{"id":14062,"date":"2021-09-02T06:00:45","date_gmt":"2021-09-02T13:00:45","guid":{"rendered":"https:\/\/www.trulioo.com\/?p=14062"},"modified":"2023-08-01T16:20:37","modified_gmt":"2023-08-01T16:20:37","slug":"travel-rule","status":"publish","type":"post","link":"https:\/\/www.trulioo.com\/blog\/crypto\/travel-rule","title":{"rendered":"The travel rule: compliance guidance for cryptocurrency exchanges"},"content":{"rendered":"\n

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Following the dramatic rise in investment in cryptocurrencies and Bitcoin over the last few years, regulators are now setting their sights on this dynamic, rapidly evolving corner of the financial services industry. The Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes Anti-Money Laundering (AML) and Know Your Customer (KYC), has published further guidance on how its 37 members should regulate cryptocurrency exchanges.<\/span><\/p>\n\n\n\n

While many in the industry welcome regulatory oversight, as it provides clarity and certainty for both investors and operators, one piece of guidance \u2014 Recommendation 16 \u2014 has caused significant controversy. The so-called <\/span>travel rule<\/span><\/a> requires \u201cobligations to obtain, hold, and transmit required originator and beneficiary information in order to identify and report suspicious transactions, monitor the availability of information, take freezing actions, and prohibit transactions with designated persons and entities.\u201d<\/span><\/p>\n\n\n\n

The FATF doesn\u2019t refer to this recommendation as the travel rule. But it has a striking similarity to an earlier Bank Secrecy Act (BSA) rule [31 CFR 103.33(g)] with that moniker, which requires all financial institutions to pass on certain information to the next financial institution, in certain funds transmittals involving more than one financial institution.<\/span><\/p>\n\n\n\n

Note that these obligations are reliant on member countries implementing the rules into their laws or regulations; the FATF does not have any direct enforcement mechanisms. However, the FATF does carry significant moral authority, as no member wants to be affiliated with money laundering and international crime. It seems just a matter of time before the travel rule for cryptocurrencies becomes enshrined in laws and regulations in the major economies around the world.<\/span><\/p>\n\n\n\n

In that case, the rules will apply to virtual asset service providers such as <\/span>cryptocurrency exchanges<\/span><\/a>, transfer services, custodial or host wallet providers and other possible business models. They suggest a threshold limit of $1,000 or \u20ac1,000 to be in line with regulations covering wire transfers, but this limit will depend on specific country requirements.<\/span><\/p>\n\n\n\n

In October 2020, financial regulators in the U.S. proposed rules to modify the BSA to <\/span>reduce the general travel rule threshold<\/span><\/a> from $3,000 to $250 for international transfers.<\/span><\/p>\n\n\n\n

An unknown technology frontier<\/h2>\n\n\n\n

As the industry grapples with ensuring a fair and transparent exchange, rapidly onboarding customers, complying with all relevant regulations and many other issues of developing a new financial marketplace, the travel rule is a whole other level of technology.<\/span><\/p>\n\n\n\n

Processes on verifying information, securing this information and safeguarding this information between only the specific parties will need to be addressed. In this era of data breaches and robust data privacy laws, coming up with a new framework that satisfies all requirements is a unique challenge.<\/span><\/p>\n\n\n\n

Even more problematic is the decentralized nature of cryptocurrency. Virtual currencies operate across borders and systems, and there are numerous technologies and channels for transactions. Virtual wallets, P2P exchanges, cryptocurrency kiosks, dapps (decentralized applications), ICOs, internet casinos and multi-sig wallets (multiple signature) are among some of the technologies that require consideration.<\/span><\/p>\n\n\n\n

Historically, there has been very little synchronization or coordination between these different cryptocurrency systems. They will now have to work together to create interrelationships and\/or technology that works for all parties \u2014 and quickly. <\/span><\/p>\n\n\n\n

One potential solution that has the backing of ING Bank, Fidelity Investments, Standard Chartered and 25 VASPs is the <\/span>Travel Rule Protocol<\/span><\/a>. Their goal is to “Create a first-generation, minimal, workable, pragmatic API specification for compliance with the FATF Travel Rule in a timely manner. Minimize fragmentation and maximize interoperation of solutions” and their Version 2.0 launched in June.<\/span><\/p>\n\n\n\n

Another option is the <\/span>Travel Rule Information Sharing Alliance<\/span><\/a>, which is a working group to provide \u201cinteroperability with open security standards and emerging messaging standards such as InterVASP, OpenVASP, and BIP75, and easy integrations backend systems.\u201d<\/span><\/p>\n\n\n\n

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The initial FATF guidelines were published in June 2019, and have now been followed up by two 12-month reviews. The second 12-month review of the implementation of FATF\u2019s <\/span>revised Standards on virtual assets and VASPs<\/span><\/a>, released in June 2021 notes:<\/span><\/p>\n\n\n\n