The Travel Rule Crypto Requirements Across Jurisdictions

The Travel Rule, as outlined in a 1996 FinCEN Advisory, mandates that financial institutions must transmit specific information to the next institution in certain fund transfers. This measure was introduced to combat money laundering.

In 2019, FATF extended this rule to include VASPs, thus bringing a new layer of compliance for those in the crypto and DeFi sectors. This shift highlights the importance of understanding and adhering to these regulations.

In this article, we will cover the updated FATF Travel Rule crypto requirements, define affected parties, and give recommendations on how to remain compliant.

What is the Travel Rule for crypto companies?

The Travel Rule is a set of recommendations by the FATF designed to prevent money laundering and ensure compliance with anti-money laundering (AML) policies.

Basically, the Travel Rule requires that the personal data of parties involved in a transaction must accompany their transfers, ensuring that “required and accurate originator information, and required beneficiary information” is obtained and shared with counterparty VASPs or financial institutions either during or before the transaction takes place.

As stated by FATF,

“To manage and mitigate the risks emerging from virtual assets, countries should ensure that virtual asset service providers are regulated for AML/CFT purposes, and licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations.”

What is the Financial Action Task Force?

Established in 1989, The Financial Action Task Force is an international organization that is responsible for developing policies to combat global money laundering and terrorist financing.

It sets international standards that aim to prevent these illegal activities and the harm they cause to society, providing a framework for countries to adopt and implement in their national regulatory systems.

Who is affected by the Travel Rule?

The Travel Rule crypto requirements primarily affect two groups: virtual asset service providers and financial institutions.

• Virtual asset service providers include cryptocurrency exchanges, wallet providers, and any other services facilitating the exchange, transfer, or safekeeping of virtual assets. VASPs are required to share and collect the necessary information about the parties involved in transactions.
• Financial institutions encompass traditional banks and financial services that engage in the transfer of funds, especially those that intersect with the cryptocurrency market, are also subject to the Travel Rule. This extends to institutions that may handle transactions involving virtual assets or that work in partnership with VASPs.

Why is the Travel Rule important? Key benefits

Implementing the Travel Rule crypto recommendations has several benefits to the virtual asset ecosystem:

• Detection of ML/TF activities. The Travel Rule helps deter money laundering and terrorism financing. It ensures that transactions are monitored more closely, making it difficult for illicit actors to hide their operations within the system.
• Market legitimacy and investor confidence. By imposing standards that ensure transparency and accountability, the regulation can attract more investors, while mitigating potential risks associated with virtual asset investments.
• Enhanced collaboration among VASPs. The requirement for VASPs to share data and communicate more efficiently about transactions creates a culture of collaboration and mutual trust. This helps build confidence in the virtual asset ecosystem as a whole.

FATF Travel Rule guidelines

The FATF has set forth guidelines suggesting a threshold of 1,000 USD/EUR for virtual asset transfers. So, when transactions meet or exceed this limit, VASPs are required to collect and share the following information:

• Virtual asset wallet addresses or transaction reference numbers
• Identities of both the originator (sender) and the recipient (beneficiary)

For transfers exceeding the limit, VASPs must also collect additional data:

• Beneficiary’s account number (if applicable)
• Beneficiary’s address or national identity details
• Originator’s account number

The rule applies when a VASP conducts transactions with another obliged entity, such as a bank, or with other virtual asset transfer platforms, including other VASPs.

Information on transactions involving non-obligated entities, such as those linked to unhosted wallets, is not required to be disclosed by VASPs.

With the introduction of these guidelines, the Travel Rule aims at combating money laundering and terrorist funding. By gathering this data, authorities are enabled to pinpoint suspicious actions, including fund transfers by individuals or entities linked to criminal conduct, and implement necessary measures to deter or prosecute illicit activities.

How to comply with the Travel Rule crypto requirements

To remain compliant, a company must implement two key solutions: one for data collection and another for data sharing. Fortunately, the FATF allows companies the flexibility to choose their own methods or technologies for data sharing, leaving it to the discretion of each company.

Furthermore, virtual asset service providers are required to adhere to a risk management policy, along with implementing secure data transmission protocols such as encryption, to identify and report suspicious transactions.

Typically, companies already possess a client’s personal data from previous Know Your Customer (KYC) processes by the time a transaction takes place. However, for companies that have not implemented KYC checks, adopting a clear KYC procedure is crucial to comply with the crypto Travel Rule.

When selecting the tool that will help comply with the crypto Travel Rule, companies should consider:

• Automated KYC/AML solutions that include customer verification at onboarding and sanctions screening for both transaction parties.
• Transaction monitoring tools that help ensure that a client’s funds do not originate from illicit activities, enhancing security and compliance.
• Data protection tools that help businesses guarantee data security and compliance with data protection laws such as GDPR and CCPA.

Compliance challenges

Implementing the FATF Travel Rule crypto requirements presents several challenges, including:

• Investment in compliance infrastructure. There’s a significant need for investments in technology and infrastructure to meet compliance standards, which can be a substantial hurdle for many organizations.
• Interoperability challenges. Currently, there’s limited compatibility between the Travel Rule compliance tools, hindering their ability to align with the FATF Standards fully. This interoperability gap may restrict VASPs from transmitting the Travel Rule data to others using different tools, consequently limiting transaction processing capabilities.
• Privacy concerns. The requirement for VASPs to share personal data raises privacy issues, potentially jeopardizing the security of customers’ personal information.

FATF Travel Rule vs BSA

The FATF Travel Rule is often compared to the Bank Secrecy Act (BSA) due to their similar objectives and requirements regarding the sharing of information for financial transactions.

Both are designed to combat money laundering and terrorist financing by ensuring that certain information about the parties involved in transactions is collected and transmitted to relevant authorities or participating entities.

The infographic below explores the key differences between the two frameworks.

Travel Rule across governments: news and updates

According to FATF’s 2023 survey, jurisdictions are currently showing limited progress in incorporating the Travel Rule requirements. The FATF, along with its Financial Action Task Force Style Regional Bodies (FSRBs), have reviewed the adherence of 98 jurisdictions to the Travel Rule recommendations.

A significant portion of these jurisdictions (73 out of 98) fall short, being only partially compliant or entirely non-compliant with FATF’s directives. At the same time, 24 jurisdictions accounting for 25% are largely compliant and one jurisdiction has achieved full compliance. This demonstrates a critical need for jurisdictions to accelerate the implementation of the Travel Rule requirements.

In September 2023, the UK integrated the Travel Rule requirement into virtual asset service providers. As for the EU, the Travel Rule will come into effect on December 30, 2024.

Summing up

The adoption of the Travel Rule is crucial in the global fight against money laundering and terrorist financing. By mandating the exchange of vital information for transactions, the Travel Rule significantly enhances the transparency and traceability of crypto assets.

PixelPlex’s Know Your Transaction (KYT) tool is designed to bolster companies’ compliance efforts. It collects and analyzes data and metadata across various aspects of Ethereum and provides real-time alerts, helping businesses avoid fraud, wash trading, terrorism funding, and other fraudulent activities. KYT seamlessly integrates into existing business infrastructure and swiftly identifies suspicious patterns and risks associated with illicit or sanctioned entities.

For organizations looking to elevate their compliance with crypto regulations and navigate the complexities of the digital asset ecosystem effectively, PixelPlex blockchain consultants are ready to offer their expertise.

Our expertise includes but is not limited to:

• Blockchain product development
• Crypto compliance solutions implementation
• Financial software development services
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• OTC Hawk solution — full-cycle portfolio management
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• Blockchain integration into FinTech, healthcare, retail, supply chain, and oil and gas software development

Contact us for tailored advice and solutions to ensure your business meets all regulatory requirements and thrives in the evolving crypto landscape.