Crypto Business: A number of important concerns have come to light in the discussion regarding the application of the Financial Action Task Force’s (FATF) Travel Rule in the cryptocurrency industry. The Travel Rule, officially known as FATF Recommendation 16, requires virtual asset service providers (VASP) to submit specific information for bitcoin transfers over a predetermined threshold in an effort to bring additional measures to combat money laundering and terrorism funding.
Regarding any fund transfers made on an originator’s behalf with the intention of making funds available to a beneficiary, the Travel Rule pertains to the information sharing that takes place between an originator and a beneficiary. The necessary data must be sent securely and right away.
Blockchain technology provides unmatched transparency with publicly accessible transaction ledgers, in contrast to conventional financial systems. By disclosing the names and transaction histories of the people behind wallet addresses, the Travel Rule’s implementation broadens this transparency.
Administrators of the Travel Rule protocol, providers of Travel Rule compliance, and VASPs must handle and share client data with caution. Although this degree of transparency has advantages, it also comes with serious privacy dangers that are not present in traditional finance (TradFi). All transactions between wallet addresses and the assets exchanged and received are readily visible to observers.
The “sunrise issue,” which arises from varying regulatory requirements in various countries, is another difficulty that hinders global compliance. Cross-border transactions can get complicated and inefficient when a VASP operating in one nation has to follow different regulations than in another.
Different methods used for the due diligence (DD) of VASPs present serious difficulties as well. Certain protocols impose strict checks, while others are permissionless and don’t require participants to provide DD. The disparity across countries creates uncertainty for VASPs’ compliance initiatives and, from a technical one, adds to the operational burden for compliance teams as they attempt to stay up to date with several standards to handle transactions involving different jurisdictions. Because of this, VASPs are forced to adopt a risk-based strategy for each transaction, which may result in operational inefficiencies and gaps.
An additional layer of complication is introduced by the variety of national legislation regarding the mandatory data fields to be exchanged and the interpretation of shared customer data. This may result in misinterpretations and noncompliance mistakes.
The industry created InterVASP Messaging Standard 101, which was recently modified, as a global standard to address formatting and standardization issues for the exchange of necessary beneficiary and originator data between VASPs. It does not, however, address the issue of various national rules requiring the interchange of distinct data sets.
It should come as no surprise that the blockchain and cryptocurrency industries have several important issues regarding the implementation of the Travel Rule. I got the opportunity to speak with a number of industry executives, and these are their thoughts on this urgent issue:
Delphine Forma, Solidus Labs, Policy Lead for Europe and UK, Crypto Compliance and Legal TG Group Founder
Delphine Forma emphasized the user experience aspect, which is vital for the mass adoption of crypto. She pointed out that the proof-of-ownership process can be cumbersome, involving methods like the “Satoshi test” or live video verification, which can deter users. Technologies like AOPP could potentially solve this issue but need to be more widely adopted.
Interoperability is another significant hurdle. Current solutions on the market lack interoperability, meaning manual processes might be necessary if counterparties do not use the same solution. This is impractical and poses data protection risks and scalability issues. The complexity of counterparty due diligence is another issue Delphine reminded. With VASPs potentially maintaining thousands of relationships, the need for extensive due diligence is burdensome and costly.
Moreover, the inconsistency in guidelines across jurisdictions, or the “sunrise issue,” adds to the complexity. Different thresholds, approaches to unhosted wallets, third-party transfers, and data sets exchanged further complicate compliance. Delphine stressed the lack of clear and practical guidelines on handling funds received without the required information or when to terminate a relationship due to missing data. The choice of Travel Rule providers is also crucial, as factors like interoperability, pricing, data storage, and ease of implementation vary widely.
Delphine questioned the Travel Rule’s overall effectiveness in her conclusion, pointing out that although VASPs are required to abide by KYC and AML requirements, these efforts may be compromised by the simplicity of establishing new addresses and transferring money swiftly. In summary, she said that the application of TradFi rules to cryptocurrency without modification could hinder innovation and prevent the use of blockchain’s special advantages.
Ivar Zukovskis, BitPay Director of Compliance
Ivar Zukovskis recognizes the controversial nature of the Travel Rule even though he supports regulation of the cryptocurrency field as long as it paves the way for widespread cryptocurrency adoption. Zukovskis draws attention to the Travel Rule’s ongoing difficulties even five years after it was first implemented, notwithstanding BitPay’s strong compliance system, which includes licenses in the US and VASP registrations in the Netherlands and Italy.
The Travel Rule is still an issue, even though the cryptocurrency sector has adjusted to other AML requirements, like the European Union’s AMLD5. One of the main problems is that international standards are inconsistent, making cross-border compliance more difficult. The challenge of guaranteeing thorough wallet attribution—which is necessary for identifying the parties engaged in transactions but is presently lacking—was emphasized by Zukovskis.
According to Zukovskis, the Travel Rule’s implementation places additional operational difficulties on businesses by requiring expenditures in compliance technologies. Given that compliance expenses in the cryptocurrency field are continuously rising, this would significantly strain the finances of smaller businesses. Due to their greater ability to adjust to rising expenses, larger businesses may have an impact on the fairness of market competition.
Complying with regulations becomes more challenging when shared consumer data formats are inconsistent. It is imperative that the industry transition to standardized data-sharing processes since inconsistent interpretations and forms might result in mistakes and inefficieny. In order to guarantee flawless compliance, Zukovskis underlined the significance of selecting the appropriate Travel Rule provider, taking into account elements like interoperability, data protection, and ease of deployment.
He believes that despite its good intentions, the Travel Rule has not yet shown itself to be completely effective. The task of tracking down the origin of criminal transactions is still difficult, and the regulation’s application in the quickly developing cryptocurrency market requires ongoing modification to prevent impeding innovation.
Tommaso Astazi, Blockchain for Europe Head of Regulatory Affairs
Tommaso Astazi pointed out that while the Markets-in-Crypto-Assets (MiCA) Regulation is well known, the recent AML package, including the review of the 2015 Transfers of Funds Regulation (TFR), is equally significant. This is because the review of TFR would serve as the EU’s implementation of the Travel Rule for the crypto industry.
Astazi highlighted that the TFR requires crypto asset service providers (CASPs) to ensure each crypto-asset transfer includes relevant information on the originator and beneficiary. This rule applies to transactions involving CASPs but not to peer-to-peer (P2P) transactions between self-custodial wallets.
Although the European Parliament initially pushed for further verification criteria, he continued, the sector was able to stop measures that would have been too onerous for companies that provide self-hosted wallet software to comply with.
He underlined that educating lawmakers about blockchain technology is another crucial step. By means of workshops and direct interaction, the sector has effectively impacted legislative talks, guaranteeing that laws continue to be in line with FATF principles without impeding innovation. A regulatory framework that strikes a balance between compliance and the need for technological innovation is the result of this proactive approach.
Astazi emphasized how important it is that policymakers and the cryptocurrency sector continue to communicate. The sector may help develop laws that favor innovation while making sure strong compliance mechanisms are in place by encouraging understanding and cooperation.
Keeping an Open Conversation
The crypto industry’s implementation of the FATF Travel Rule brings to light a number of important obstacles. These concerns need to be carefully considered and adjusted for, among other things, the transparency risks specific to blockchain technology and the uneven regulatory environment among all jurisdictions.
Prominent figures such as Delphine Forma, Ivar Zukovskis, and Tommaso Astazi offer significant perspectives on the intricacies and possible resolutions. In order to successfully manage these issues, their opinions highlight the necessity of standardized methods, efficient due diligence, and ongoing contact with politicians. In the end, maintaining the sustainable expansion of the cryptocurrency business will depend on striking a balance between strict regulation and encouraging innovation.
