Travel Rule: The Key to Transparency in Blockchain Transactions

In recent years, blockchain technology has increasingly become an important component of the financial industry. In order to improve the anti-money laundering and compliance frameworks of industry participants, regulatory authorities have begun to implement the Travel Rule. This regulation aims to enhance transaction transparency by linking blockchain transactions with real-world entities and identities, thereby better managing the risks of money laundering, terrorist financing, and counterparty risk in on-chain transactions.

The Travel Rule requires virtual asset service providers ( VASP ) to obtain, hold, and submit information related to the sender and beneficiary of virtual asset transfers in order to identify and report suspicious transactions, take freezing actions, and prohibit transactions with sanctioned individuals and entities. These obligations must be fulfilled before initiating blockchain transactions, meaning potential illegal transactions can be blocked before they enter the blockchain.

The global adoption of the Travel Rule is accelerating. The Asia-Pacific region is leading in adoption, while Europe and the Middle East are also seeing significant increases in adoption rates. More and more exchanges are complying with or beginning to comply with the Travel Rule, and the industry's acceptance of this regulatory requirement is also improving.

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

1. The scope of information collected and shared varies depending on the transaction amount.
2. If the required information is not received, the VASP should request the initiating VASP to provide it and consider terminating the business relationship if necessary.
3. Provides detailed guidance on how to conduct due diligence on counterparties.
4. Require verification of account or wallet ownership when transacting with self-custody wallets.

The Travel Rule still faces some challenges during its implementation:

1. "Sunrise Period" issue: The implementation times vary across different jurisdictions.
2. Lack of interoperability: There are compatibility issues between different Travel Rule protocols.

Nonetheless, the global adoption of the Travel Rule is steadily advancing. Over time, these challenges are expected to be addressed, laying the foundation for building a more transparent and compliant Blockchain financial ecosystem.