Navigate the Travel Rule as fraud, regulatory scrutiny rises

Cryptocurrencies have seen an exponential rise in adoption over recent years. In late 2023, the number of global cryptocurrency owners reached 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 fraudsters. Recent statistics reveal growing concerns regarding cryptocurrency fraud.

According to the Better Business Bureau (BBB), cryptocurrency fraud is now considered the riskiest type of scam in the US, with about 80% of Americans targeted in crypto scams losing money. The median loss reported was $3,800, although many victims lost substantially more.

The surge in crypto-related fraud has, therefore, prompted regulators worldwide to tighten their grip on the industry. For example, in 2023, the European Union adopted the Markets in Crypto-Assets Regulation (MiCA) regulation, a comprehensive framework designed to regulate the issuance and provision of services related to crypto assets.

The government in Thailand is taking steps to block access to unauthorized crypto platforms to combat fraud and enhance consumer protection. Similarly, the United States has seen increased scrutiny from agencies like the Securities and Exchange Commission, which has been actively investigating and prosecuting crypto fraud cases.

Introducing 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. Although the Travel Rule is controversial, as not all players know how to comply with it smoothly, it helps the market become more transparent and reduces fraud and money laundering. Businesses just need to choose the right way to deal with their challenges successfully. 

There is an option to handle Travel Rule compliance in-house, but it is technologically complex and expensive, typically affordable only 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 mandates that virtual asset service providers (VASPs), or crypto asset service providers (CASPs), such as exchanges and custodians, share specific information about the sender and recipient in cryptocurrency transactions exceeding a certain threshold. The counterparties need to share and prove this information before the transaction hits the blockchain. The threshold is usually 1,000 US dollars or euros, but it may differ depending on the jurisdiction. For example, in Lithuania, the regulation does not specify the threshold; therefore, it can be assumed that the rule is applied to all transactions regardless of the amount. In Mauritius, there’s no de minimis threshold.

While the Travel Rule aims to enhance transparency and deter illicit activities, its implementation has presented several challenges for industry players. 

• Sunrise issue: Different jurisdictions adopt 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 hurdles: Various countries are encountering difficulties related to technology requirements and regulatory harmonization. As the FATF states in their 2023 report, “for many jurisdictions, the source of the challenges is <…>, a lack of resources, technical expertise and capacity, as well as potentially a lack of recognition of urgency.”
• Interoperability: Ensuring that different VASPs’ systems can communicate effectively to share the required information is a significant technical challenge.

Healthier industry

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

Moreover, compliance with the Travel Rule can enhance the credibility of the cryptocurrency industry. By adhering to regulatory standards, VASPs can build trust with users, investors, and regulatory bodies, fostering a more stable and legitimate market environment.

What’s new in the world of crypto regulations?

The European Union’s MiCA regulation exemplifies the move towards comprehensive regulatory frameworks for cryptocurrencies. MiCA aims to provide legal certainty for crypto assets that are 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, the regulation of crypto-asset service providers, and the prevention of market abuse. By providing a clear regulatory structure, MiCA aims to mitigate the risks associated with cryptocurrencies while fostering innovation and ensuring that Europe remains an attractive destination for crypto businesses.

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

Moreover, according to the FATF’s April 2024 assessment, 65 of 94 jurisdictions have passed legislation implementing the Travel Rule, while 15 reported that they are in the process, which shows improvement since 2023. Although the number of jurisdictions that have implemented the rule is not yet impressive, we see a stable trend indicating that more countries will adopt it in the near future.

Assisting in Travel Rule compliance 

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

Moreover, a reliable provider should offer tools for identity verification, transaction monitoring, and regulatory reporting, ensuring that VASPs can comply with the Travel Rule and other regulatory mandates without compromising on user experience or operational efficiency. A reliable anti-fraud and Travel Rule solution should also handle the “sunrise” and other issues related to the Travel Rule implementation in different jurisdictions.

The rapid growth of the cryptocurrency industry has brought with it increased scrutiny from regulators seeking to protect users and prevent financial crimes. The Travel Rule, while challenging to implement, is a crucial step towards greater transparency and security in the crypto space. Regulations like MiCA further exemplify the global trend towards comprehensive crypto regulation. For VASPs, leveraging the right compliance partners is essential to navigate this evolving landscape successfully and contribute to a healthier, more transparent cryptocurrency ecosystem.

Ilya Brovin

Ilya Brovin joined Sumsub in 2021 and got 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 vast experience working with tech and financial services companies as an investor and board member/ observer.