Understanding the FATF Travel Rule for cryptocurrency

0:00thank you very much Alex all right next I would let you call it up Joseph Weinberg from shift Network and Dina Manville from cipher Trace and as well I will be buried on this power and the panel is on the analyst F ATF Financial Action Task Force course and the travel rule correctives that are

0:28bringing a lot of implications across the cryptocurrency industry and may shape the future of cryptocurrency trading this is very important to listen to welcome you to yes because I'm just gonna get Alex here all right so if we

0:58could kick off the conversation by just getting a brief overview because this can get very technical for those that are not familiar with regulation and compliance and the way that crypto currency exchanges and vast as we will define need to work on the backend Dena maybe if you could start by explaining you know what is the financial action task force and what is their job and

1:21what is this travel rule that is now being implemented into the cryptocurrency industry yeah absolutely my pleasure so for anyone it's not familiar with the Financial Action Task Force or FATA for the eff ATF they are a global money laundering and Harris financing watchdog headquartered in Paris so they're I think sometimes misunderstood to be a regulatory body they in fact aren't but

1:51the reality is that they set guidance that member countries are expected to follow and the reality is that when you know there's an instance of non-compliance generally the country at fault is either gray or blacklisted great and Joseph to have anything to add to that yeah yeah so yeah like the goal of the savages as Deena kind of said to

2:21ensure that we have a reduction in financial crimes and I would say that where this became meaningful to crypto was last year in June when the FBI basically made you know a requirement under guidance that Mesa stated that every country needed to add in the requirements that banks are traditionally bound by which is the requirement to move identity information

2:44on behalf of all transacting users so really in the same way that Swift works fattest requirements for crypto today is now that we have payment rails they also need the ability to move personal information along with those so that's kind of I would say we're the biggest bulk of yeah it's definitely been you know in the incubation of cryptocurrency the

3:09trading has sort of been in the Wild West and to reach that level of mainstream adoption there's going to be some regulations obviously to protect the users the exchanges and the funds and both of you are part of you know spearheading this initiative to bring eventually cryptocurrency trading into the mainstream so it would be great if we could both get an explanation on

3:33shift as well as cipher trace and you know the solutions that you're providing and how they relate to the travel rule being implemented into the cryptocurrency industry Joseph you want to go first yeah sure yes we started shipped in 2017 the focus that we had really had was around this solving problems that involve counterparties really around how data is moved so shift

4:00is really designed for national identity systems and really the problem that you're trying to solve and then identity environment is read how you trust your counterparty is right so if you have a government that needs to talk to a bank that needs to talk to someone's personal information how do you do that and so that's really what our solution was

4:17designed on it works on top of a public network that's secured by the Bitcoin network it relies on smart contracts and I would say that the main focus for what shift was trying to solve in this solution wasn't so much around how data moves but really more and how you saw counterparty identification because that's actually the biggest problem in the spaces how do you want to know if I

4:40am finance that in fact the other exchange on the other side is coinbase right or someone else and how do I know that therefore the wallet isn't tailed by any of us and so she has really been focused on more discovery and coordination as really what we think to be the hardest problem and then it's been working with other companies like safer trace on kind of other parts of

5:03the solution so yeah and for us so safer trace began the travel rule information sharing architecture which is what trisystem stands for the sort of larger mandate is specifically around travel rule compliance without making modification to core blockchain protocols so what we do is we created a separate out-of-band mechanism to augment existing block chains so it's I

5:32think spirited while with the nature of crypto it's an open source infrastructure capability which means that it isn't owned by anybody it's peer-to-peer it doesn't require a centralized network as I mentioned it's sort of mandated to comply with thought ups new travel rule recommendations and it leverages a bunch of existing technologies that are proven to work so

5:55Joseph had already mentioned Swift in that model you know all transactions kind of go through a centralized hub traces approach is to have sort of a mesh infrastructure that instead connects virtual asset service providers directly to one another we've got a peer-to-peer the messaging structure we've got a federated certificate authority that basically allows vasts to

6:19obtain digital certificates to prove their identity there's a whole model around revocation in case something goes wrong yeah and so we're we're very excited to be you know I'm really excited that it's an open source protocol we're doing a lot with the industry in general and I think you know one of the goals of meeting the travel rule requirement is

6:40really that level of interoperability yeah interoperability especially in the blockchain industry everyone needs to work together to create these common solutions and I believe that cipher Trace is you know you shift are working together to help spearhead this can you talk a little bit about the relationship and how the companies interact with each

7:02other yeah yeah so I think there's like – there's a few core principles right I think like all the majority of solutions that you know have a successfully bright future I would say and there will not be one of them they'll definitely be a few really comes down to how you interoperate at the data transmission level I would say and I think that's a key consideration to a lot of

7:29projects in the next six months is you know I think the first the last year has been really just figuring out what actually is required in order to make a solution properly work and then I think the next phase as we're connecting exchanges today will really be the second question of how do we actually allow packets of data to move between a shift validated exchange and someone

7:49that's working on Theresa and so I would say other than ideologies ideologies aside where everyone was fairly I think aligned I think the next question will be around how do you actually aggregate data across untrusted counterparties on both systems and so that I think is where majority of the work will be anything to add do you know I think one of the you know contentious the one of

8:17the reasons why this is a highly contentious issue for the industries because at the protocol level these technologies just don't inherently capture the data that Madoff is looking for right so there's been the need to build something that either like either you hard work your way to getting the data into the blockchain or you have to build some sort of layer data layer that

8:37sits atop and figure out how to transmit that data so we absolutely are in agreement about that great and do you know what so this applies to vasp switches first assistant providers does that include primarily crypto currency exchanges but also other wallets and counterparties yeah so I mean it's really so it's the acronym is for virtual assets service

9:02providers so you've got you know companies that are doing issuance custodial services decentralize exchanges in some places I think you might see this shake out differently right because again thought if is not a body that creates law they instead set recommendations that are then later translated into local law and different member jurisdictions so really anyone

9:27that's kind of a business in this space is likely someone that's going to fall under these types of requirements and I'm and I read that this applies or as it says it's not legally binding because it's not law yet but it's mainly applying to the g20 countries and the mainstream countries that have a large financial system now a lot of cryptocurrency exchanges that come up in

9:51the United States obviously have tighter regulations than these overseas crypto currency exchanges that we're seeing that don't need kyc or they only use crypto currencies does this apply to primarily to you know the major ones in you know North America and the developed countries and what about those other crypto currency exchanges that are in offshore locations or smaller locations

10:18yes yeah this is a big I don't say topic of debate but discussion for enhanced coordination is the big questions today that we're trying to determine in the space is whether or not well first of all what the definition of ASP is because that is extremely broad and as you're saying like countries have a very different perspective on it and I think

10:43it's probably one of the most interesting challenges that the space has today is that you're kind of having to say well first of all all countries apply so doesn't matter if you're in the top 20 or the 36 or the 200 fattest requirements apply to you how you choose to embed them into your regulatory legislative infrastructure is a different question but they apply no

11:06matter what and so that's like the first point but the key consideration is whether or not you're a designated fast and I'll give an example so in an example where I'm in a country that does not have full regulatory requirements and let's say they don't occur for the next five years but I'm a vasp and I still want to be regulate compliant what is the mandate am I allowed to be a part

11:30of these systems and my allowed to still transact I'm not technically regulated but I would probably still want to be able to transact with regulated entities right and so these are like the discussions that we're all trying to kind of figure out is like what are the edge cases look like by far and large but far and wide I would say that this applies to everyone and the biggest

11:49exchange is that at least we're working with today which would probably more than more than most fit into that where do you live question are complying regardless of where they are and so yeah I hope that answers questions or raises more but definitely definitely yeah I would add to that actually I would say that while the this is meant to be translated into a lot next month you've

12:12got you know like organizations like fin Sun who are saying that they've been doing travel rule since 2013 right so we're finding that there's just this huge inefficiency when you're trying to compare different jurisdictions and how they're tackling this or whether they have been or whether in fact they've actually been enforcing any of those yeah well implementing this into the

12:37exchange I could imagine might take some some resources you know time and money is this you know what are the implications for crypto currency exchanges that are looking to implement this is this a huge barrier to entry for smaller exchanges and it's going to make it harder for you know more of to increase the competition and it's going to more consolidate the power into only

12:59the exchanges that can actually spend the time and money to implement these travel rules properly you know the practical issues and then Joseph maybe comment on the more abroad sort of industry out come on this so I think from a tactical perspective the barrier to entry it's not low right like I remember when in New York they sort of came out with a bit license and

13:28everyone sort of complained about how burdensome an arduous that was and then they just moved business elsewhere it's still not it's not nothing right like there's a whole laundry list of tactical guidance that's been provided you know that encompasses registration and licensing prohibitions against criminals or criminal phileas owning or controlling the vasp in question the

13:51assignment of a compliance officer a slew of written policies procedures documented risk assessments ongoing training it just the list goes on and on so it's I'd say the barrier to entry certainly not low yeah there's a like the reality is that if you were to fully comply it would that it would that would be a world that doesn't really exist

14:18today like the requirements for an exchange to be fully compliant if you are let's say in the US and following every rule to the book we've probably like what we think would increase the cost of doing business by probably two to three times what it is today and so it also depends where you are because of course that does change but it but I would say that this is going to

14:43change this space pretty fundamentally like what we're noticing right now even just like going through actual integrations of the system is that there are so many questions that are so specific to every edge case you could imagine whether there's a threshold limit if I'm sending a thousand dollars in Singapore it's a thousand dollar limit and in Canada it's higher right

15:04and so how do you how do you counteract the fact that every one of your counterparties all have different requirements they all need to be balancing you know their books effectively and there'll be a ton of other questions that start to happen right and so I think what we're noticing now is that this argue is increasing compliance cost boy like at least five

15:22to fifteen percent but once you put in if you were to get the whole space into full mode you'd look very similar to banks today at least on the compliance side maybe less costs on the actual regulatory side but your your overall internal onboarding costs are very expensive so I think that's just a reality and I think that leads to consolidation it just reduces the amount

15:44of competitiveness that you have naturally and yeah it adds a lot of unknown unknowns which i think really is well we'll start seeing in the next years things that we don't really understand yet how they'll start to take shape as a kind of reactive side effect to this as well definitely well five to fifteen percent increase is one thing but a 2 to 3x on you know full

16:08compliance and implementation obviously could take out a lot of players that are working month-to-month just trying to build to build a platform to add value to the space so that's really interesting we'll see how that plays out now Joseph both shift and Teresa were you were in Paris in February at the Financial Action Task Force industry meeting I know you were present there

16:32can you help the audience understand how international sentiment among governments and regulators is evolving throughout the digital digital space yeah so I can give like a bit of background – so the way that the FATF is basically approached this which I actually think is the right approach is to cut out the noise because crypto can be very noisy but is to really try to

16:56work with five to seven solution providers or vasts kind of a mixture around a few different core concepts one education because everyone here still trying to learn this is new to everyone not just regulators put us as well to also really give a good level of degree or measurement around how successful we actually are in the process of getting this integrated you know at the end of

17:23the day like Faddis and compliant countries or what they're trying to do is monitor effectiveness and so as much as they want to slap a bunch of regulations on you it's awesome more about making sure that the things that they put in actually have you know you know an upside have a return on the investment now if you will and so that I think largely has been

17:42what the goal is we meet every about six weeks the goal is to give status reports and updates at the meeting there that we had an in-person which is the last one will – for a while it was really good we got a chance to kind of demo our solutions and really give them a good you know temperature as to where we think things are and also really trying to give them

18:02information on what we think is feasible and non feasible right because you know people are talking about well do all non-custodial wallets in the space would that go into regulation and if and so that was the questions that they asked us and that's giving a very candid response and saying these are the complexities the difficulties these are where we're gonna see more issues down

18:21the road and I think that relationship between industry and guidance writing is really really critical and I think that it's it's an interesting situation when you have one watchdog that represents the entire world which is not normal to most of the regulatory requirements so yeah it's a good relationship hopefully we can continue to impress them but yeah that's kind of

18:43the lay of the land oh definitely definitely and do you know what pre-service you're you're renters are tackling this issue and filling out the syllabus channels of solutions we're getting a break some of the things that I think are important to both you know the trees a project I think probably

19:12ships would agree as well is we want to maintain some of the principles that we all love about block chains and Bitcoin specifically right like I think decentralisation is really important I think maintaining user privacy is important and of course that has a lot of complicated implications right because you're again dealing with different jurisdictions who may have or

19:33have not enacted different different laws around privacy and how they treat that I think establishing and maintaining autonomy and sovereignty for the person the user that's involved in transaction is important I think meeting principles of inclusion is important you know we could there's there's an issue right now right like my our CEO likes to refer to this as a

19:55sunrise problem what happens if there is a vast in Canada that wants to engage with a vasp in a different part of the world who might not yet have these requirements or might not yet have found a way to comply you know you're you're excluding people from that financial model and of course we don't want to break efficiencies whether it's at the blockchain level or at the vast

20:18level right these are businesses that are fully operational and I think it's important that whatever we're building now doesn't completely break the workflows that they've already built and we're running out of time but I really want to end on a positive note and it'd be great if you both could give a vision of the upside of this because it sounds like there's a

20:39lot of barriers to entry you know our exchange is going to be benefiting from this and the users that are trading on exchanges and vast you know is there an up side where you know we're gonna drive more institutional adoption or cryptocurrency traders will see you know their their personal privacy and data is more protected yeah I can speak I mean I think it depends on how you look

21:08at the space to try to be positive mystic and positive always but yeah I think that in many respects that what this is effectively doing is it's giving the regulated and traditional world a better ability to interact and integrate in interoperate and I think that over the long term depending on your view of Krypton that's a good thing on the user side I would say that there

21:36could be benefits I would say knowing direct benefits in the short term this is probably less beneficial to users then than other you know services and that you're opening up a lot of risk on security and data but I think ultimately if you can move to a system where you have identity as a base layer using these systems for new services then it becomes really really

22:01so I would say that yeah long-term it looks brighter short-term might be a bit you know interesting to navigate but ultimately yes institutional adoption becomes a lot easier we have a lot more transparency into how these systems work and other bi-directional effects like the SEC doing ETFs might become possible as a as an offset to these section system so that's yeah I think I would

22:24really agree I mean I think regular regulation is always a touchy subject when you're in a very fast-moving in a space that innovates quickly but I would say maybe the long-term prospect of crypto is positive when you've got regulated entities maybe from the consumer protection angle there's a silver lining and I suppose from an educational standpoint this is I think

22:49probably for the benefit of the space in the long term awesome and we do have one audience question from Magdalena and I'll sum it up with a couple of other questions that I had and this will be the last question Magdalena asks does this travel rule affect second layer solutions like lightning Network as well as you know the travel rule applies to vasp s– but it doesn't necessarily

23:14apply to individual transactions and also you know atomic swaps decentralized exchanges and not using vassals to transfer funds you know does does all of that sort of not apply and it's really just for exchanges wait wait yeah well I mean so you have the travel rule directives don't apply to individual

23:42users which i think is a really positive thing in this space the question about atomic swaps and lightning we get that all the time and i and joseph maybe you'll have a different perspective but as far as I know it's really up to the different jurisdictions to figure out how they want to interpret those directives as they pertain to those two circumstances and I'm not sure that I've

24:03really heard any conclusive evidence one way or another about how those types of transactions are going to be handled at this one time yeah like yeah you're ready like it depends where you are from what I at last I remember it was that if you're let's say in Europe and you're operating like a lightning hub then you are effectively under money transmission

24:27requirements which is one of the big issues that people are trying to understand because you're you're effectively acting is like a hub-and-spoke where you're helping direct funds on behalf of customers or else hold them as collateral and so that one I think will be ever meandering let's say but primarily at least today like I said this is mainly only for

24:50companies and hopefully we keep it that way there's discussions about you know the next phase of this I personally don't know how you do this one non-custodial with any effectiveness but I guess we'll see how the future unfolds yeah definitely and it looks like ksama next speakers just fixing up his microphone so we do have a couple more minutes here

25:11I wanted to touch on the identity part because part of you know the crypto currency exchanges anti money laundering and kyc is having a proper digital identity you know and shift does have that built into the system could you talk a little bit about how the identity part works as well Joseph Joseph yeah so is it like a independent solution it's it's like secondaries so for like the

25:41travel rule we're just trying to solve a database integration problem whereas on the identity like the national identity side that's full-hearted identity full full-blown solution I would say where it does get really interesting and a lot of exchanges that we've been working with today are looking into this as to whether because it's built in so like

26:03the idea is that once you have a compliant address let's say an address which is a unique identification you know number it's a sign to a user that user is you know transacting in exchange for that of compliance reasons they're printing your kyc information against that you know unique identifier it's not too hard to allow users to use that ie port

26:29out that identity and so where we think the future looks really bright is in the ability for users to autonomously control their wallets or control their identities using the exchanges as a distributed data infrastructure effectively what that means is that you're basically saying oh we have to come we have to k2 I see all of our users and flipping it into well hey

26:51everyone if you kyc with us you're now getting an added service of having a fully decentralized identity that can be used for things like defy for other types of applications and so trying to look at like not just the downsides but where you can build positive you know upsides for everyone I think is the next phase of this but at the end of the day if you can solve digital identity as

27:12it pertains to customer due diligence you've pretty much solved the compliance issue in most respects and I think that's something that regulators are fairly really realizing today especially the Financial Action Task Force well that's great well that's great all the time that we have turn to behalf thank you so much Joe system you know the Kachina this exciting panel and that's