Travel Rule: Creating a more transparent and secure digital asset trading environment

With the continuous deepening of blockchain technology and digital asset applications in the financial sector, global regulatory bodies are beginning to focus on how to manage the risks of on-chain transactions through effective rules. The Travel Rule has emerged as an important regulatory measure aimed at increasing transaction transparency and preventing financial crimes such as money laundering.

The Essence and Significance of the Travel Rule

The core of the Travel Rule is to link blockchain transactions with real-world entities and identities to better manage the money laundering, terrorist financing, and counterparty risks of on-chain transactions. While "anonymity" is an important feature of blockchain, it has also led to some illegal activities using blockchain transfers for financial crimes. In order to better integrate blockchain technology into the regulatory framework, regulatory agencies require relevant platforms to comply with basic regulatory principles, including KYC( Know Your Customer), market surveillance, etc., while the Travel Rule further requires the identification information of both parties in the transaction.

Before the introduction of the Travel Rule regulatory guidelines in 2019, virtual asset service providers (VASP) only needed to monitor their own customers through the KYC process. This led to VASPs rarely checking counterparties when sending transactions to other platforms, increasing counterparty risk and the risk of involvement in illegal activities. The emergence of the Travel Rule was precisely to address this issue, requiring VASPs to obtain, hold, and submit information about the initiators and beneficiaries related to virtual asset transfers, in order to identify suspicious transactions and take appropriate measures.

Global Adoption of the Travel Rule

The adoption of the Travel Rule is a global trend, stemming from guidance from international organizations. There are differences in the adoption progress across regions, with the Asia-Pacific region leading others, mainly due to Singapore, Japan, and South Korea being the first to adopt the Travel Rule. Recently, the adoption rates in Europe and the Middle East have also been significantly increasing.

In the past six months, the global adoption rate of the Travel Rule has significantly increased, with more and more exchanges either complying or in the process of compliance. This trend reflects the regulators' emphasis on compliance and has also driven non-licensed institutions to adopt the Travel Rule. Compared to one or two years ago, the industry's attitude towards regulation has changed significantly, shifting from strong opposition to gradually accepting and adapting to new compliance requirements.

Implementation of the Travel Rule in Hong Kong

Hong Kong will require virtual asset service providers to comply with the Travel Rule starting June 1. The requirements in Hong Kong are similar to those in other jurisdictions, but there are several key points to note:

1. The scope of information collection varies depending on the transaction amount; transactions exceeding 8,000 HKD require more extensive initiator information.

2. If the receiving VASP does not receive the required Travel Rule information, it should request the initiating VASP to provide it; otherwise, it may need to consider terminating or limiting the business relationship.

3. The Hong Kong Securities and Futures Commission has provided detailed guidance on how VASPs should conduct counterparty due diligence.

4. The exchange needs to verify account or wallet ownership when trading with self-custody wallets, as well as conduct verification when trading with high-risk VASPs/accounts.

Challenges Faced in Regulatory Implementation

Despite the increasing global adoption rate, the implementation of the Travel Rule still faces some challenges:

1. "Sunrise Issue": Different jurisdictions have different implementation timelines for the Travel Rule, which may result in compliant VASPs being unable to conduct compliant transactions with counterparties that have not yet implemented the Travel Rule.

2. Protocol Interoperability: There is a lack of interoperability between different Travel Rule protocols, which is especially evident in closed networks.

As more countries and regions adopt the Travel Rule, these challenges are expected to be gradually resolved. By implementing the Travel Rule, the digital asset industry will move towards a more transparent, secure, and compliant direction, laying the foundation for the long-term healthy development of the industry.