travel rule crypto

Travel Rule Primer for Crypto Transaction Monitoring

The travel rule in refers to a set of regulatory requirements aimed at preventing money laundering and terrorist financing. It is often associated with traditional financial institutions, but it has been extended to include virtual asset service providers (VASPs), which include cryptocurrency exchanges and wallet providers.

The travel rule typically mandates that these entities collect and transmit certain information about the parties involved in a cryptocurrency transaction. This information may include the sender’s and receiver’s names, addresses, and account numbers. The goal is to enhance transparency and traceability in cryptocurrency transactions, making it more difficult for criminals to use digital currencies for illicit purposes.

These regulations are often put in place by government authorities and financial regulatory bodies to ensure that cryptocurrency transactions adhere to the same anti-money laundering (AML) and know your customer (KYC) standards as traditional financial transactions. Compliance with the travel rule is essential for cryptocurrency businesses to operate legally and avoid legal repercussions.

Originally, the Travel Rule exclusively pertained to financial institutions. However, in 2019, the Financial Action Task Force (FATF) expanded its recommendation to encompass Virtual Asset Service Providers (VASPs). The term “VASP,” as defined by the FATF, includes any individual or legal entity conducting business activities on behalf of another individual or legal entity. These activities involve:

  1. Facilitating the exchange between virtual assets and fiat currencies.
  2. Facilitating the exchange between one or more types of virtual assets.
  3. Executing the transfer of virtual assets.
  4. Safeguarding and/or administering virtual assets or instruments that enable control over virtual assets.
  5. Participating in and offering financial services related to the issuer’s offer and/or sale of a virtual asset.

Current Challenges to Travel Rule Implementation in Crypto Transactions

The implementation of the Travel Rule in the cryptocurrency industry faces several challenges, including:

  1. Jurisdictional Non-Uniformity: Different countries adopt the Travel Rule based on their individual regulations, leading to a lack of uniformity. This results in variations in de minimis thresholds, the types of originator and beneficiary data to be collected and transmitted, and other discrepancies that deviate from FATF standards.
  2. Interoperability Challenges: There is a lack of interoperability among Virtual Asset Service Providers (VASPs), as they employ various protocols and solutions that do not always seamlessly interact with each other. This lack of standardized communication and data exchange protocols complicates the implementation of the Travel Rule.
  3. Sunrise Issue: The “sunrise issue” arises from the uneven global implementation of the Travel Rule. Some jurisdictions enforce the rule (“the sun is up”), while others do not yet have it in place (“the sun is down”). This inconsistency creates challenges when VASPs from different jurisdictions interact, as one may be obligated to comply with the Travel Rule while the other is not. The VASP subject to the rule may face difficulties in obtaining cooperation and compliance from the entity not yet obliged to adhere to the Travel Rule.

As a result, VASPs are often unable to comply with relevant Travel Rule regulations. This noncompliance typically entails:

  1. Inaccurate Data Transmission: Instances where incorrect data, such as transmitting a transaction ID instead of the originator’s wallet address, is collected and transferred.
  2. Flawed Communication Chain: Problems arise when the ordering VASP acquires beneficiary information from the beneficiary VASP rather than collecting it directly.
  3. Delayed Transmission of Information: Originator and beneficiary details are transmitted after the execution of the transaction, causing a timing discrepancy.
  4. Limited Support for Virtual Assets and Transaction Amounts: Some systems only accommodate specific types of virtual assets (VAs) or transaction amounts, leading to partial coverage.
  5. Unretrievable Transmitted Information: Issues arise when the transmitted information cannot be downloaded or retained by the receiving party.
  6. Difficulty in Locating Counterparty VASPs: Challenges exist in locating VASPs associated with the counterparty for all virtual asset transfers.

Legal Thresholds

The FATF suggests that nations implement a de minimis threshold of 1,000 USD/EUR for virtual asset (VA) transfers. It emphasizes that VA transfers below this threshold should have fewer regulatory requirements in comparison to those exceeding the threshold.

Similar to the FATF Travel Rule, the FinCEN Travel Rule mandates that both financial institutions and VASPs collect and share information concerning the originator and beneficiary of a transaction. Additionally, VASPs in the United States must verify that cryptocurrency transactions do not have their origin or destination in sanctioned countries or entities.

However, there is a distinct threshold for the FinCEN Travel Rule. Transactions meeting or exceeding $3,000, encompassing any foreign equivalent and virtual assets, fall under the purview of this rule, irrespective of the involvement of traditional currency.

Travel Rule Compliance for VASPs

The primary requirements of the Travel Rule are as follows:

  • Conducting due diligence on the counterparty before data sharing.

For the originating VASP:

  • Identifying its client (originator).
  • Gathering required information from the originator, maintaining a record, and subsequently sharing the information with the beneficiary VASP after completing all necessary checks.
  • Screening to verify that the beneficiary is not a sanctioned entity.
  • Monitoring transactions and reporting any that raise suspicion.

For the beneficiary VASP:

  • Obtaining necessary information from the originator’s VASP.
  • Verifying the accuracy and consistency of the obtained information and maintaining a record.
  • Screening to confirm that the originator is not a sanctioned entity.
  • Monitoring transactions and reporting any that raise suspicion.

In summary, a company must implement two solutions to ensure compliance: one for the collection of data and another for the secure sharing of this information.

Conclusion

As the US, UK and EU increase regulation, oversight and penalties for Travel Rule non-compliance, implementing a robust Travel Rule Compliance Policy and corresponding program becomes of paramount importance.

Adam Tracy works with VASPs and FI’s on creating Travel Rule programs. Be sure to reach out with any questions or comments.

Book a free consultation here.

About Adam Tracy

Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.

Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.

In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.

Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.

Find Adam: https://linktr.ee/adamtracy

Blockrunner, LLC., is a financial services match-making marketplace and consulting company. We are not a bank, FI/NBFI, Payment Service Provider, deposit taking institution, trust, or money services business of any kind. We are not regulated by any financial regulator. Banking, Payment, Processing, and Licensing services are provided by our participating members. This website is for informational purposes only and does not constitute legal advice. If you need legal advice, please consult a licensed attorney in your jurisdiction.

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