Travel Rule: Bringing Transparency to Blockchain Transactions

The rapid development of virtual assets has attracted the attention of regulatory agencies towards anti-money laundering and compliance. The Travel Rule, as a new regulatory requirement, aims to enhance the transparency of Blockchain transactions by linking on-chain activities to real-world identities.

The core of the Travel Rule requires Virtual Asset Service Providers ( VASP ) to obtain, retain, and submit information about the originator and beneficiary related to virtual asset transfers. This requirement enables VASPs to better identify suspicious transactions, screen against sanctions lists, and prevent transactions with sanctioned entities.

Unlike traditional KYC( Know Your Customer), the Travel Rule focuses on transactions between VASPs. Before the implementation of the Travel Rule, VASPs only needed to conduct KYC reviews on their own customers and could not obtain information about the counterparty, which increased counterparty risk. The implementation of the Travel Rule fills this regulatory gap.

The global adoption of the Travel Rule is accelerating. The Asia-Pacific region is leading the way, with Singapore, Japan, and South Korea being the earliest countries to implement the Travel Rule. Europe and the Middle East have also been speeding up their adoption recently. An increasing number of exchanges are complying with or preparing to comply with the Travel Rule, reflecting the industry's growing acceptance of regulatory compliance.

Hong Kong will require VASPs to comply with the Travel Rule starting from June 1. Specific requirements include:

1. Collect different ranges of information based on the transaction amount.
2. When the required information is not received, request the counterparty to provide it.
3. Conduct due diligence on counterparties
4. Verify ownership of self-custody wallet

The Travel Rule still faces some challenges during its implementation.

1. The regulatory timelines in different jurisdictions are inconsistent, leading to compliance discrepancies.
2. There is a lack of interoperability between Travel Rule agreements.
3. Closed networks exacerbate interoperability issues.

Nevertheless, the implementation of the Travel Rule will significantly enhance the transparency of virtual asset transactions and help combat money laundering and terrorist financing activities. As global regulatory coordination advances, these challenges are expected to be gradually addressed.