Travel Rule Crypto: Navigating Compliance and Its Impact on Transactions
The Travel Rule Crypto is broadly similar to the Travel Rule in traditional banking and represents a regulatory framework designed to monitor and control cryptocurrency transactions. This means that any cryptocurrency transaction that exceeds a certain threshold must be accompanied by personal data of the customer and the one providing the service, in this case the virtual asset service provider (VASP).
In addition to providing data related to crypto asset transactions, VASPs must authorize verification of the counterparty customer and conduct due diligence on the counterparty VASP. Therefore, cryptocurrency and DeFi companies and crypto businesses should take the time to research and prepare for compliance with the Cryptocurrency Travel Rule to avoid the risks of losing their operational licenses.
What Does All This Have to Do with Crypto Projects?
When the number of cryptocurrencies and related companies began to grow dramatically at some point, FATF, an international organization specializing in AML and the development of rules for tracking suspicious transactions, expanded the scope of the Travel Rule to include "virtual assets" and "virtual asset service providers".
Now, if, from the regulator's perspective, your project or business deals with "virtual assets" and falls under the term "virtual asset service provider" (VASP), you will have to comply with the cryptocurrency Travel Rule.
Key Components of the Travel Rule in Crypto
The components of this rule vary from jurisdiction to jurisdiction, but often have something in common, such as a list of VASPs and cryptocurrency companies. These include:
Crypto funds and so on.
It is also worth mentioning that the requirements often specify a threshold monetary limit, above which these components must exchange customer information with each other when transferring funds above that limit. However, remember that each jurisdiction has its own Travel Rule Cryptocurrency regulations, which may have other unspecified components.
What are the Travel Rule Requirements for Cryptocurrency Exchanges?
Each regulatory organization has different requirements. Let's take the example of FATF. Since September 1, 2023 Great Britain has signed agreements with this organization and adopted the Travel Rule. After signing the agreement, people registered in this country can no longer for example transfer from their exchange account any cryptocurrency with a market price exceeding $1000 to an offline or anonymous wallet. That's because the regulator requires the exchange to know and disclose information about the parties involved in the transactions.
Travel Rule Crypto affected not only senders, but also receivers. Now they need to go through the full KYC procedure, provide their passport details, tax number and confirm ownership of the wallet to which the cryptocurrency is transferred in the amount of more than $1000. Otherwise, the crypto exchange will simply not allow this payment and will freeze it.
At the same time, the location of the recipient will not help in this situation. Even if the buyer is located in a country that has not signed an agreement with FATF and has not adopted the Travel Rule, the cryptocurrency transaction is automatically treated as suspicious and can be blocked by the service provider (VASP).
Why is the Crypto Travel Rule Important?
The Travel Rule Cryptocurrency is very important for regulating economic processes. To be more specific, these rules are aimed at standardizing processes in the crypto business and bringing them in line with accepted standards of the larger financial services industry.
Travel Rule Crypto's requirements and obligations to obtain, store and transmit the necessary originator and beneficiary information help identify and report suspicious transactions, monitor the availability of information and take action to freeze dubious operations. Overall, this Travel Rule has the effect of strengthening the cryptocurrency industry's anti-money laundering (AML) and counter-terrorist financing (CTF) policies.
How Does the Travel Rule Crypto Affect Cryptocurrency Users?
In addition to crypto projects, the Travel Rule Crypto also applies to ordinary cryptocurrency users, who now also have to provide additional information about themselves to VASPs and exchanges.
On the one hand, the new Travel Rule for crypto transactions can serve as a regulatory framework to protect cryptocurrency users and society as a whole from various problems. It could also have the effect of limiting the growth of criminals, terrorists and sanctioned individuals who freely use wire transfers to move their funds. And for example, the transaction data transmitted by traders can then serve as evidence of your innocence and serve to resolve a legal violation.
On the other hand, with this rule, regulators are literally beginning to centralize and control the technology of the cryptocurrency industry and the means of money transfers, which were originally created for peer-to-peer operation, without boundaries and influence of third parties. There is also additional risk from illegal or fake VASPs who may use legislation as an opportunity to collect user data, as well as from repressive regimes seeking to control legitimate cryptocurrency users.
Overall, the mass implementation of the Crypto Travel Rule requirements can be controversial, as it then both serves as a means to prevent criminal activity, but also has significant consequences and brings with it many challenges for the cryptocurrency business and risks for users.