As digital assets and decentralized finance (DeFi) grow, regulators are concerned about black money and crypto money laundering, fearing that they may not be able to intervene in the peer-to-peer financial system.
To improve this situation,Financial Action Task Force(FATF) updated its 16 AML Recommendations (also known as the Travel Rule) in June 2019 to align the crypto ecosystem with compliance requirements for traditional banking. Later in October 2021, the proposal was expanded even further.
Although FATF has no jurisdiction, the "Travel Rule" is now gradually being translated into local laws around the world, and countries that stray off course may end up on the FATF blacklist or graylist. On the other hand, fully compliant jurisdictions – such as Switzerland and Singapore – may be at the forefront of institutional digital asset adoption.
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What is the Travel Rule?
In short, the Travel Rule requires all virtual asset service providers (VASPs) to share the identity information of originators and beneficiaries of digital asset transfers, including names, physical addresses, and national identification numbers.
What is an Asset Service Provider?
in October 2021update guide, expanded the definition of VASP to include not only entities that deal with encrypted assets, such as banks and exchanges, but also businesses that provide protection or management, such as licensed custodians.
The guidance covers the following activities for businesses acting on behalf of clients:
Exchange between virtual assets and fiat currencies;
exchange between one or more forms of virtual assets;
transfer of virtual assets;
Custody and/or management of virtual assets or instruments capable of controlling virtual assets; and
Engage in and provide financial services related to the issuer's offer and/or sale of virtual assets.
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In response to recent government scrutiny of the crypto industry, new guidance in October expanded VASP obligations beyond sharing transaction data to include several additional requirements:
Recordkeeping: VASPs are required to “retain all transaction records and CDD measures for at least five years so that individual transactions can be reconstructed and relevant elements promptly provided to competent authorities.”
Registration: States are required to “register or license individuals and entities providing virtual asset services and ensure compliance with relevant AML/CFT requirements”.
Reporting: States are required to ensure that VASPs “obtain, hold, and submit required originator and beneficiary information related to VA transfers, identify and report suspicious transactions, take freezing action, and prohibit transactions with designated persons and entities.”
The transaction threshold at which the full suite of obligations begins is USD/EUR 1,000, and at least one jurisdiction has set this value to zero, meaning that every transaction of some type must be assessed and appropriate compliance measures taken.
However, despite their willingness to comply, we have heard from other VASPs that they have been held back by technical and legal challenges. And these challenges cannot be easily solved by existing infrastructure.
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Qredo is compliant with this travel rule
Qredo Network is a decentralized custody and settlement network that enables easy travel rule compliance. The network consists of a layer 2 blockchain that works withMPC protocolWhen a VASP on Qredo sends a digital asset over a layer 2 blockchain, a cryptographically bound data packet is simultaneously sent on a layer 3 network. The package ties compliance data, including originator and beneficiary information, to digital asset transactions, linking otherwise anonymous activity to real-world identities.
When a VASP on Qredo sends a digital asset over a layer 2 blockchain, a cryptographically bound data packet is simultaneously sent on a layer 3 network. The package ties compliance data, including originator and beneficiary information, to digital asset transactions, linking otherwise anonymous activity to real-world identities.
Through this mechanism, registered VASPs can send digital assets to: other approved registered VASPs on the Qredo Network; newly registered VASPs that have been automatically vetted for compliance; and external platforms not found on the Qredo Network.
When receiving a transaction, the packet data Travel Rule information can be used to accept, reject or quarantine (vet) incoming digital assets in a process that can be managed programmatically through Qredo's combined Python library.
This elegant solution enables VASPs seeking Travel Rule compliance to overcome key challenges around privacy, identifying other VASPs, and managing transaction flow.
Why choose Matrix?
Qredo choseMatrixAs its decentralized architecture and end-to-end encryption. These features provide unprecedented levels of privacy and security, making them popular among secretive services around the world.
Unlike travel rule compliance solutions based on secondary email systems or Transport Layer Security (TLS), Matrix messages enable compliance packets to be bound to enforcement flows at Layer 2. This provides complete non-repudiation, since neither party can deny that it sent or received a message.
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Protect privacy 🔒
Under Travel Rule guidance, VASPs are required to examine transaction data of sanctioned or suspicious persons or entities before releasing funds.
This forces them to securely store not only their customers' personal data, but everyone who sends them money - vastly increasing the amount of data that needs to be protected from breaches.
To protect personal data while sharing it, Qredo cryptographically binds Travel Rule information exchanged between VASPs with end-to-end encryption in Matrix.
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Identify other asset service providers 📖
As in "sunrise problemAs described, the emergence of new regulatory regimes is slowly bringing countries around the world in line with international guidance. Sunny countries such as Switzerland and Singapore have translated travel rules into local law, while others have lagged behind — creating various An environment of compliance obligations, which may make it difficult for registered VASPs to identify others and make informed decisions about whom to transact with.
To solve this problem, Qredo is building a decentralized directory that will enable registered VASPs to directly connect with each other.
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Enable batch transaction processing 📜
According to the guidance, both sending and receiving VASPs are responsible for checking transactions by sanctioned or suspicious persons or entities.
This requirement could disrupt transactional workflows for VASPs, especially exchanges, which are used to batching as many as 50-200 payments into a single transaction, reducing blockchain processing fees. Manually coordinating batch process compliance requirements can create delays and risk data breaches as customers are forced to wait before funds can be used.
With Qredo's near real-time transaction finality and integration library, any VASP can quickly achieve compliance with guidance without disrupting their transaction flow, enabling them to comply without delays and increased costs.
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