Companies propose travel rule solutions, but governance question remains

Since the Financial Action Task Force (FATF) released its guidance in June, industry players have raced toward a protocol solution for the so-called “travel rule.” Now multiple entities are coming forward with proposals. However, Global Head of Policy at Chainalysis Jesse Spiro said the travel rule conversation is moving from technical solutions toward governance concerns.

The inclusion of a travel rule caused something of a shakeup in the crypto world, mandating virtual asset providers (VASPs) be held to a traditional banking standard. VASPs must collect and transfer the name and account number of both the originator and beneficiary, as well as the location information of the originator.

Because the FATF standards have been accepted by multiple international bodies, including the G20, industry adoption has become a more present problem, as non-compliance could lead to fines, sanctions or general boycotting of a VASP on an international scale. Developers Netki and CipherTrace have both rolled out a solution that is notably lower tech, and Spiro said a non-blockchain solution is likely the answer on the protocol end.

“There's still two major potential issues that you're seeing,” said Spiro. “One is the protocol, which is actually a much smaller problem, easily remedied, and the other issue of governance, which is still a primary sticking point in relation to that. What we envision at Chainalysis is something that's a relatively light touch when it comes to the technology.”

This light touch has taken the form of X.509 certificates, a tool commonly used to prove website ownership, now used to transfer proved pieces of information. Rather than utilize blockchain to securely transfer the necessary originator and beneficiary information, the digital certificates verify a public key belongs to a user using public key infrastructure (PKI). In fact, Spiro said many of the solutions that have been proposed look relatively similar.

Netki has overhauled its existing TransactID, used by traditional finance entities, as a solution. Utilizing X.509 certificates, VASPs can request and receive specific pieces of information, rather than collect and transmit all originator or beneficiary information as some have proposed. 

The 2016 version of the product has been updated for crypto’s travel rule, allowing individual pieces of identity information to be transmitted rather than one large certificate with certain information that may not be applicable to every jurisdiction. This allows the protocol to work in different jurisdictions with different compliance standards. If one jurisdiction requires additional information, that can be sent, as opposed to a single certificate containing information that may be considered incomplete by some jurisdictions.

Additionally, Netki CEO Justin Newton said this peer to peer model is more likely to be understood by existing regulators.

“One of the reasons we decided to go with X.509 specifically is because X.509 is a legally recognized digital identity standard by government and compliance people,” he said. “And the certificate authority model means that you're able to trust the identity that someone presents you with even if you don't necessarily trust the other end of the transaction itself.”

CipherTrace soon followed with its solution, its Travel Rule Information Sharing Architecture (TRISA). It similarly utilizes PKI to authenticate VASPs and transmit the required information, using a Certificate Authority model to provide the extended validation for X.509 digital certificates, according to CipherTrace CEO Dave Jevans. 

According to Jevans, a blockchain-based solution could introduce further complications. It’s unlikely a solution would gain consensus to modify blockchains with hard forks, and all blockchains would need to be modified to be compliant. Additionally, Jevans said a centralized service could also introduce concerns of outages, performance issues or attacks. In contrast, an overlay solution like TRISA can apply to all tokens, as does Netki’s PKI-based solution. 

The PKI approach is in line with Spiro’s assertion that a “light touch” of technology will win the day. As for Chainalysis, Spiro said any solution coming from the blockchain analysis company is still in exploratory phases, conferencing with industry leaders. Of the solutions he’s seen, and Spiro said he’s seen most of them to his knowledge, the industry is on a similar page.

“There's many similarities, slight nuanced differences, and, and I think really the question is going to be what's scalable and can be implemented as quickly as possible by the entirety of the industry because that's going to be very important,” he said.

The question that remains on the table, according to Spiro, is governance. The biggest hurdle remains gaining global consensus for a solution, since most solutions require mass adoption. However, an industry-wide solution isn’t guaranteed, according to Spiro. There is potential that one solution would be favored by one jurisdiction over another. 

“If that happens, it’s not necessarily a bad thing, but it could potentially have an impact of impacting liquidity within the market,” said Spiro.

Looking forward, coalitions of industry players continue to discuss the FATF travel rule compliance issue, with groups like Chainalysis continuing to explore solutions. Similarly, other bodies like Global Digital Finance (GDF), an industry body related to standards and best practices has convened a cohort of VASPs to collaborate on gaining global consensus and a governance model for a solution.

For now, it seems the race for a solution is still on.