Ask Sumsubers: What Are the Main Challenges in Regulatory Implementation for the Travel Rule?

Initially introduced for banks, FATF Recommendation 16, also known as the Travel Rule, requires financial institutions to share information about their customers and assume the responsibility to report suspicious activities. Later on, this recommendation was expanded to include Virtual Asset Service Providers (VASPs). The main purpose of sharing the originator and beneficiary information is the prevention of money laundering and terrorist financing. While implementing Travel Rule requirements, VASPs are indeed facing the same challenges previously experienced by the traditional banks, including:

• 1) Integration of efficient and secure protocols and compliant technical solutions, which will also incur additional costs. In fact, any new regulatory requirements usually increase operational workload and require significant investment in technology, training, and resources.

• 2) Differences in regulations by country, also known as the ‘Sunrise issue’. Since the regulatory framework varies from one jurisdiction to another, there might be a situation where one VASP doesn’t adhere to the same approach to unhosted providers or de minimis thresholds as the other.

• 3) Compliance with existing data privacy laws. VASPs, especially those operating globally, need to ensure they have all applicable data protection measures in place to safeguard customer information.

• 4) Lack of clarity from regulators. This can be mitigated by regulators engaging market players in consultation, which could help VASPs handle the Travel Rule more efficiently. This is because full compliance includes the prompt reporting of suspicious transactions to regulators, as well as cooperation with competent authorities on request.

• 5) Customer education and interaction. VASPs will need to educate their customers about the requirements and implications of the Travel Rule, including the need to provide accurate and complete information. Clear instructions and guidance for customers can help prevent errors, omissions and further consequences.

Regulators, on the other hand, also face challenges while introducing the Travel Rule requirement, including

• 1) Keeping pace with technological advancements

• 2) Cross-border coordination with foreign authorities and enforcement mechanisms, especially for global or unlicensed providers

It’s time to admit that the crypto world is not going to stay the same. The best strategy for smooth compliance would be an openness to collaboration, transparency, and involvement in global standardization in order to reduce financial crime in the crypto industry.