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Reviewing the Travel Rule for Virtual Assets: What You Need to Know

Jan 18, 2023 | Blog, KYC

With virtual assets and decentralized financial exchanges continuing to make headlines in 2022, many countries are aiming to implement more compliance advancements in the coming years. Reviewing the Financial Action Task Force (FATF) Travel Rule and related virtual asset recommendation is advisable for all financial and virtual asset service providers (VASPs), to better understand existing frameworks in place. Designed to circumvent fraudulent actions when transferring funds, the Travel Rule presents VASPs with a particularly difficult challenge in implementing and collaborating with security protocols and other providers.

While initiatives like the Travel Rule can highlight the difficulties of creating cohesive security within a decentralized financial market, they also point to the importance of prioritizing Know Your Customer (KYC), Know Your Business (KYB), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD) as foundational pillars of your business operations. At iComply, we know that staying on top of evolving AML, CFT, and privacy legislation can be challenging, especially when working with non-tangible assets like bank funds or cryptocurrency. Our modular suite of KYC + KYB software makes it easy to get the information you need to stay compliant, as well as streamline your operations and reduce costs in the process.

Below, we’ll take a closer look at the Travel Rule when applied to virtual assets and the greater implications for identity verification and security practices for financial entities globally.

What is The “Travel Rule”

Introduced in late 2019, the FATF Travel Rule (also referred to as Recommendation 16) is intended to implement more consistent and dependable regulations for virtual transactions like electronic money transfers, crypto transactions, and other exchanges involving digital/virtual assets. By verifying both originator and beneficiary information and sharing it with the necessary counterparty during (or before) the transaction, the intention is to reduce the risk of fraud, money laundering, and terrorism financing—all of which have been historically difficult to eradicate from decentralized platforms.

Under the guidelines suggested by the FATF, there is a minimum threshold of USD 1,000/EUR 1,000 for virtual asset (VA) wire transfers. For transfers under this threshold, VASPs must collect the name of the originator and beneficiary, as well as the VA wallet address for each and/or a unique transaction code. For those transactions over the threshold, additional information is required, including:

  • Originator’s name
  • Account number of the originator (i.e. wallet address)
  • The physical address of the originator (geographically)
  • National identity number (SSN or SIN)
  • Customer ID number that is signature of the ordering institution
  • Date and place of birth
  • Beneficiary’s name
  • Beneficiary’s account number used to process the transaction (i.e. wallet address)

The Travel Rule applies to both financial institutions and VASPs when a transaction involves a traditional wire transfer or a VA transfer between a VASP and another obligated party (i.e. banking institution). While several countries like Switzerland, Canada, and the US* have taken strides to embrace the Travel Rule, universal adaptation is difficult to enforce and seamless integration remains a challenge that regulators and institutions have yet to reconcile.

*Note that the Travel Rule is quite similar to the Bank Secrecy Act, meaning that the United States was already implementing verification standards.

What are the Implications?

While it’s easy to take the direct implications of regulations like the Travel Rule at their face value, it’s important to remember that these rules come out of a much larger conversation that reveals the prevailing need for financial institutions and VASPs to establish and prioritize a foundation of KYC and CDD protocols in their daily operations. Whether dealing with virtual assets like money transfers and crypto exchanges, vetting credit applications, signing off on mortgages, or handling sensitive information transfers, due diligence and identity verification are essential to circumventing fraud and stopping criminals from taking advantage of vulnerable systems.

Partner with iComply Today

At iComply, we know how essential this foundation of knowledge and verification is to protect your business, as well as your clients’ sensitive data. We are pleased to offer a unique, end-to-end suite of KYC + KYB software that makes it simple to stay informed and compliant with the latest AML legislation. Our modular platform can be set up within minutes and configured to match your own workflows with the specific regulations of the jurisdictions you operate in and serve, meaning your downtime is minimal and process integration is as seamless as possible.

Learn how you can stay ahead of evolving AML and fraud standards, and discover why iComply is your leading choice for software solutions by talking to our team today!

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