The Travel Rule, Sanctions Screening and AML

Traditional wire transfers have long carried a travel rule: banks moving money above a threshold must attach the originator's and beneficiary's names and account details so the payment can be traced. Regulators extended this to crypto — exchanges (called virtual asset service providers) must now collect and transmit identifying information for transfers over a set amount, typically $1,000 or $3,000 depending on jurisdiction, even when the underlying blockchain transfer itself is pseudonymous.

Alongside this sits sanctions screening: exchanges check both sides of a transaction against government sanctions lists and known illicit-address databases before processing it, and anti-money-laundering (AML) programs more broadly monitor for suspicious patterns like structuring deposits to dodge reporting thresholds.

Worked example. A customer at one exchange sends $5,000 in stablecoin to a customer at another exchange. Because the amount exceeds the travel-rule threshold, the sending exchange must transmit the sender's name and the receiving exchange's identifying details alongside the transaction, and both platforms screen the addresses involved against sanctions lists before releasing funds.

Enforcing this is harder in crypto than in banking, because the blockchain transfer itself carries none of this information — it moves between wallet addresses, not verified bank accounts — so exchanges rely on a separate messaging layer running alongside the transaction to exchange the required identity data. Transfers to self-hosted wallets that aren't run by any exchange complicate this further, since there's no counterparty institution to send the information to, which is why many jurisdictions apply extra scrutiny to withdrawals heading to unhosted wallets.