Travel Rule Solutions - Everything VASPs Need to Know

Virtual asset service providers (VASPs) need Travel Rule solutions. While a Travel Rule solution’s main function is to transact per the Travel Rule’s standards, it also carries many benefits for its users. 

Below, we explain in detail the relevance of a Travel Rule solution, how to choose the best solution for your business, and why and when VASPs need a Travel Rule solution.

What Is a Travel Rule Solution?

A Travel Rule solution is a tool VASPs use to comply with the Travel Rule. Travel Rule solutions can offer various functionalities to their users. However, the primary function of a Travel Rule solution is to provide a secure channel for obtaining, holding, and sharing Travel Rule data between an originator and beneficiary in a digital asset transfer per the FATF Travel Rule.  

Read Everything VASPs Need to Know about the FATF Travel Rule

How to Choose a Travel Rule Solution

Good Travel Rule solutions offer VASPs compliance with the Travel Rule. That is, the company developing the tool has done its regulatory research to ensure it has been developed following the FATF Travel Rule’s requirements. 

Some non-negotiable features of a Travel Rule solution include: 

• The correct timing of Travel Rule data exchanges (before the transaction). 

• Counterparty VASP identification, also before the transaction takes place. 

• Data exchange for all transactions, irrespective of the transaction’s value. 

• Data retention functionalities for audits or investigations. 

• Complete digital asset support: the Travel Rule applies to each and every digital asset. 

• At least one self-hosted verification method.

• A fallback option for non-Travel-Rule-ready jurisdictions. 

Better Travel Rule solutions offer the above, as well as additional functionalities, like more flexibility, i.e., the ability to reject transactions before they occur on-chain, or automated features, like 21 Analytics’ AOPP Portal, for self-hosted wallet proofs. However, the best Travel Rule solutions are always on-premises (on-prem). 

Learn more about the latest version of 21 Travel Rule. 

The Benefits of an On-premises Travel Rule Solution 

Some benefits of an on-prem Travel Rule solution include: 

• All personally identifiable information is kept on-premises, on your servers, minimising the risk of data breaches associated with 3rd party providers.

• By keeping all data transfers within your infrastructure, the middleman is eliminated, reducing the risk of cyber threats and enhancing the speed and reliability of the transaction. 

• You decide when data is physically deleted, and data protection obligations are fulfilled. 

• You are not reliant on a 3rd-party’s availability and uptime to transact. 

• Better adherence to GDPRs. 

In a recent blog, Software-as-a-Service (Saas) Solutions: A Double-edged Sword, we discussed extensively why Travel Rule solutions need to be on-prem, and listed the risks of SaaS options. 

Why Do VASPs Need a Travel Rule Solution?

VASPs need a Travel Rule solution to handle transactions, comply with regulatory requirements, mitigate risks, and streamline VASP counterparty discovery. Without a Travel Rule solution, VASPs risk jeopardising their business. The most obvious risk is non-compliance with the Travel Rule, which exposes VASPs to regulatory penalties, reputation damage, and financial risks. 

Firstly, VASPs need a solution for collecting, storing, and exchanging Travel Rule data with their counterparties in a digital asset transfer. Moreover, a Travel Rule solution facilitates the automated exchange of information and allows for real-time verification checks of the shared data, playing a pivotal role in risk mitigation. Of course, this can be done without a Travel Rule solution via email and spreadsheets, but this is by no means secure. What’s more, it is slow, adds friction to the user experience, and is prone to error. 

Additionally, a Travel Rule solution ensures smooth data exchange and compliance across multiple jurisdictions. Without a streamlined method, VASPs face discovery problems—they may not know if the receiving entity is Travel Rule-compliant.

With the growing adoption of the Travel Rule, nearly every jurisdiction implementing it includes self-hosted wallets within its scope; therefore, VASPs need an effective solution to verify wallet ownership. In other words, VASPS must have a reliable and user-friendly method for customers to provide proof of ownership for their self-hosted wallets, which is a standard functionality of a Travel Rule solution. Without an ownership-proof solution and relying only on their customers' self-declaration, VASPs unknowingly risk transferring to other VASPs, which is a breach of the Travel Rule.

Read: Regulatory Frameworks that Include Self-hosted Wallets

When Do VASPs Need a Travel Rule Solution? 

If the Travel Rule is live in your jurisdiction, you must have a Travel Rule solution in place to ensure you are transacting according to its regulations. 

In all other cases, VASPs should consider implementing a solution sooner rather than later, especially in the EU*. As mentioned in the previous section, waiting until the last minute to implement a Travel Rule solution puts VASPs at risk. 

*The Transfer of Funds Regulation (TFR) goes live on 30 December 2024. European crypto asset service providers (CASPs) need a Travel Rule solution to ensure compliance. 

Contact us to learn more about 21 Travel Rule and how it can streamline your Travel Rule compliance.