Turning crypto regulatory compliance into a competitive advantage

Who is Notabene, for those who do not know it yet?

Using privacy-preserving technology, Notabene’s full-service software helps virtual asset service providers (VASPs) to manage real-time regulatory and counterparty risk in virtual asset transactions. Financial institutions, crypto exchanges, and custodians use our Travel Rule compliance solution to comply with international AML regulations and guidelines. Clients like Luno, Bitso, Crypto.com, Bitstamp, Cross River Bank, and more leverage our end-to-end Travel Rule compliance software to:

• identify virtual asset accounts, 

• perform mandated VASP due diligence, and

• manage the exchange of global Travel Rule transfers from one dashboard.

Our clients turn regulatory compliance into a competitive advantage while unlocking the flow of trillions of institutional dollars into the space. Notabene aims to make secure and trusted crypto transactions a part of the everyday economy.

What does the adoption of travel rule requirements across the globe look like?

In June 2022, the FATF issued a Targeted Update on the implementation of FATF Standards on Virtual Assets and VASPs (‘Update’) and reported that countries’ adoption of Travel Rule requirements is at an earlier stage compared to other components of crypto compliance. Only 29 out of 98 responders passed legislation, and only 11 started enforcing and supervising Travel Rule compliance. 

Unlike other components of crypto compliance (such as customer due diligence obligations), the different speed of enforcement of travel rule requirements across jurisdictions causes particular challenges for VASPs – these challenges have been coined the Sunrise Issue. 

In 2022, Notabene saw a peak increase in Travel Rule adoption by VASPs. This willingness to comply is also explicitly acknowledged by the FATF in the previously mentioned Update. 

The results of the State of Travel Rule Survey that Notabene ran back in October 2021 showed that most VASPs intended to comply with the travel Rule by the end of Q2 2022. And this year proved that VASPs’ forecasts were realistic. Within our network, we have seen an increase of 2x in transaction count just in the past 90 days. This means that the number of crypto transactions for which VASPs send a corresponding Travel Rule message doubled in just one quarter. 

Even though Travel Rule requirements are still not uniformly mandated across jurisdictions, the industry is making substantial progress toward compliance. This is a relevant data point for any VASP, regardless of whether Travel Rule is enforced in its jurisdiction: to continue transacting with VASPs are mandated to comply with the Travel Rule, VASPs need to be ready to start engaging in Travel Rule flows. Notabene recently launched a Sunrise Plan targeting this use case.

What are some challenges related to travel rule requirements standardisation?

Travel Rule requirements vary substantially across jurisdictions, especially in terms of:

1. Applicable de minimis thresholds (whether the Travel Rule is required for all transactions or only above a specific transaction amount); and 

2. Scope of Originator and Beneficiary information that needs to be transmitted.

These variations are not specific to Recommendation 16, the ‘Travel Rule,’ –variations in the local implementation of FATF recommendations are common and expected. What is particular about the Travel Rule is that, unlike other compliance obligations (such as customer due diligence), the Travel Rule requires collaboration between VASPs. VASPs are subject to different requirements and need to interact with one another. 

For instance, the Beneficiary VASP might expect and be required to receive a particular data point about the Originator customer that the Originator VASP is not required–and may not be allowed–to share. Situations like these have the potential to create issues and transaction friction. In these cases, the Beneficiary VASP will be obliged to request further information from the Originator VASP. To transact with the Beneficiary VASP, the Originator VASP would need to share a broader scope of customer PII than required under their jurisdiction.

The International Monetary Fund (IMF) recently highlighted the advantages of cross-border collaboration and cooperation in the regulatory approach to crypto. The highlight is paramount, particularly in the context of Travel Rule regulations. Standardising requirements on the country level and best practices on the industry level will be essential for successfully implementing Travel Rule worldwide.

Please give some practical examples/projects that you have worked on to scale legal knowledge within the crypto industry.

From the start, embedded global compliance was at the centre of Notabene’s product design. Travel Rule requirements vary across jurisdictions, so our product abstracts this complexity from VASPs. We embed Travel Rule requirements of different jurisdictions directly in our product to ensure that VASPs can comply with the requirements of the jurisdictions involved in each transaction.

We are committed to making Travel Rule information easily accessible for consumers and VASPs. Our content library includes 75 informative blog posts, 15 country-specific regulation guidelines, and two downloadable cryptocurrency regulation guides as PDFs. Additionally, we regularly summarise key regulatory updates on a global scale. 

We host jurisdictional workshops: VASPs based in the same jurisdiction are all working towards the same deadline for compliance with the same requirements. We create opportunities for compliance officers and legal professionals of VASPs to gather and discuss their interpretation of the requirements that apply and how they plan to build those requirements into their processes and policies. 

In addition, we constantly work on facilitating the standardisation of best practices across the industry. We run monthly compliance deep dives where compliance officers and legal professionals of VASPs across jurisdictions get together to discuss specific topics, ranging from operational/strategic topics such as how to deal with transactions with unhosted wallets and counterparty VASP due diligence best practices to knowledge sharing sessions around new relevant pieces of legislation, such as the EU Transfer of Funds Regulation. 

How will the legal framework around crypto evolve over the next period?

I expect to see a big push for Travel Rule adoption and enforcement in the next few quarters. The FATF recently flagged an ‘immediate need for jurisdictions to progress in this area’. This year’s spotlight on sanctions compliance in crypto – first with the speculation around whether crypto could be instrumentalised as a means to evade sanctions imposed on Russia and more recently with the novelty of the sanctions imposed on Tornado Cash – highlights the importance of Travel Rule for effectively managing counterparty risks in crypto transactions. 

Without Travel Rule compliance, VASPs are blind to their transaction counterparty.

Besides Travel Rule, we can expect developments in stablecoins regulation – an area of particular interest due to the potential for mass adoption. The novel comprehensive EU framework already covers the topic of stablecoins for crypto, MiCA, and recently made the news in the USA with the proposed two-year ban on algorithmic-based stablecoins. I also expect developments in decentralised finance – an area that, due to its distinctive characteristics, might require re-thinking the existing regulatory frameworks, as acknowledged by the European Commission in their European Financial Stability and Integration Review 2022.

About Catarina Veloso

Catarina is the Legal Engineer at Notabene, serving as the compliance liaison between global crypto regulators and Notabene customers on their journey towards travel rule compliance. She works closely with Notabene’s product team to reflect the Travel Rule requirements of different jurisdictions.