NI Bureau
The Financial Action Task Force (FATF) Travel Rule, or Recommendation 16, is a global anti-money laundering (AML) directive requiring financial entities to share transaction data for transparency. While initially designed for banks, it was extended to Virtual Asset Service Providers (VASPs) in 2019 to regulate crypto transactions. Despite its significance, implementation has proven complex, particularly in the crypto sector.
A major challenge in implementing the Travel Rule is jurisdictional inconsistency. Countries have adopted the regulation at different speeds, creating compliance gaps. For instance, Switzerland enforces a $0 compliance threshold, whereas others have higher thresholds, leading to uneven adoption.
Interoperability issues also pose significant obstacles. Crypto platforms operate on different compliance protocols, making seamless data sharing difficult. Without standardized global frameworks, verifying sender and receiver details across platforms remains inefficient. Another critical issue is high compliance costs. Small and mid-sized VASPs struggle to afford compliance tools, which are expensive and complex. Unlike larger firms with extensive resources, smaller players often lack the infrastructure to implement real-time compliance solutions, making them vulnerable to regulatory action or exclusion from international financial networks.
Adding to these concerns is the risk of monopolization. Leading crypto firms are developing proprietary compliance systems. These closed-loop solutions limit interoperability and consolidate compliance control among a few dominant players, reducing market competition. If left unchecked, this trend could create an oligopoly in global crypto compliance and Indian companies would end up on the paying side. Moreover, Indian regulators would also be dependent on these foreign firms for the data, something which has been problematic for some time now.
What should India’s approach be to implementing the FATF Travel Rule?
Indian exchanges face over-reliance on foreign compliance solutions, which could expose the domestic ecosystem to external dependencies. To address these issues, India should focus on developing its own Travel Rule compliance infrastructure by leveraging its well-established Digital Public Infrastructure (DPI), such as UPI and Aadhaar-based eKYC. By integrating existing digital frameworks with compliance tools, India can create a scalable, cost-effective system that ensures transparency while maintaining financial sovereignty.
By taking a proactive stance on Travel Rule compliance, India can not only safeguard its domestic markets but also emerge as a global leader in regulatory technology. Developing an indigenous compliance solution would allow India to export its expertise to emerging markets in Africa and Southeast Asia, where FATF scrutiny is increasing. A proactive strategy will ensure financial sovereignty, protect domestic crypto markets, and position India as a key player in next-generation regulatory technology.
