In 2019, the Financial Action Task Force (FATF) decided that the so-called “travel rule” requiring financial service providers to obtain, hold and transmit originator and beneficiary information for transactions would apply to Virtual Asset Service Providers (VASP). What does that mean concretely?
This means that virtual assets providers will need to exchange the information between each other. For instance, customer A from exchange A wants to send 1BTC to customer B in exchange B, exchange A will need to obtain beneficiary information and then send this information plus customer A information to exchange B. It should be noted that FATF requires this to happen only for transfer superior or equal to USD1000. In Switzerland, article 10 AMLO applies whatever the amount of the transfer.
Bitcoin Suisse, Lykke, Seba, Sygnum, MME and Avaloq are the founding members of the Open VASP initiative, what is their (common) interest?
We all want to comply with applicable rules and regulations. The Swiss regulator informed the industry that the rule has always applied and that we need to comply with it.
Our common interest is to be able to keep doing business in a compliant way with a solution that meets the needs of the industry. We have therefore come together as we share the view that the design principles of the openvasp protocol is the best basis to move forward.
The goal is an open protocol to implement FATF’s travel rules for virtual assets. How does the collaboration looks like?
We are in the process of setting up a non-profit organization to ensure standard governance and to provide a contact point for the industry and regulators (stay tuned this is coming very soon). The IT development is led by Lykke business and Bitcoin Suisse with the support of other partners to be disclosed at a future date.
The travel rule is implemented to fight financial crime. How big is this problem really?
According to Europol (2018) 3% to 4% of the 100 billions in illicit proceeds in Europe is laundered through crypto, criminals are getting familiar with new technologies but this is still at its infancy. It is also interesting to note that according to Chainalysis state of crypto crime report 2020, illicit transactions still make up a small share of all cryptocurrency activity at just 1.1%.
“3% to 4% of the 100 billions in illicit proceeds in Europe is laundered through crypto,”
Blockchain technology provides a public record of each transaction which makes the use of cryptocurrency not the best choice for criminals to hide the source of their funds. Using blockchain investigations tools, law enforcement agencies can track the full flow of money and see the potential exposure to illicit activities, which is not possible with fiat currency. According to the annual report of Chainalysis, criminals mostly use exchanges which now have to comply with AML regulations including KYC, which allows law enforcements to get access to the names behind an address. For instance, in October 2019, US Law enforcement dismantled one of the largest child porn website by tracing BTC.
How negative is the reputation of virtual assets in general?
Cryptocurrencies, mainly because of their pseudo-anonymity, are still associated with criminal activity and this has had a negative impact on the industry. The fact that VASPs have to apply same compliance standards as financial institutions, including the travel rule, will reinforce the trust of institutional players and potentially pave the way for mass adoption.
Is the travel rule not contrary to the basic philosophy of Distributed Ledger Technology (DLT) and decentralization?
Yes and no. Yes as VASPS will need to know from who and to who their customers are transferring virtual assets whereas today only wallet addresses are known. And no as VASPs already have to do KYC, and OpenVASP protocol is a decentralized protocol with full encryption of personal data which preserves and protects the “anonymity” of clients data.
How many persons and institutions are participating in the building of the new standard form to the crypto world?
We have several developers that are contributing to the code, and we are involved with several international organisations to develop global standards. We also have a telegram community of 300 members which we hope will continue to be active in the standards development in the future.
What are the main hurdles?
The biggest challenges are the varying levels of the implementation of the travel rule in different jurisdictions and the recent emergence of circumventing by certain VASPs and stricter rules in some jurisdictions such as the requirements imposed by FINMA to obtain identity, beneficial owner information and proof of ownership for third party assets.
Adding to this, the various approaches for authenticating Vasp may add uncertainty in global implementation.
Could this Crypto Valley or Swiss standard form become one day a world stand for the whole crypto world?
We strongly believe that our design principles come the closest to those of the decentralized crypto ethos. We also strongly support principles of free and open market and that is why we have already begun working on interoperability with some of the industry leaders also developing travel rule solutions.
“We strongly believe that our design principles come the closest to those of the decentralized crypto ethos.”
How far are you compared to other initiatives, if there are any similar?
There are over a dozen solutions being developed on the market with a wide range of approaches and levels of centralization. We align closely with those that share our design principles of decentralization, data privacy, and we are aiming to be blockchain agnostic.
We are aware that certain solutions are in testing phase, we aimed to be there by the end of Q1, however in light of the recent situation with COVID-19 this is currently being reassessed.
Delphine is an experienced Compliance officer who worked across different countries and industries including large Banks in the UK. She holds two Master Degrees specialized in European Criminal Business Law and Frauds and Money Laundering Prevention. After heading the Global Compliance division of Lykke crypto exchange, she is now responsible for compliance advisory and partnerships at Lykke business. Delphine sees Compliance as a way to help the business achieve its objectives in a compliant environment. Flexibility and creativity are keys.
