Travel Rule Challenges: FAQ

This FAQ is based on Sumsub’s “How to Succeed in the Evolving Crypto Market: Adapting to the Travel Rule and Regulatory Changes” webinar, where our guest speakers discussed the main challenges with the Travel Rule.*

*The views presented in this webinar don’t necessarily reflect those of Sumsub.

What is the crypto industry’s main struggle with Travel Rule implementation?

There are few struggles in Travel Rule implementation for the crypto industry, including:

• Non-uniformity among jurisdictions, meaning that countries adopt the Travel Rule based on their own regulations, which may deviate from FATF standards. In particular, jurisdictions may have different de minimis thresholds, varying originator and beneficiary data to be collected and transferred, etc.
• Lack of interoperability, meaning that VASPs use various protocols and solutions that are not always able to interact with each other, complicating communication and data exchange.
• The “sunrise issue”, which refers to uneven implementation of the Travel Rule worldwide, since VASPs may or may not be subject to the Travel Rule given the implementation status in their jurisdiction. “The sun is up” where the Travel Rule is enforced, and “down” where it’s not enforced yet. The “sunrise issue” therefore occurs when one VASP isn’t yet obliged to follow the Travel Rule and therefore doesn’t have the resources to cooperate with one that does.

To address the “sunrise issue”, the FATF spurs cooperation between governments to ensure that the Travel Rule is applied more or less consistently.

Sumsub’s Travel Rule solution deals with these challenges.

What are the most frequent compliance-related issues with the Travel Rule?

Based on on the FATF’s annual report, the most frequent issues include: 

• Wrong data collected and transferred (e.g., transaction ID transmitted instead of the originator’s wallet address)
• Wrong chain of communication (e.g., the ordering VASP obtains beneficiary information from the beneficiary VASP instead of collecting it itself)
• Originator and beneficiary information is sent after the transaction is executed 
• Only certain types of virtual assets (VA) and/or transaction amounts are supported
• Transmitted information can’t be downloaded or otherwise retained 
• Counterparty VASPs can’t be located for all VA transfers.

What are some EU-specific issues with Travel Rule implementation?

The EU plans to harmonize the Travel Rule across all its member states in 2024. At the same time, some challenges may persist, including:

• Compliance with data protection and other regulations. Companies with headquarters in countries like the USA or Switzerland, which have subsidiaries in the EU, will also need to comply with local data protection laws and regulations, like GDPR in the EU, or DPA
• The “sunrise issue” which may occur between the EU and other jurisdictions
• Stricter requirements for transactions with third parties
• Lack of standardized systems to transfer data

What are some UK-specific issues with Travel Rule implementation?

• The “sunrise issue”, as it might put regulated companies at a relative disadvantage compared to non-regulated ones
• Some members of the industry feel like more time and guidance could have been given by regulators to comply with the Travel Rule, including instructions on certain practicalities (e.g., how to treat DeFi)
• Small firms may have to leave the field due to their inability to meet the new requirements
• Issues with manual transactions: transactions are either blocked, because it’s not permitted to send crypto to non-cooperative VASPs, or transactions are delayed because the sender is waiting for data to comply with the Travel Rule
• No standardized Travel Rule solution, leading to providers trying to create their own directories.

What is the difference between a Travel Rule solution, protocol, and network?

Solutions typically implement protocols and integrate networks into a single API, allowing customers to integrate with multiple protocols and networks at once. 

Protocols are specification flows and data payloads. Customers should implement protocols internally, or get a solution which implements protocols. There are managed and unmanaged solutions. Get more details regarding managed and unmanaged solutions in the webinar.

Networks are based on solutions and protocols. A network is typically a combination of a protocol and a VASP directory service.

Enter your email to watch the webinar on:

• Existing solutions for effective Travel Rule compliance
• EU regulation of the crypto industry
• UK Travel Rule, and others.