With the crypto market gaining mainstream attention in the 2017 bull market, as observed in terms of sharp growth in the crypto market cap, policymakers, regulators, and other national and international authorities started being increasingly concerned about the potential use of virtual assets to illicitly move funds across the ecosystem. However, they adopted a wait & watch approach towards the virtual assets industry.
Financial Action Task Force (FATF), the global anti-money laundering watchdog, was one such international body. Cryptocurrencies entered the FATF's consciousness back in 2014 amid increasing concerns that malicious actors are abusing this emerging asset class for illicit activities, such as human trafficking, drug trafficking, terrorist fundraising, sanctions evasion, states being able to enrich nuclear weapons, and so forth.
As such, the global anti-money laundering watchdog published guidelines on cryptocurrencies in 2019, directing countries to register virtual asset service providers and requiring such firms to monitor crypto transactions and report any suspicious activity to authorities.
Yet, to date, only a few countries have enforced the FATF Travel Rule. However, with India assuming the G20 presidency, crypto regulations, including the FATF Travel Rule, will continue to be a hotly debated topic globally, as reiterated multiple times by the country’s finance minister Nirmala Sitharaman. Indian Prime minister Narendra Modi, too, has demanded several times for global cooperation on crypto regulations, noting that it's not enough for one country to regulate cryptocurrencies.
On top of this, 2022 hasn’t been too kind to the crypto market shaken by the TerraUSD crash, Celsius, or FTX collapse, to mention a few. The decade-or-so-long ecosystem has experienced unprecedented setbacks this year. Moreover, crypto hacks in 2022, which amount to $3 billion so far, have surpassed the numbers from previous years by a considerably large margin.
All these instances have added to the resolve of authorities, compelling them to adopt crypto regulations at the earliest. Travel Rule is now widely recognized as a disruptor to illicit finance from using cryptocurrency.
The FATF, too, reiterated ahead of the “No Money for Terror” meeting, which is scheduled to take place next week, that countries must enforce the Travel Rule at the earliest. All countries are being urged to comply with the Travel Rule as a matter of international priority, and to that point, Travel Rule compliance will be mandatory for all VASPS, no matter the location.
However, there is a critical issue that VASPs face whilst attempting to comply with the Travel Rule: no way to automatically discover and verify the counterparty VASP to an entity level which would automatically provide information on the entity’s location, regulated status, Travel Rule reporting threshold, supported Travel Rule protocols, and contact details.
The combination of Shyft Discover and Shyft Veriscope Share solves this issue without friction for end-users, in real time, securely, and while maintaining the decentralized nature of crypto.
When complying with the Travel Rule, originator VASPs should accurately verify who owns the beneficiary wallet address, which is crucial as user data is sensitive information. It’s a critical step as otherwise, user personal information may be sent to the incorrect counterparty VASP, causing a breach of data privacy obligations.
This is where Shyft Discover excels, as it enables VASPs to auto-detect counterparty VASPs just by using the crypto wallet address, without requiring users to input additional information themselves and without the VASP having to publicly publish its own wallet addresses.
A further step of automated address proofing ensures that the VASP actually controls the wallet address they claim to. Once verified, a payload of information about the VASP is shared, including the regulated status, travel rule threshold, and travel rule protocols supported.
Shyft Discover automates VASP discovery and enables originator VASPs to reliably identify counterparty VASPs at a legal entity/jurisdiction level. Moreover, it further empowers VASPs with the ability to choose which counterparties they are prepared to share data with and which ones to exclude, depending on the VASP’s own risk-based approach.
Shyft Discover is essentially providing a decentralized, verified phone book for VASPs on a global basis. The information on a VASP is owned by the VASP but becomes available to counterparties on-demand in real-time. As the only solution to provide this, and as a public utility, this forms the first layer of critical infrastructure in solving the Travel Rule.
However, once VASP discovery & proofing is successfully completed through Shyft Discover, it’s time for Shyft’s Veriscope Share, the second part of the critical Travel Rule compliance infrastructure framework, to resolve the user data sharing problem.
Under the Travel Rule, VASPs must share critical user data along with the crypto transaction with their counterparty VASPs. However, just as there is no globally-agreed framework to solve the VASP discovery problem while complying with the Travel Rule, there is also no framework to standardize the mechanism for secure data transfers between VASPs.
Although some Travel Rule Solutions exist in the market that can help solve the sharing, VASPs should be aware that the user data they share with their counterparty VASPs may be passing through the Travel Rule solution’s own servers. And there are significant risks in this approach, particularly in relation to unauthorized access, monitoring, and liability.
This is where Veriscope Share proves to be a true game-changer. In contrast to a majority of Travel Rule Solutions that are available, Veriscope Share enables VASPs to exchange user data in a fully secured manner without storing it on third-party servers. Transfers are peer-to-peer, VASP to VASP, with no intermediary steps.
When using Veriscope Share, VASPs mitigate risks of rogue employees of a Travel Rule Solution accessing their user data for dubious purposes and also removes the potential for wide-scale data breaches.
Veriscope Share complies with all major data privacy laws, such as GDPR, while ensuring 100% VASP-to-VASP data transfers.
Overall, Shyft has reinvented Travel Rule compliance by considering all angles of the requirements, from AML to data privacy, and building privacy, security, AML, and compliance from the outset.
VASPs need a Travel Rule Solution to begin complying with the FATF Travel Rule. So, have you zeroed in on it yet? Check out Veriscope, the only frictionless crypto Travel Rule compliance solution.
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