JFSC Travel Rule supervisory engagement: key findings and recommended next steps for VASPs

• Travel Rule compliance has matured across Jersey's VASP sector, with firms increasingly embedding requirements into everyday operations.
  
  
• Technology and cross-border challenges remain, particularly where Travel Rule solutions are incompatible or jurisdictions adopt different approaches.
  
  
• A risk-based approach is essential, supported by clear policies, documented procedures and regular staff training to ensure consistent compliance.

The JFSC has recently published feedback following its supervisory engagement with virtual asset service providers (VASPs) on Travel Rule compliance. The findings confirm that implementation across the sector has matured significantly, while identifying a number of practical challenges that firms should continue to address. 

The full JFSC notice is available here.

Background

FATF Recommendation 16 established the Travel Rule, which is an international regulatory standard designed to combat financial crimes like money laundering and terrorism financing. It mandates that financial institutions, including those dealing with virtual assets, share specific information about the parties involved in a transaction when transferring funds electronically.

The JFSC's Travel Rule framework requires VASPs operating in Jersey to obtain, hold, and transmit specified originator and beneficiary information when conducting virtual asset transfers. As the regulatory landscape continues to develop - both in Jersey and internationally - the JFSC has undertaken targeted supervisory engagement to assess the sector's progress in embedding Travel Rule requirements into day-to-day operations.

See our previous a note on Jersey's implementation of the Travel Rule here for more information on this.

Overview of findings

Overall, the JFSC found that Travel Rule implementation has matured significantly across the sector. Firms have established policies, procedures, and controls, and Travel Rule requirements are increasingly embedded in daily operations. VASPs demonstrated a sound understanding of their obligations and were able to clearly convey how they meet the relevant requirements.

Despite this progress, certain practical challenges remain. These largely reflect broader developments in the virtual asset sector and varying levels of Travel Rule adoption across jurisdictions. 

The JFSC's engagement identified three key themes:

1. Travel Rule solution compatibility

Firms continue to experience challenges where different Travel Rule solutions are being adopted, resulting in manual processes and delays in the exchange of required information resulting in impact on funds being made available to customers. 

Firms are mitigating these risks by regularly reviewing counterparties, monitoring jurisdictional market adoption of solutions, and applying risk-based decision-making. For example, where Travel Rule information cannot be exchanged automatically, firms are taking a risk-based approach when determining whether to proceed or reject a transaction by into account variables such as jurisdiction, customer profile, and VASP profile when determining an appropriate course of action.

2. Cross-border implementation

Differences in Travel Rule implementation across jurisdictions remain a key operational challenge for the sector. While global adoption of the Travel Rule is increasing, firms continue to encounter counterparties operating under different requirements or at varying levels of implementation maturity, enforcement, and operational readiness. 

In response to these challenges, firms are keeping up to date on risks associated with the jurisdictions and counterparties they work with – this assists firms, apply a risk-based approach at the point of transaction, and determine whether transactions involving non-compliant or higher-risk jurisdictions should be subject to enhanced risk assessments, mitigation measures, or avoided altogether, all of which supports ongoing compliance.

3. Consistent application of requirements

There is still uncertainty regarding how Travel Rule requirements apply to certain business models and transaction types. 

Firms have indicated that information collected during standard onboarding and customer due diligence is not sufficient to meet the Travel Rule requirements and also that there are differing interpretations internally of how the Travel Rule applies to certain transaction types.

Firms should therefore be regularly reviewing their policies and procedures, and implanting staff training to ensure that Travel Rule requirements and obligations are clearly understood and consistently applied across the full scope of their operations. Firms should also be embedding Travel Rule considerations within wider compliance and risk management arrangement.

Recommended next steps for VASPs

In light of the JFSC's findings, VASPs should therefore consider the following matters on an ongoing basis:

• Understanding the limitations of their Travel Rule solution. Firms should maintain a clear and current understanding of any functional or technical limitations inherent in their chosen Travel Rule solution.
  
  
• Documenting procedures for managing transactions where required information cannot be exchanged automatically. This includes maintaining records of related decision-making to demonstrate a robust and auditable compliance process.
  
  
• Regularly assessing jurisdictional and counterparty risks. VASPs should ensure that their risk frameworks are responsive to developments in Travel Rule adoption, implementation and enforcement in jurisdictions they work with.
  
  
• Clearly distinguishing Travel Rule obligations from broader regulatory requirements. Firms should ensure that Travel Rule compliance is treated as a distinct workstream and is not conflated with other regulatory obligations.
  
  
• Periodically reviewing and updating staff training, policies, and procedures. All internal frameworks should be periodically reviewed and benchmarked against current JFSC guidance to ensure continued alignment.

How we can help

Jersey is a progressive regulatory jurisdiction which offers a proportionate and flexible regulatory framework for VASPs and other fintech businesses, supporting innovation whilst ensuring robust investor protection and upholding international standards.

Our market-leading Fintech and Regulatory & Risk Advisory teams combine deep industry insight with specialist legal expertise and are supporting VASPs and other fintech businesses with their continued compliance in this rapidly evolving area. Our team's extensive experience includes advising VASPs on licensing and AML/CFT/CPF obligations, establishment of real world asset tokenisation issuers, provision of cross border crypto services and crypto funds.

Please do not hesitate to get in touch if you would like to discuss further.