It may sound ominous and it may have its downsides, but the travel rule (in crypto and beyond) isn’t that limiting —at least not for average users. As most rules in the financial world, it applies to businesses, and not directly to customers. This regulation now includes cryptocurrencies, but it has existed long before Bitcoin. Likely, you didn’t even know that it was there in the first place.
The travel rule was introduced by the U.S. Bank Secrecy Act (BSA) in 1996 and later adopted by the Financial Action Task Force (FATF), an international regulatory entity, as a global anti-money laundering (AML) standard. This rule, also known as Recommendation 16 by the FATF, mandates that financial institutions, such as banks, must collect and share specific information when processing transfers above a certain threshold (typically $1,000 in the U.S.).
In 2019, the FATF extended the Travel Rule to cover cryptocurrencies, requiring Virtual Asset Service Providers (VASPs), like exchanges and custodial wallet providers, to follow similar guidelines as traditional financial institutions. This expansion aimed to prevent money laundering and terrorist financing in the growing crypto sector.
The term “Travel Rule” comes from the fact that the required customer information must “travel” with the transaction as it moves from one financial institution to another. When a financial institution processes a transfer—whether it’s fiat or crypto—it must ensure that key details, such as the sender’s and receiver’s names, account numbers, and crypto addresses, “travel” along with the funds to the receiving institution. This enables authorities to track and investigate suspicious activities across different institutions and jurisdictions.
Who is affected by the travel rule?
As mentioned above, this rule primarily targets Virtual Asset Service Providers (VASPs) —which means crypto businesses. These include crypto exchanges, custodial wallet providers, and firms handling token offerings. Businesses that facilitate asset exchange, transfer, or safekeeping must comply by collecting and sharing sender and recipient details in fiat or crypto transactions. The rule applies to transactions between VASPs or between a VASP and a financial institution.
This way, though, customers using those regulated platforms are also impacted. They must provide personal details for verification and record-keeping, including their full name, address, and account details, ensuring compliance with anti-money laundering measures. Transaction information such as the sender and recipient’s identification, transaction amount, and purpose must also be shared between VASPs. While this enhances transparency, it raises concerns about user privacy, adequate treatment of sensible data, and transaction delays.
Regions such as the EU, starting December 30, 2024, the U.S., Canada, and Singapore have adopted the Travel Rule for crypto transactions. Although it promotes market legitimacy, compliance can be costly and time-consuming, particularly for smaller businesses. Meeting regulatory requirements often requires significant investment in technology and personnel, potentially hindering growth and innovation within the crypto industry.
Decentralized wallets and the travel rule
As an individual user, you can always choose. The travel rule doesn’t affect non-custodial wallets or peer-to-peer (P2P) operations, only kicking in when you use businesses to store your funds or complete your transactions —e.g., a crypto exchange website. Decentralized services, on the other hand, don’t rely on centralized intermediaries, which are typically the target of regulations.
If users exchange cryptocurrency directly between their non-custodial wallets or use Decentralized Exchanges (DEXs), they won’t be affected by the travel rule. Since DEXs operate without intermediaries and allow direct P2P trading, they generally don’t require verification, which is a key component of the travel rule. This enables users to maintain greater privacy and anonymity while trading. However, some jurisdictions may still impose certain regulations on DEXs, requiring them to implement specific measures, but as of now, the travel rule mainly impacts centralized exchanges and services that involve intermediaries.
By using the Obyte ecosystem, anyone can conduct secure transactions without middlemen on our popular DEX Oswap.io or directly between individual wallets through conditional payments. In the latter case, transactions are safeguarded by smart contracts that lock funds until predefined publicly verifiable conditions are met. This process ensures that both parties fulfill their obligations before the transfer is completed, promoting trust and security without intermediaries. For cases where contract performance cannot be publicly verified, Obyte’s arbitration feature, along with the ArbStore, offer another reliable option for decentralized, secure exchanges, this time by adding a human professional to the mix.
