration, enabling users to immediately benefit from advanced compliance features.
SAFE Implementation phases are part of Notabene's broader efforts to support customers with regulatory compliance, recognizing the complexity and dynamic nature of regulatory compliance. We are dedicated to providing our customers with the necessary tools and expertise, constantly updating our solutions to meet the latest regulatory requirements, with a team of experts ready to answer any questions.
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Navigating the intricate challenges of the Travel Rule’s “sunrise issue” is a dynamic journey. As shown, the disparate stages of compliance among VASPs have significant business implications and impact on maintaining the international nature of crypto. A proactive stance towards compliance is the key to mitigating this effect, a strategy exemplified by Notabene’s phased approach to Travel Rule implementation. A harmonized global adoption of the Travel Rule will minimize the sunrise issue and provide a firm foundation for the continued growth and maturation of the crypto industry.
[1] FATF, "Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers," p. 64, para. 201, October 28, 2021.
[2] FATF, "Targeted Update on Implementation of the FATF Standards on Virtual Assets/VASPs," p.3, 2022.
[3] FATF, "Targeted Update on Implementation of the FATF Standards on Virtual Assets/VASPs," p. 23, para. 18, June 30, 2022.
[4] FATF, "Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers," p. 64, para. 200, October 28, 2021.
