In June 2019, the Financial Action Task Force (FATF) amended the anti-money laundering (AML) and counter-terrorist financing (CTF) recommendation to include virtual assets. Recommendation 16, widely known as the Travel Rule was established to provide guidelines for combating financial crime. Initially, the Travel Rule only applied to banks. However, the recent amendment has widened its scope to include virtual assets and exchanges with the FATF attempting to catch up with the evolution of cryptocurrencies.
Under this new amendment, Virtual Asset Service Providers (VASPs) are required to share identification details of users transacting virtual assets worth $1,000 USD or more. To fulfill these obligations, VASPs will need to collect and verify their customer identification. They are also obliged to share this data with other VASPs or financial institutions that their users transact with.
Implications for crypto users and investors
From whichever angle you look at it, the Travel Rule is bound to have some major implications on the crypto sector. From a control viewpoint, the rule presents an existential crisis that tears apart crypto’s core fabric of anonymity and confidentiality. The introduction of regulation in the crypto space negates the main reason for their existence, which is maintaining privacy in financial transactions. The Travel Rule appears like a brazen attempt by international regulators to gain control over the crypto space and its users. Anonymity is a major attraction to digital currencies and taking this away would strip its users of this privilege.
However, taking a deep dive into the long term impact, it is clear that the Travel Rule is a blessing in disguise for crypto. The sector has been struggling with gaining mass adoption since its inception as cryptocurrencies are often associated with illicit transactions. Financial regulators have repeatedly cautioned the public against using cryptocurrencies while banks have actively refused to trade with VASPs. This is about to change, thanks to the Travel Rule.
The introduction of crypto regulation heralds a new era that bears huge promise for digital assets. Firstly, it provides the much-coveted ‘official recognition’ that has eluded the sector for years. Secondly, the recent amendment provides a bridge between VASPs and the mainstream financial sector. This will level the playing field by enabling the sharing of data across the divide. As such, it may become easier for users and VASPs to open bank accounts to facilitate crypto transactions.
Third and most important, the amendment provides the much-needed legitimacy for digital assets which in turn increases their potential for mass adoption. The Travel Rule brings an additional layer of transparency for digital assets’ payments and helps get rid of bad actors hiding behind the veil of anonymity afforded by cryptocurrencies. The law makes it much harder for criminals to use digital currencies and VASPs thus opening up the sector to more well-intentioned users from the public. This could potentially boost the usage and acceptance of cryptocurrencies as a medium of exchange that aids the quest to go mainstream.
Implementation, execution, and enforcement of the Travel Rule
The FATF does not make laws but rather offers recommendations for fighting financial crime globally. Each country chooses how to implement and execute the recommendations based on their laws. And herein lies the problem.
The regulations will differ among nations making compliance difficult for VASPs across different territories. Most VASPs, like crypto exchanges, operate in several countries that may have divergent laws governing the transmission of users’ personal data. For instance, privacy laws such as GDPR and CCPA add to the complexity of compliance in these jurisdictions. Additionally, VASPs need to meet the technical designs and security requirements among a host of other individual nation specifications. This will make compliance across multiple nations a tedious and expensive affair.
Implementation of the Travel Rule in the crypto sector has its unique set of challenges due to the technical nature of blockchain technology. Naturally, blockchains are decentralized opt-in networks without the capability of gathering the needed personal information. Additionally, various cryptocurrencies operate on different blockchains while most VASPs use their custom platforms. This poses a serious challenge of obtaining and sharing user data as required by the Travel Rule.
Presumably, regulators will require the unification of the crypto sector and aggregation of VASPs on a common platform for easier execution and enforcement of the Travel Rule. This presents an additional set of challenges with the need to create a robust architecture to accommodate all VASPs. It also forces VASPs to operate in a competitive environment to collaborate with each other to be compliant. Furthermore, it tries to introduce centralization which is a foreign concept in the crypto sector. This problem is a huge concern especially for the increasingly popular Decentralised Finance (DeFi) applications that have a high degree of anonymity.
The alternative approach is requiring each VASP to meet compliance goals individually. However, this is an insurmountable task both for the VASPs and the regulator due to issues of interoperability, scalability, and high costs. Furthermore, different VASPs will take different approaches to data handling, transfer, and protection. This is quite risky as some VASPs may not adhere to best practices for handling users’ personal information thus exposing them to cybercrime.
The Shyft Network Solution
The Shyft Network is developing a platform named Veriscope that helps VASPs comply with the Travel Rule. With Veriscope, Shyft Network is trying to create the technology, the frameworks, and infrastructure needed to implement the Travel Rule at a global scale, without jeopardizing users’ PII, and without major transformation costs for VASPs. By being proactive, VASPs and the entire crypto industry for that matter can lead the way in which the Travel Rule is implemented, instead of waiting for policymakers to decide on this matter, all based on their own knowledge of the industry, their users, and the potential the technology has in changing the way we live.
Veriscope is a cleverly crafted initiative that solves the above-discussed challenges and goes a step further to establish a set of best practices surrounding the implementation of the FATF Travel Rule. In this regard, Shyft created the Veriscope Governance Taskforce to set the rules framework and oversee the development of the platform to ensure that it is in line with the FAFT AML regulations. This taskforce has gained immense support and backing from the crypto community and established VASP. Just recently, leading crypto exchange Binance and Bitfury joined the taskforce. These are major additions to already existing members that include Bitfinex, Tether, Huobi, Hashkey, Unocoin, Paycase Financial, and TokoCrypto. The taskforce is still open to VASPs that are willing to participate according to Shyft Network co-founder Joseph Weinberg
It’s an inclusive working team that’s open to any other VASPs to join. It’s for the users of the system. Shyft developers are handing over the most important decisions to the stakeholders
It is therefore expected that more VASPs will join the Veriscope governance task force in the future as coordination is important to achieve interoperability between multiple players. According to Weinberg, it helps in establishing many approaches to the Travel Rule problem thus boosting the viability of the Veriscope platform across the entire crypto industry.