The Travel Rule, like the sun, rises at different times around the world. The “sunrise period” refers to the period during which the Travel Rule is not in full effect across jurisdictions, which causes various stages of implementation, as examined in Chapter 3 of the State of Travel Rule Compliance Report.
Complying with the Travel Rule during the sunrise period is particularly difficult for VASPs, as crypto is inherently borderless and international. 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 - unless these counterparties take a proactive approach to compliance.
As noted in our recent State of Crypto Travel Rule Compliance Report, 25% respondents named the sunrise period as one of the top hindrances to complying with the Travel Rule.
Currently, a growing number of VASPs are receiving requests for travel rule data transfers before they have Travel Rule solutions in place. FATF’s Travel Rule guidelines stipulate that VASPs should limit or completely restrict transactions with counterparty VASPs that do not reply to their Travel Rule data transfers.
The FATF recognizes the compliance hindrances that the sunrise period brings, yet 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 [OCT 2021] paragraph 201, FATF says, “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.”
VASPs are currently feeling the negative business impact of the Crypto Travel Rule’s sunrise period. Ultimately, the phenomenon of compliant VASPs restricting transactions with non-compliant
VASPs carry a negative business impact for both sides. Notabene conducted an industry-first comprehensive survey and subsequent report of the global state of Travel Rule compliance. Of 56 surveyed VASPs, 11% of the respondents reported suspending transactions until they are ready to comply with the Travel Rule (see page 23 of the State of Crypto Travel Rule Compliance Report.)
To mitigate the negative business impact for 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 the VASPs are based.
Results from our State of Crypto Travel Rule Compliance survey show that VASPs are currently in very different stages of their implementation of the Travel Rule, although the majority aim to be fully compliant in Q3/Q4 2021 or Q1/Q2 2022 (see Takeaway 2, page 17 of the State of Travel Rule Compliance Report).
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 (Updated Guidance [OCT 2021] paragraph 200.) 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.