If 2021 was the year that the growing need to enforce anti-money laundering (AML) rules within the cryptocurrency industry turned into the creation of actual rules and enforcement tools, 2022 is off to a good start as the year of compliance.
The years-long push for cryptocurrency exchanges, payments processors and other virtual asset service providers (VASPs) to put know your customer (KYC) procedures in place to meet the requirements of the Financial Action Task Force’s (FATF) Travel Rule requiring two-party identification for any transaction of $3,000 or more came to a head last year as regulators around the world began pushing hard for action.
The results were on display on both sides of the U.S.’s northern border Wednesday (Feb. 16), as Canadian regulators and U.S.-based VASPs took concrete actions that showed the impact of the rules in action.
In the U.S., this took the form of industry action, with nearly 20 top crypto firms announcing the creation of a members-only group to develop an infrastructure for the new Travel Rule AML identity compliance requirements.
In Canada, regulatory authorities took the reins, with the AML enforcement body FinTrac turning to the Royal Canadian Mounted Police (RCMP) to ensure that all money services businesses follow emergency orders to halt any funds to 34 cryptocurrency wallets associated with the “Freedom Convoy” protestors in the capital city of Ottawa.
From the Bottom, Up
Eighteen well-known exchanges, custodians, stablecoin issuers and others announced the formation of the Travel Rule Universal Solution Technology (TRUST), which public cryptocurrency exchange Coinbase described as “an industry-driven solution designed to comply with a requirement known as the Travel Rule while protecting the security and privacy of our customers.”
As the name suggests, the group’s solution aims to meet legal requirements while protecting customers’ privacy and safeguarding their personal data.
The Travel Rule requires financial institutions (FIs) to share some basic identifying information about customers when sending funds to another FI — a rule in place long before bitcoin launched the crypto economy in 2009.
The TRUST members’ announcement focuses on meeting this requirement by ensuring three safeguards are met. There must be no central repository of customer information to be hacked, the receiving exchange must provide proof it controls the receiving address, and it must prove the core of security and privacy standards are met by all parties.
What’s most interesting is that TRUST is described as an organization intended to expand across the industry in the U.S. and eventually abroad. It is set up as a members-only club. Notably, all 18 members — Anchorage, Avanti, BitGo, bitFlyer, Bittrex, BlockFi, Circle, Coinbase, Fidelity Digital Assets, Gemini, Kraken, Paxos, Robinhood, Standard Custody & Trust, Symbridge, TradeStation, Zero Hash and Zodia Custody — must unanimously approve new applicants.
If successful, the result would be to not only create an infrastructure for Travel Rule compliance, but also create a hierarchy separating the compliant from the non-compliant, and — from a customer privacy perspective — the trustworthy from the non-trustworthy.
From the Top, Down
Canada’s FinTrac, an AML regulator with which all money services businesses must register, turned to the country’s top law enforcement agency, the RCMP (or Mounties), to enforce its orders blocking the transfer of any cryptocurrency to a group of wallet addresses thought to be under control of the leaders of the “Freedom Convoy” protests.
That action started as a city-center blockade by truckers upset by over vaccine mandates but has turned into a broader protest movement that has shut down a fair chunk of central Ottawa. In recent days, the central government has a taken a much tougher approach, invoking the Emergency Measures Act, pressuring GoFundMe and similar companies into halting the distribution of millions of dollars in donations by ordering banks to freeze the accounts linked to the protestors, and even banning citizens from bringing in supporting supplies.
So, it’s understandable that cryptocurrency would be the next target, both for fundraising supporters and authorities trying to starve the movement of funds.
FinTrac-registered BitBuy told crypto industry news outlet The Block that the order “does not change what compliant Canadian crypto trading platforms are already doing today with surveillance and reporting,” other than adding a group of cryptocurrency wallets to a blacklist.
What’s most notable is that both actions mark a change in direction, with compliance measures — both voluntary and enforced — moving beyond individual firms to industry-wide action.
If it catches on — and inevitably it will, even though these are early days — it will mark perhaps not the beginning but maybe the middle of the end of crypto’s libertarian mindset and opposition to government intervention — or interference, depending on your mindset.