AAX: Implementing FATF’s ‘Travel Rule’

In an effort to optimize investor protection, and tackle money laundering and the risk of terrorist financing, the Financial Action Task Force (FATF) recently published new guidelines for the proper management of digital assets.

Its framework includes the so-called ‘travel rule’, requiring digital asset exchanges to collect and transfer customer information whenever processing a transaction.

It’s a huge step forward in terms of regulation, but in no way easy.

The travel rule goes straight to the heart of blockchain’s original value proposition, raising questions over privacy, decentralization, and financial freedom, but also addressing identity concerns, real ownership of assets, and transparency.

These concerns are valid and must be addressed fairly. Nevertheless, at AAX we believe regulatory developments, such as the travel rule, should be embraced: they are key to creating the right conditions for the digital assets economy to flourish while keeping investors safe.

What is the travel rule?

The travel rule requires virtual asset service providers (VASPs), including digital asset exchanges, to obtain and hold information on customers depositing funds into the exchange, and on beneficiary accounts when funds are sent to another wallet.

Whenever digital asset transactions take place, this information must be transferred to its recipients as well.

While the FATF’s guidance is not legally binding, non-compliant countries are at risk of being penalized by exclusion from global financial networks.

As such, the G-20 has already declared it will follow the FATF in its regulation of digital assets’ AML/CFT compliance.

It stated that, although it recognized the value of blockchain technology, digital assets “…raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering, and terrorist financing”.

It went on to say:

“We commit to implement the FATF standards as they apply to crypto-assets, look forward to the FATF review of those standards, and call on the FATF to advance global implementation.”

What are the concerns?

Among the great value propositions of blockchain-enabled digital assets, is their ability to be transferred across borders on a peer-to-peer basis, with a high degree of privacy, and without the need for third-party record keeping. These features are an inextricable part of blockchain’s DNA.

Privacy considerations cannot simply be dismissed. Privacy infringement and identity theft are among the serious risks that blockchain is designed to guard against. On the other hand — quite fairly — the travel rule aims to promote safety and transparency for users and investors in digital assets.

Technically, the travel rule also raises some questions. For example, while the travel rule only applies to VASPs, when processing transactions, digital exchanges may have a hard time determining whether beneficiary accounts are linked to another VASP or an individual. The reason is that, at least for the time being, wallets do not contain information apart from the address itself. There is no ‘real world’ connection between addresses and, say, a person, entity, or bank account.

What does the travel rule mean for AAX?

Ever since the inception of Bitcoin, back in 2008, the industry has been plagued by hacks, elaborate scams and loss or misappropriation of funds.

As such, any regulation that seeks to promote safety, protect investors, ensure exchanges’ accountability, and foster transparency, should be welcomed.

At AAX, we have already begun thinking through the complexities of implementing the travel rule, and have started consulting with our partners to understand how best to utilize blockchain analytics techniques to optimize crypto provenance. We are making progress and are optimistic about reaching a solution

Our mission to deliver an institutional-grade exchange that can be trusted and used by everyone means that we’re committed to being — and remaining — fully compliant with all applicable rules and regulations.

Learn more about AAX.

Originally published at https://blog.aax.com on July 10, 2019.