Navigate the Travel Rule as fraud, regulatory scrutiny rises

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Cryptocurrencies have seen exponential growth in adoption in recent years. By the end of 2023, the number of global cryptocurrency holders is set to reach approximately 580 million — a 34% increase from 432 million at the beginning of the year.

As more individuals and institutions adopt cryptocurrencies, the ecosystem has inevitably attracted a mix of genuine participants and scammers. Recent statistics highlight the growing concerns about cryptocurrency scams.

According to the Better Business Bureau (BBB), cryptocurrency scams are now considered the riskiest type of fraud in the U.S., with nearly 80% of Americans targeted in crypto scams losing money. The average reported loss was $3,800, but many victims lost significantly more.

The rise in crypto-related scams has therefore led regulators worldwide to tighten their scrutiny of the sector. For example, in 2023, the European Union adopted the Markets in Crypto-Assets Regulation (MiCA), a comprehensive framework designed to regulate the issuance and provision of crypto-asset-related services.

The Thai government is taking steps to block access to unauthorized crypto platforms to combat fraud and increase consumer protection. Similarly, the US has seen increased scrutiny from agencies like the Securities and Exchange Commission, which is actively investigating and prosecuting crypto fraud cases.

Introduction of the Travel Rule

To address the risks associated with the anonymity and pseudo-anonymity of cryptocurrency transactions, the Financial Action Task Force (FATF) introduced the Travel Rule. While the Travel Rule is controversial and not all players know how to comply with it seamlessly, it does help make the market more transparent and reduce fraud and money laundering. Businesses just need to choose the right path to successfully address its challenges.

There is an option to handle Travel Rule compliance in-house, but this is technologically complex and expensive, typically only suitable for large crypto exchanges. Another option is to outsource it to external compliance providers. Let’s dive into the Travel Rule challenges and discuss whether a compliance provider is a good solution.

Transparency and compliance challenges

The FAFT Travel Rule requires virtual asset service providers (VASPs) or crypto asset service providers (CASPs), such as exchanges and custodians, to share certain information about the sender and recipient of cryptocurrency transactions that exceed a certain threshold. Counterparties must share and prove this information before the transaction reaches the blockchain. The threshold is usually $1,000 or euros, but can vary depending on the jurisdiction. For example, in Lithuania, the regulation does not specify a threshold, so it can be assumed that the rule applies to all transactions regardless of the amount. In Mauritius, there is no minimum threshold.

While the Travel Rule aims to increase transparency and deter illegal activities, its implementation has presented some challenges for industry players.

Sunrise problem: Different jurisdictions are adopting the Travel Rule at different times, creating inconsistencies in compliance requirements across borders. Data privacy concerns: Sharing detailed transaction information raises concerns about user privacy and data protection. Technological barriers: Various countries face challenges related to technology requirements and regulatory harmonization. As the FATF noted in its 2023 report, “the challenges for many jurisdictions stem from a lack of resources, technical expertise and capacity, as well as potentially a lack of recognition of the urgency.” Interoperability: Ensuring that different VASP systems can communicate effectively to share the necessary information is a significant technical challenge. Healthier industry

Despite these challenges, the Travel Rule is not a hostile measure. Instead, it represents a necessary step toward creating a more secure and transparent cryptocurrency ecosystem. By forcing VASPs to share critical transaction information, regulators can more effectively monitor and prevent money laundering, terrorist financing, and other illicit activities.

Additionally, compliance with the Travel Rule can increase the credibility of the cryptocurrency industry. By adhering to regulatory standards, VASPs can build trust with users, investors, and regulators, creating a more stable and legitimate market environment.

What’s going on in the world of crypto regulation?

The European Union’s MiCA regulation exemplifies the move towards comprehensive regulatory frameworks for cryptocurrencies. MiCA aims to provide legal certainty for crypto assets not covered by existing financial services legislation, establish uniform rules for crypto asset service providers and issuers at the EU level, and ensure high standards of consumer protection and market integrity.

MiCA addresses several key areas, including the issuance of stablecoins, regulation of crypto asset service providers, and prevention of market abuse. By providing a clear regulatory framework, MiCA aims to reduce the risks associated with cryptocurrencies, foster innovation, and ensure that Europe remains an attractive location for crypto businesses.

In South Africa, the Financial Intelligence Centre recently published a draft directive requiring accountable institutions providing crypto asset services to comply with and implement recommendations from the Financial Action Task Force. In Singapore, the Monetary Authority of Singapore announced a series of measures last year aimed at more stringently regulating digital payment token (DPT) service providers. In Thailand, regulators, inspired by examples from India and the Philippines, are blocking unlicensed crypto exchanges “to address online crime.”

Additionally, according to FATF’s April 2024 assessment, 65 of 94 jurisdictions have passed legislation implementing the Travel Rule, with 15 reporting that they are in the process of doing so, indicating improvement since 2023. While the number of jurisdictions implementing the rule is not yet impressive, we are seeing a steady trend that suggests more countries will adopt it in the near future.

Assisting with compliance with Travel Rules

For crypto asset service providers, navigating the complex landscape of regulations like the Travel Rule and MiCA requires selecting robust compliance solutions. Partnering with a provider that supports a broad VASP network is crucial for seamless compliance. With over 1,700 VASPs and 10,000 supported assets in the ecosystem, companies like Sumsub offer comprehensive compliance solutions that can help service providers efficiently meet regulatory requirements.

Additionally, a trusted provider should offer tools for identity verification, transaction tracking, and regulatory reporting, and ensure that VASPs comply with the Travel Rule and other regulatory mandates without compromising user experience or operational efficiency. A trusted fraud prevention and Travel Rule solution should also address “sunrise” and other issues related to Travel Rule implementation across jurisdictions.

The rapid growth of the crypto space has brought increased scrutiny from regulators aiming to protect users and prevent financial crime. The Travel Rule, while difficult to enforce, is an important step toward greater transparency and security in the crypto space. Regulations like MiCA further exemplify the global trend toward comprehensive crypto regulation. For VASPs, leveraging the right compliance partners is essential to successfully navigate this evolving landscape and contribute to a healthier, more transparent crypto ecosystem.

Ilya Brovin

Ilya Brovin joined Sumsub in 2021 and will assume a leading position as chief growth officer in 2023. He has over 20 years of experience in finance and private equity, having previously worked at firms such as Hellman & Friedman, Eton Park and Morgan Stanley. He has extensive experience working with technology and financial services companies as an investor and board member/observer.