Together We Can See the Light: Inside Veriscope’s Solution to the Crypto Sunrise Issue
Following the launch of Veriscope on the Shyft Network blockchain and integration from the world’s leading crypto exchanges, we break down how Veriscope’s solution to the “Sunrise Issue” solves one of the biggest regulatory challenges facing the industry and regulators alike.
Imagine for a moment: you head outside, stare up into the sky, and see a beautiful mix of red, orange, and blue above as the sunrise slowly takes form.
You ask yourself: is anyone else seeing this?
The answer? Well, it’s complicated. While the sun rises for everyone on Earth, it doesn’t happen for us all at the same time. Time zones exist to acknowledge this fact of life, establishing set (albeit changing) times each day when the sun comes up over the horizon in different parts of the world.
Ok, so now you’re probably wondering: why am I getting an Astronomy 101 lesson in a Shyft Network blog? As with the rising sun, global crypto regulation, specifically anti-money laundering (AML) takes shape and is implemented in different ways and at different times depending on what country, or jurisdiction, you are in. When the real question is not whether regulation is coming or not, but when and how; the tricky part is, how do we prepare ourselves for the inevitable?
Enter the Sunrise Issue.
FATF & The Travel Rule
In 2019, the Financial Action Task Force (FATF), an intergovernmental organization focused on preventing money laundering and other malicious financial activities, set its sights on crypto. The FATF proposed that the Travel Rule, a requirement for regulated firms to collect and share the personal data of participants in financial transactions, should now apply to what they defined as VASPs (Virtual Asset Service Providers). Broadly speaking, a VASP is a cryptocurrency exchange, liquidity provider or custodian; whether centralized or decentralized. According to the FATF’s pseudo-binding Recommendations, VASPs are required to collect personal data on participants in financial exchanges exceeding 1,000 USD/EUR. Some countries have lowered the threshold to zero.
For the VASPs subject to FATF’s latest Recommendations and the Travel Rule, identifying info such as names and account numbers of transacting parties (senders, recipients) is now required to be “in compliance” as these Recommendations are implemented into local regulations on a country-by-country basis.
Veriscope, Shyft Network’s Travel Rule solution, was developed to grant VASPs a decentralized solution for complying with global regulations, such as the FATF’s Travel Rule. Veriscope allows VASPs to be Travel Rule-compliant by enabling them to automatically discover which VASP (an exchange, liquidity provider or custodial wallet) is the recipient of crypto assets sent by their customers. Then, Veriscope enables VASPs to transmit the required customer data to each other to ensure that their customers are not involved in money laundering, sanctions evasion, or other illicit activity. Veriscope automates the discovery of VASP details on-chain and the secure and authenticated exchange of customers’ private data.
Veriscope’s seamless approach protects customers and empowers local and global VASPs to be compliant when processing transactions regardless of when their counterparty VASPs agree to start using a Travel Rule solution (Veriscope) or where they operate across the world.
So why is the last part so important? Because just like the sunrise takes place at different times around the world, so does the implementation of the FATF’s Travel Rule.
Setting up the Sunrise
So let’s break it down:
- VASP “A” operates in a jurisdiction where Travel Rule compliance is required. VASP A can see the sunrise in their location and wants the ability to talk about it without someone else who lives in a different place, where the sun hasn’t yet gone up (VASP B).
- VASP “B” is located somewhere where the Travel Rule isn’t yet a regulatory obligation.
- VASP A sends an information request to VASP B. In layman’s terms, this means that VASP A simply wants to talk to VASP B about their experience watching the sunrise. They ask (or post a request) for this information from VASP B, who will respond once the sun has risen wherever they are, enabling them to successfully answer VASP’s A question, regardless of how much time has passed between the question and answer.
- However, this isn’t always the case. Does VASP B really need to answer VASP A’s request for information about the sunrise? So if the sender needs information that the recipient is not (yet) obligated to provide, how can the sender be compliant? Alas, the Sunrise Issue.
The Sunrise Issue has become a challenging roadblock to global Travel Rule compliance because, as said above, different countries adopt Travel Rule laws at different times. The result — and issue — is that certain VASPs who comply with FATF Travel Rule today might want to share customer details with their VASP counterparties who have not implemented a Travel Rule solution (even though they might tomorrow).
Shyft, Veriscope, and a Sunrise Solution
Veriscope, Shyft Network’s Travel Rule solution, was developed to solve this very issue. Due to an innovative technology called “historic look back,” Veriscope allows VASPs to obtain information on any transaction regardless of when the transaction happened, even if it happened before the receiving VASP signed on with Veriscope or another Travel Rule solution. To obtain these details, originator VASPs post information requests that will be responded to when the beneficiary VASP joins the network. As a new VASP joins, they receive these historical requests and can respond with the necessary information. No other Travel Rule solution can do this.
So let’s return to where we started, looking up at the sky as the sun begins to appear from over the horizon. If regulation requires us to only transact with those who, like us, see the sun rising (i.e. are compliant with the Travel Rule), how do we help those who are still living in darkness (i.e. don’t have the requirement to support Travel Rule)? We don’t leave them behind. Veriscope allows them to transact when the sun rises for them, but based on a time when the sun rose for us, generate the supporting material that shows that they are compliant, and enable a globalized network of VASPs to remain at the vanguard of this technological movement.
How do we do this? Veriscope achieves historic lookback through immutable on-chain records, providing an open, permanent audit trail of every request for information submitted by VASPs. Additionally, Veriscope’s interoperability permits ultra-secure VASP-to-VASP communication and can enable the broadest VASP network reach by integrating with other Travel Rule protocols. We should say, whilst we use Blockchain technology to drive Veriscope and to power this feature, no customer private information is stored on there; instead, this information is exchanged over a direct peer-to-peer communication between VASPs.
We are living (and transacting) in a time where regulation in crypto is experiencing more significant complexities than ever before. As of late March 2022, we even learned that the European Parliament had voted on implementing new sanctions that would require KYC (know-your-customer) on private, unhosted crypto wallets. So how can we adhere to growing regulation and a need for more identifying information on crypto customers without giving up our identity completely? It’s for this very reason that Veriscope was created.
We know that compliant solutions like Veriscope and its ability to solve regulatory problems like the Sunrise Issue will benefit everyone. Regulators we work with every day are impressed by our solution’s unique feature and how it can help bridge the gap between compliant and non-compliant VASPs and the jurisdictions they operate in. Ultimately, we all share the dream of mass adoption of cryptocurrency as a better path forward for financial markets and society.
Regulation and compliance are no longer requirements we should consider a “bad word” or roadblock to circumnavigate. Through solutions like Veriscope, we can bring everyone from this incredible world together to move forward as one, not merely around obstacles that have long hindered our progress.
Like the beautiful morning light from the sun, we should all be able to share in the innovative power of crypto transactions safely and securely. Finally, we can all see the sunrise together — and be ready when the light hits.
Visit our new Veriscope website to learn more and implement our Travel Rule solution. https://veriscope.network/
— Shyft Network