The adoption of cryptocurrencies has increased significantly recently, always becoming more present and influential in the financial world.
This growth has attracted the attention of national and international actors seeking solutions to regulate the crypto industry, especially when CEXs act as black boxes.
This article will focus on the travel rule and the solutions available to the Virtual Assets Service Providers (VASPs), particularly CEXs.
Why, starting from 2020, has been identified by the regulators of various states as an important piece for regulating the cryptocurrency ecosystem?
Origins and implications of the travel rule
Before describing the travel rule, a small introduction about its origins should be made.
The term travel rule is linked to the Financial Action Task Force on Money Laundering (FATF) - an intergovernmental body set up in 1989 on the initiative of the G7 to harmonize international regulations primarily to combat organized crime and money laundering- that in 2009 updated the publication of the FinCEN of 1996 in the matter of assets’ regulation.
In June 2019, the authority encouraged the regulation of the phenomenon and asked VASPs to identify market operators involved in transactions of value equal to or greater than $3000, accurately tracking the data of the movements.
This amendment became the so-called travel rule: an obligation imposed on VASPs to collect and share financial transaction data with regulatory authorities.
12 months after the release of the Guidance, the FAFT published a report that notes the status of its worldwide adoption.
What emerges overall is that both the public and private sectors are making progress in the implementation of FATF standards: 35 out of 54 countries have announced that they have implemented the rules in their updated version: of these, only 3 countries would forbid VASPs any activity, while in the remaining jurisdictions, the regulator would have transposed the updated recommendations allowing VASPs to operate in full compliance.
The other 19 countries, however, still need to implement the regulatory protocols because this would involve revising their national laws.
What is travel rule in crypto?
In a nutshell, the travel rule is a measure that comes into play when a fiat currency transfer occurs between two financial institutions.
It requires institutions providing financial services to comply with several disclosure requirements, in particular, to obtain the identification of the sender and receiver, originator and beneficiary.
The extension of this measure to the crypto industry means that the VASPs -which include exchanges- must fulfil the same requirements, and then know the identity of who sends the cryptocurrencies and who receives them.
More specifically, as defined by FATF, VASPs include any person or entity that provides services to others as a business:
Fiat and virtual asset exchange;
Exchange between virtual assets;
Transfer of virtual assets;
Safekeeping of virtual assets;
Activities related to issuing or underwriting virtual assets.
This regulatory measure aims to combat money laundering and, more generally, illicit transfers.
In this sense, it is understandable that cryptocurrencies are also subject to it, given their increasing role as a payment and investment instrument.
Why is the travel rule so important for the crypto industry?
As we know, a feature of cryptocurrencies is creating your own wallet in a "pseudonymous" form without needing to contact any institution.
This complicates the task of VASPs operating in countries where the travel rule is already in force.
When a user makes a transaction, VASP has to know and store information about who made the transaction, the address used to make it, the person’s domicile, personal data, and the data of an identity document.
To collect and share this information, most VASPs and centralized exchanges are adopting a KYC (Know Your Customer) system that allows transferring of funds to external wallets only after the user has entered all the identification data of the person.
This assumes that the holder of the external wallet to which the cryptocurrencies are transferred corresponds with the owner of the account registered on the CEX.
CEXs point of view
From a centralized cryptocurrency exchange perspective, the travel rule is important for several reasons:
Compliance with the travel rule is a legal requirement. Exchanges that fail to comply with the travel rule may face significant fines and other penalties, such as losing their operating license. This is a significant risk for CEXs, as their operating ability is vital to their business model.
Reputational standpoint. The cryptocurrency industry has recently faced significant scrutiny from regulators and the public. CEXs that fail to comply with the travel rule may be seen as contributing to the problem. This could lead to a loss of trust among customers and damage the exchange's reputation.
To promote trust and transparency and prevents money laundering and other financial crimes
The industry's success depends on trust and transparency, and the travel rule is an important measure that helps promote these values.
By ensuring that exchanges collect and verify their customers' identities, the travel rule helps prevent money laundering and other financial crimes.
This, in turn, helps protect the industry's integrity and promote its growth and development.
Takeaways
In conclusion, one of the biggest challenges is the technical difficulty of implementing the travel rule in a compliant and efficient way.
Many VASPs do not have the infrastructure to collect and transmit the required information, and building this infrastructure can be costly.
Furthermore, the rule also raises privacy concerns.
The collection and transmission of users’ private personal information (PPI) is a sensitive issue, and VASPs must be careful to balance their compliance obligations with the privacy rights of their customers.
Despite these topics, the travel rule helps to promote trust and transparency and regulate the services offered by VASPs, ensuring that they take appropriate steps to prevent money laundering and other financial crimes building a stronger and more transparent industry.
This improvement is surely useful for the security of CEXs, a little less for users who, in a decentralized world such as the crypto industry and blockchains, aim to share as little data as possible to safeguard their privacy.
Further readings
FAQ from Google
What is the travel rule for crypto providers?
The travel rule for crypto providers is a regulation put forth by the Financial Action Task Force (FATF). This requirement applies to cryptocurrency exchanges, digital wallet providers, and financial institutions that deal with virtual assets. Under the travel rule, these virtual asset service providers (VASPs) are required to disclose specific customer data when transacting cryptoassets over a particular threshold.
What is the travel rule?
The travel rule is an international regulatory requirement that mandates money service businesses to communicate with each other when users send funds from one financial institution to another.
What is crypto travel rule in EU?
The crypto travel rule in the European Union (EU) was introduced to ensure financial transparency on exchanges in crypto-assets. It provides the EU with a robust and proportional framework that complies with high international standards on the exchange of crypto-assets.
What is the travel rule on Coinbase?
Coinbase has implemented the Travel Rule Universal Solution Technology (TRUST), which is an industry-driven solution designed to comply with the travel rule, while also ensuring the security and privacy of its customers.
What is the 3000 rule?
The $3000 rule refers to a requirement that financial institutions verify and record the identity of each cash purchaser of money orders and bank, cashier's, and traveler's checks in excess of $3,000.
What is the travel rule trust?
The Travel Rule Universal Solution Technology (TRUST) is a global, secure, and industry-driven solution designed to comply with the travel rule while protecting the security and privacy of customers. TRUST was collaboratively designed and built by leading crypto exchanges to set the standard for travel rule compliance.
What is the travel rule Swift?
In the context of the SWIFT network, which is a global banking telecommunications system, the travel rule is implemented by banks using this system to deliver necessary travel rule information to each other.
What is travel rule virtual assets?
In the context of virtual assets, the travel rule, also known as the funds transfer record keeping regulation and FATF Recommendation 16, requires virtual asset service providers (VASPs) and other financial institutions to exchange originator and beneficiary identifying information with counterparties during transactions that exceed certain thresholds.
What is the travel rule in Coinhako?
The Travel Rule in Coinhako is a part of the global regulatory framework that Coinhako complies with to ensure the safety and legality of its transactions. Coinhako has made increased efforts to conduct all the necessary due diligence and ensure compliance with the requirements set forth by the Travel Rule. They continuously adapt to the evolving regulatory landscape, with the aim of not only ensuring compliance but also providing their users with the best possible services and product offerings.
Will the EU regulate crypto?
Yes, the European Union (EU) will regulate crypto. European lawmakers have given their final approval to an ambitious law that will give the EU its first rules to govern the crypto industry. This marks the start of a new era of regulatory scrutiny on unregulated crypto markets. These new rules are expected to come into effect over the next two years, and some officials are already pushing for a second round of regulations.
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