At first glance, you might think of Travel Rule as a term for some guidelines or rules related to travel. However, the term contains rules related to anti-money laundering, combating the financing of terrorism, etc. that have nothing to do with travel.
In the Travel Rule, the subject of travel is a virtual asset (VA), not a person. Just as a person reports traveler information such as immigration when traveling in one country or another, the goal of it is to identify where virtual assets are going and report them to regulatory authorities.
According to it, when transferring virtual assets, a virtual asset service provider (VASP) who is in charge of transmission has an obligation to provide information related to the transfer to the recipient. In other words, if it is a virtual asset exchange, the information of users who use the exchange must be reported to the regulatory authorities.
According to it, the VASP must implement the following:
1. Collect and implement VA transaction originator and beneficiary customer identification (KYC, Know-Your-Customer) information
2. Identify other VASPs
3. Distinct address between VASP wallet (custodial wallet) and personal wallet (non-custodial wallet)
4. Determine and considerate whether the wallet address is suspicious of ML/TF(Money Laundering/Terrorist Financing) activities
5. In case of doubt, consider follow-up actions including execution, suspension, rejection of VA transactions and Suspicious Transaction Report (STR)
It is provision included in the FATF's virtual asset regulation recommendations. As it is a recommendation, it follows the autonomy of each country, but many countries as well as G20 member countries declared that they would follow it because non-implementing countries have to take the risk of being alienated from the global financial network.
In Korea as well, virtual asset business operators must follow it according to the amendment to the Special Act.
The threshold amount for virtual asset transfer is 1 million won or more. When the conversion amount is calculated according to the notification of the Director of Financial Intelligence and Analysis, it applies to the worth 1 million won or more. However, Travel Rule does not apply to transactions between individuals.
Travel Rule Benefits and Concerns
Fiat currency is issued by a specific institution. It is generally easy to manage because there is an issuing entity. It also identifies and manages the movement of money in transactions between countries. However, virtual assets exist on the network. Borders don't mean anything. As a result, there are significant concerns about fraud, money laundering and criminal exploitation.
The Travel Rule was born out of these concerns. If it is successfully introduced, the occurrence of financial crimes will decrease and regulators will be able to more quickly identify and prevent the misuse of virtual assets.
In addition, a comprehensive KYC system and rules can increase customer confidence in virtual asset providers. Customers can have confidence that they are well controlled in transactions with VASPs that have introduced Travel Rule and are difficult to be misused for crime. As a result, the introduction of it can bring more customers to the virtual asset industry.
However, there are also concerns about it. The reason is that regulation such as Travel Rule is in conflict with the identity of virtual assets. It was born on the premise that all rights were left to users, out of the control of the state or institution that is, centralized. Even if there is a justification for crime prevention, central control destroys the identity of virtual assets.
Of course, it is born from the evils of central finance, but we have experienced over the years just how dangerous and vulnerable to crime as it without control. Therefore, most users agree that the minimum regulation is absolutely necessary.
There is a conflicting aspect between virtual assets, the identity of decentralization, and central regulation
There are also technical difficulties. VASP should prevent malicious actors from collecting personal information of users by spoofing (a generic term for attacks using deception in the network) or pretending to be VASPs. In other words, they must meet regulatory requirements without violating customer privacy. It should be possible to encrypt customer information and data subjects, and to provide personal information to the relevant institution only when necessary. Many virtual asset providers prefer to use Travel Rule solution providers because there are no clear guidelines along with technical difficulties.
As the application is approaching March 25, 2022, the virtual asset industry is also moving quickly. Four major exchanges Upbit, Coinone, Korbit, and Bithumb's have established a joint venture to respond the Travel Rule together. While the existing financial sector applies it based on the standardized code base of the The Society for Worldwide Interbank Financial Telecommunication (SWIFT), the virtual asset industry has introduced it solutions individually. Therefore, it took a lot of time to build an autonomous information transmission and sharing system between operators.
A corporation for joint response was established to solve these difficulties. The four major exchanges announced that they plan to open their doors to those companies if they want to use the Travel Rule service.
Korea's four major virtual asset exchanges have launched a joint response to Travel Rule
It is clear that it is a difficult task for virtual asset companies to solve, but at the same time, it can also create other opportunities.
To virtual assets, as is the case with current banks, the introduction of Travel rule is significant because it guarantees that virtual assets, which are regarded as risky like scams or gambling, are safe assets that follow the rules of international agreement.
Ultimately, the introduction of it by virtual asset providers is expected to have a positive effect on resolving uncertainty in virtual assets.