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[April Week 4] PEN TALK

📌 Today’s Topic: Travel Rule… Who are you…?

Hello! This Editor K.

Starting with the recent listing of Bibox, a global exchange, I think there will be more situations where exchange users have to actually purchase, deposit, or withdraw PEN, the token of Protocon. However, since regulations on cryptocurrencies are different in each country, you must check these aspects to safely transmit and hold virtual assets. So today, if you are interested in this field, I would like to talk about the Travel Rule.

What is the Travel Rule?

Image Credit: Upbit

The Travel Rule is a system for tracking the flow of digital assets. To prevent money laundering in the financial sector, the travel rule records the remittance information according to the format required by the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

The Financial Action Task Force (FATF), established to monitor illegal funds to prevent money laundering and to support cooperation between countries, added virtual assets to travel rules in 2019. Accordingly, the obligation to collect the recipient’s information when transmitting virtual assets is imposed on the virtual asset service provider (VASP).

How are exchanges in Korea doing?

Image Credit: New1

According to the implementation of the Travel Rule, exchanges are required to record the flow of funds when depositing or transferring money. Typical recording systems include CODE and VerifyVASP. Initially, Bithumb, Upbit, Coinone, and Korbit, the four major virtual asset exchanges in Korea, signed a joint MOU on Travel Rule. However, as Upbit withdrew, Bithumb, Coinone, and Cobit applied co-developed CODE and Upbit applied Verify VASP as interlocking systems.

Image Credit: Coindesk Korea (As of 27 March)

The problem is that there is no unified guide, so there are different things to consider for each exchange. The things that users need to consider, such as whether it is a domestic or foreign and account holder verification service, have become so complicated. A huge barrier suddenly appeared in deposits and withdrawals, which had been done without difficulty. It is no exaggeration to say that this is the beginning of confusion.

Since the exchanges that allow deposits and withdrawals for each exchange are also updated every moment, it is essential to check again when moving funds.

So, what is the reaction in the field…?👀

In the case of Korea, from March 25, 2022, according to the Specific Financial Information Act, it is mandatory to record the identity information of the sender and receiver of virtual assets at the virtual asset exchange. This is also the first in the world to be applied to the domestic cryptocurrency industry in accordance with the revised Special Payment Act in 2020. The FSC(Financial Services Commission) decided to allow a grace period of one year and applied the regulation in consideration of the introduction of a solution for establishing an information sharing system between virtual asset service providers. Currently, travel rules apply when transferring virtual assets worth 1 million won or more to a personal wallet, and do not apply to transactions between individuals.

Image Credit: Aju News

In order to clarify the source of the funds, deposits and withdrawals are possible only for personal wallets that have been confirmed to be owned by the person. However, as a characteristic of virtual currency that anonymity is guaranteed, the travel rule that is comparable to a real-name system was applied, causing objection to existing users.

It is the users who have suffered the most from the regulations actually implemented. The list of VASPs that can deposit and withdraw money is different for each exchange, and the process is also complicated. There is a possibility that the number of cases for each item such as wallet, domestic/overseas, and solution must be considered and complicated procedures must be followed, which raises the possibility that users will leave and the market will shrink.

Exchanges are equally facing difficulty. Exchanges had to prepare their own solutions in a situation where no international standard was established and clear guidelines were not announced by the Financial Services Commission.

In this situation, the link between VerifyVASP and CODE, the travel rule solution originally planned for March 25, was postponed to April 25. For this reason, they have temporarily suspended cryptocurrency deposit and withdrawal services between exchanges. Currently, interworking between exchanges has been completed, allowing mutual remittance of cryptocurrencies from the 25th.

To sum up

The Travel Rule is a necessary regulation to prevent money laundering, but it is also a policy that is causing confusion in the market. According to Financial News, the 24 hour trading volume of domestic exchanges based on CoinMarketCap was $3.9 billion, down about 86% from $27.3 billion on April 20, 2021, a year ago.

Of course, there are various factors that contributed to the contraction of the domestic market, but it cannot be denied that the Travel Rule played a role. In order to resolve travel rule problems caused by ambiguous laws, the need for a unified guideline and the importance of a revised process for correct policy application are emerging.

Today, we talked about the travel rule briefly. We need to see how this policy, which seems to require a lot of trial and error, will change the industry in the long term. I’ll come back with another topic next time.

Thank you.

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