What you need to know: KYC, AML and Travel Rule
Benefits of the Travel Rule
With the growth of the cryptocurrency industry, more regulations are necessary so as to protect the industry. However, with more firms, there is greater inconsistency in terms of regulations. This has led to an increase in illegal activities such as money laundering through virtual assets. This is attributed by the anonymity of blockchain technology as money launderers take advantage of this anonymity to commit illegal transactions.
Through the implementation of the Travel Rule, it allows for the audit trail to be enhanced when virtual assets are being transferred between entities such as exchanges and wallets, thus helping to AML/CFT efforts. The information collected under the Travel Rule help financial authorities to detect and prevent money laundering activities. This further deters the criminals by reducing the number of VASPs through which they can use to move funds.
How does KYC/AML differ from the Travel Rule
Both KYC/AML and Travel Rule are risk-based approaches that combat illegal activities associated with virtual currencies. However, they have their differences as seen in the table below.
Does Travel Rule replace KYC?
The Travel Rule does not replace KYC but rather, complements it. KYC and Travel Rule have different objectives when it comes to regulations and compliance. KYC plays a key role in deterring criminals from using cryptocurrencies for illegal activities. However, despite of this, there are still many illegal activities ongoing and billions of virtual assets were reported to be stolen in 2019.
As such, the Travel Rule aims to complement KYC through the enhancement of auditing trails. KYC helps both authorities and VASPs to ensure that the Travel Rule can function effectively. It allows VASPs to collect information in an accurate and safe manner. The Travel Rule then puts regulatory pressure on countries to ensure that VASPs are doing their part to mitigate risks. This ensures that financial institutions will implement more robust and comprehensive KYC processes that comply with financial industry standards while sharing accurate user data as required by the FATF. Overall, the implementation of KYC and the Travel Rule are major tools that can help financial institutions to comply with regulations worldwide in an effective manner.
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