Crypto

Turning crypto regulatory compliance into a competitive advantage – interview with Notabene

The latest regulatory developments in the crypto world require companies to comply with the travel rule requirements. We have invited Catarina VelosoLegal Engineer at Nota Beneto share tips on how best to reflect these requirements from different jurisdictions in your business.

Who is Notabene, for those who don’t know him yet?

Using privacy protection technology, Nota Bene‘s full-service software helps Virtual Asset Service Providers (VASPs) manage regulatory and counterparty risk in virtual asset transactions in real time. Financial institutions, crypto exchanges and custodians use our travel rules compliance solution to comply with international anti-money laundering regulations and guidelines. Clients such as Luno, Bitso, Crypto.com, Bitstamp, Cross River Bank and many more leverage our end-to-end travel rules compliance software to:

  • identify virtual asset accounts,

  • perform mandated VASP due diligence, and

  • manage the exchange of global travel rule transfers from a dashboard.

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

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

In June 2022, the FATF published a Focused Update on the Implementation of the FATF Standards on Virtual Assets and VASPs (“Update”) and reported that country adoption of Travel Rules requirements is at an early stage compared to other components of crypto compliance. Only 29 of 98 stakeholders have adopted legislation and only 11 have started to enforce and monitor compliance with travel rules.

Unlike other components of crypto compliance (such as customer due diligence obligations), the differing speed of enforcement of travel rules requirements across jurisdictions poses challenges. particular for VASPs – these challenges were invented Sunrise problem.

In 2022, Notabene saw a peak increase in travel rule adoption by VASPs. This willingness to comply is also explicitly recognized by the FATF in the previously mentioned update.

The results of the Travel Rules Status Survey that Notabene ran in October 2021 showed that most VASPs intended to comply with the travel rule by the end of the second quarter of 2022. And this year proved that VASP predictions were realistic. In our network, we have seen a two-fold increase in the number of transactions over the past 90 days. This means that the number of crypto transactions for which VASPs send a corresponding Travel Rule message has doubled in just one quarter.

Even though travel rule requirements are still not enforced uniformly across jurisdictions, the industry is making substantial progress towards compliance. This is a relevant data point for any VASP whether or not the travel rule is enforced in their jurisdiction: to continue transacting with VASPs are required to comply with the travel rule, VASPs must be ready to start engaging in travel rule flows. Notabene recently launched a Sunrise Package targeting this use case.

What are the challenges in standardizing travel rule requirements?

Travel rule requirements vary widely from jurisdiction to jurisdictionparticularly in terms of:

  1. In force 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 to be transmitted.

These variations are not specific to Recommendation 16, the “travel rule”, variations in local implementation of FATF Recommendations are common and expected. What makes the Travel Rule unique is that, unlike other compliance obligations (such as customer due diligence), the Travel Rule requires collaboration between VASPs. VASPs have different requirements and must interact with each other.

For example, the receiving VASP may expect and be required to receive a particular data point about the sending client that the sending VASP is not required – and may not be permitted – to share. Situations like these have the potential to create problems and friction in transactions. In these cases, the VASP Beneficiary will be obliged to request additional information from the VASP Initiator. To transact with the recipient VASP, the sending VASP would need to share a wider scope of client PII than required by its jurisdiction.

The The International Monetary Fund (IMF) recently pointed out the benefits of cross-border collaboration and cooperation in the regulatory approach to crypto. Highlighting is paramount, especially in the context of Travel Rule regulations. Standardization of country-level requirements and industry-level best practices will be critical to the successful implementation of the Travel Rule worldwide.

Please provide some practical examples/projects you have worked on to advance legal knowledge within the crypto industry.

From the start, integrated global compliance was central to Notabene’s product design. Travel rule requirements vary by jurisdiction, so our product abstracts from this complexity of VASPs. We integrate travel rule requirements from different jurisdictions directly into our product to ensure that VASPs can comply with the requirements of the jurisdictions involved in each transaction.

We are committed to making travel rules information easily accessible to consumers and VASPs. Our content library includes 75 informative blog posts, 15 country-specific regulatory guidelines, and two downloadable PDF cryptocurrency regulatory guides. In addition, we regularly summarize major regulatory updates globally.

We run jurisdictional workshops: VASPs based in the same jurisdiction all work within the same time frame to comply with the same requirements. We create opportunities for VASP compliance officers and legal professionals to come together and discuss their interpretation of the requirements that apply and how they plan to incorporate these requirements into their processes and policies.

In addition, we are constantly working to facilitate the standardization of best practices in the industry. We will run monthly in-depth compliance reviews where VASP compliance officers and legal professionals from all jurisdictions come together to discuss specific topics, ranging from operational/strategic topics such as how to handle transactions with non-hosted wallets and VASP due diligence best practices counterpart to knowledge sharing sessions around relevant new legislation, such as the EU Funds Transfer Regulations.

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

I expect to see a strong push for the adoption and enforcement of travel rules in the coming quarters. The FATF recently signaled an “immediate need for jurisdictions to make progress in this area”. This year’s spotlight on crypto sanctions compliance – first with speculation over whether crypto could be instrumentalized as a way to evade sanctions on Russia and more recently with the novelty of sanctions imposed on Tornado Cash – highlight the importance of the travel rule to effectively manage counterparty risk in crypto transactions.

Without compliance with travel rules, VASPs are blind to their transaction counterparty.

Along with the travel rule, we can expect developments in stablecoin regulation – an area of ​​particular focus due to the potential for mass adoption. The new comprehensive EU framework already covers the topic of stablecoins for crypto, MiCA, and recently made headlines in the US with the proposed two-year ban on algorithmic stablecoins. I also expect developments in the field of decentralized finance – an area which, due to its particular characteristics, may require rethinking existing regulatory frameworks, as recognized by the European Commission in its European Financial Stability and Integration Review 2022.

About Catarina Veloso

Katherine is the legal engineer at Notabene, serving as the compliance liaison between global crypto regulators and Notabene clients on their journey to travel rules compliance. She works closely with the Notabene product team to reflect the travel rule requirements of different jurisdictions.

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