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The travel rule represents a significant new regulatory burden for cryptocurrency businesses around the world. Currently, there is no single solution that would allow full compliance with these new requirements. In this article, we describe the challenges of travel compliance and how businesses can make best efforts to comply using existing blockchain monitoring tools.

The Travel Rule was introduced to assist law enforcement in detecting, investigating and prosecuting money laundering and other financial crimes by maintaining an information trail of persons sending and receiving funds through the funds transfer system. It has been applied to financial institutions such as banks for more than twenty years and requires them to send originator and beneficiary information to the receiving financial institution when sending payments.

In June 2019, the Financial Action Task Force (FATF), the global anti-money laundering and countering the financing of terrorism (AML/CFT) standard-setter, updated its guidelines to explicitly state that virtual asset service providers (VASPs) such as future that crypto asset exchanges will also have to comply with the Travel Rules.

Compliance with the Travel Rule looks very different for VASPs than it does for traditional financial institutions (FIs), and two key issues must be addressed to meet the requirements of the Rule:

  1. Attribution
    The sending VASP must be able to reliably identify whether the destination address of the crypto-asset belongs to another VASP. If so, they need to know which VASP, so they know who to send the principal/customer information to.
  2. Data transfer
    The sending VASP must be able to send the originator and user information to the receiving VASP – reliably and securely at the time of payment.

1. Attribution

Banks have solved the attribution problem by using unique identifiers such as SWIFT BIC codes and IBANs, which allow them to reliably identify which financial institution is on the other side of the transaction.

No such system exists for crypto asset transactions. It is not immediately clear which VASP a given crypto-asset address belongs to, or if it belongs to a VASP at all.

In order to fully solve this problem, the crypto industry must find an approach to ensure that all VASP crypto addresses are attributed to a controlling VASP. At Elliptic, we have identified a number of potential solutions.

This could include, for example, establishing a registry of VASP addresses or creating a peer-to-peer (P2P) network that would allow VASPs to establish a communication channel where they verify that an address belongs to them. Every solution has its drawbacks, and we work with the industry to build consensus on key design decisions.

Using blockchain analytics in the meantime

As the industry explores long-term solutions to the VASP attribution challenge, blockchain tracking solutions offer a path to travel compliance.

Tools such as Elliptic AML can be used to identify whether a crypto asset address with a history of previous spending belongs to a VASP. This capability is based on our unparalleled data set of addresses belonging to identified entities such as exchanges. The VASP executing the transaction on behalf of the client can therefore check whether the transaction will be subject to the Travel Rules and identify the VASP to whom the requested information must be sent.

One challenge that sending VASPs may continue to face even when using blockchain analytics is determining whether a previously unused address belongs to a receiving VASP. The risk of misidentifying an address as not belonging to a VASP can also be mitigated by asking users if they knowingly send funds to another VASP, at the time a transaction is requested.

2. Data transfer

Banks and other financial institutions exchange information about originators and beneficiaries through messaging systems such as SWIFT. Again, no such system exists for VASP.

A complete solution to this problem will need to support the exchange of large amounts of data between VASPs and must be agnostic to the particular medium being transferred. It must do so in a manner that complies with data privacy regulations such as the EU GDPR. It must also be adopted by a wide range of VASPs to achieve the scale needed to drive universal adoption.

What can VASPs do in the meantime?

The lack of a single, standardized, global system for sharing travel rules data does not necessarily prevent VASPs from starting to share this data on a bilateral basis. The travel rule itself does not specify how the information should be transmitted.

Establishing channels of communication with all VASPs of other parties can be challenging, especially given the lack of transparency in some of these deals, but VASPs can prioritize the transfer of information to those VASPs to which they send the largest amounts of funds.

Towards Compliance

The FATF has given countries until June 2020 to introduce travel rule requirements for VASP. However, it already applies in the US, where FinCEN has ruled that crypto services such as exchanges are money service businesses (MSBs), subject to the Travel of Funds Rule under the Bank Secrecy Act.

In the absence of a single agreed solution, VASPs have a stark choice – to completely ignore their obligations under the Travel Rules or to do their best to comply in the meantime, using the tools at their disposal. Fortunately, Elliptic’s blockchain tracking solutions can bridge the travel compliance gap for those who choose to take action today.

Contact us if you would like to discuss how you can use our blockchain analytics solutions for travel compliance in the short term, as well as be part of initiatives to find a long-term approach that can work for all stakeholders in the crypto space.

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