The recently concluded V-20 summit, which took place in parallel with the G-20 meeting in Japan, brought together regulators and Virtual Asset Service Providers (VASPs) from different countries.
As reported by The Blockchain Land, the goal of the V20 was to discuss the latest guidance issued by the Financial Action Task Force (FATF) on how to prevent cryptos being used for money laundering.
A term that was frequently heard and that created ripples of reactions was the “Travel Rule”.
What is the Travel Rule?
The travel rule lies under section 7(b) in the FATF’s guideline and requires VASPs to collect and transfer customer information during transactions.
Specifically, this rule instructs both the originating VASPs and beneficiary VASPs to obtain and hold the accurate information of the sender and the beneficiary and make the information so obtained available on request to appropriate authorities.
It also asks the “beneficiary VASPs” to
“Obtain and hold required originator information and required and accurate beneficiary information on virtual asset transfers, and make it available on request to appropriate authorities.”
Although the FATF guideline is not legally binding, it is still effective since the country that doesn’t comply with it might face exclusion from the global financial network. FATF guidelines have gained weight as the G20 declared that it will rely on the FATF to regulate money-laundering activities related to cryptocurrency to combat the financing of terrorism.
The rule is only applicable to VASPs, excluding individuals. FATF has provided the local authorities and VASPs with one year to come up and include country-specific regulations based on the travel rule. Further, to establish compliance between VASPs, V-20 is planning to develop an association.
It is essential to mention here that the rule is already determined, and the issue is now about proper implementation.
There are a few technical challenges that this travel rule poses:
- Since this rule is only valid on VASPs and not on individuals, it is tough to distinguish the two.
- Because VASPs can’t send information to counterparties by email, for example, the question is: how will this information be shared? There’s a need for a new trustworthy infrastructure for information sharing. This also raises the questions of deadlines and what is the procedure when two VASPs in the world aren’t compliant with the rule at the same time.
- There may be cases when the same person has registered with two different VASPs with two different names. In such a case, how the information of individuals will be confirmed?
What are the major concerns?
Amongst the numerous concerns issued from this decision, three main ones have been voiced over the last couple of days.
How can VASPs implement the Travel Rule? The next step after applying a rule is to put it into practice. Tom Neylan, FATF Secretariat, explained to Cointelegraph, that “there are still pieces of work to be done by the private sector to develop a technical system that is capable of implementing this rule.”
Do crypto startups have the resources and capabilities to comply? For now, technical solutions haven’t been made available to implement the new rule. It is expected, however, that it’ll require not only an extensive pool of knowledge but also a significant investment. The concern is that some startups could be forced out of business if an accessible solution isn’t presented to all service providers.
On the other hand, the new rule may make it easier for startups to work with traditional banks.
On that same note, the concern is that the number of P2P transactions will increase. Given the strict aspect of the rule, there is a strong possibility that these transactions might be prioritized, as they’re often not regulated.
What do the critics say?
The crypto world was fast to react to the rule. Is the Travel Rule against the spirit of financial privacy?
Because it requires collecting and transferring more information than ever, privacy advocated in the industry have felt their autonomy directly threatened.
That’s because Bitcoin and other cryptocurrencies are based on the idea that you have full control of your own funds without having to go through the governmental and financial institution’s way.
The rule that requires collecting and transferring more customer information than ever has inevitably invited criticism from privacy advocates in the industry. The idea of having full control over one’s own funds without relying on governments or large institutions — i.e., autonomy — is crucial to the existence of Bitcoin and other cryptocurrencies.
Steve Christie, Global Head of Compliance at Kraken, said:
“We understand that there are certain rules that we will have to comply in order to help the transition from the traditional financial service industry to the new economy. We have to find a way to find common ground. If you are a core believer and if you want to get to that utopia, you need to find ways of getting there.”
Jesse Spiro, the head of policy at Chainalysis, thinks that, in the long term, the guidance can be a stepping stone for the crypto industry’s maturity and its mainstream adoption. But in the short term, “the industry needs to develop technical solutions in order to comply, which will require significant investment.”
The FATF thinks there’s work to be done by the private sector to find common ground regarding the development of technical details. However, regulators are expected to follow a detailed regime, which might surpass the current efforts done in many countries.
The Wrap Up
Although the new travel rule was brought forward to maintain the stability of the cryptocurrency industry, the lack of a technical solution is proving to be a challenge.
Startups, regulators and VASPs will each have to tackle this according to their resources as they prepare for the implementation phase next year. While this might prove to be a crucial step in for the crypto industry, it can also have further consequences.
We’ll keep an eye out for any further developments!