Partnership plans to solve the problems of FATF's travel rule with a blockchain and encryption

In the wake of the Financial Action Task Force (FATF) guidance, a partnership between two blockchain security solution developers believes it’s found a solution for travel rule compliance. 

CipherTrace and Shyft say they’re creating an ecosystem for compliance. Together, they’re working to bring an encrypted ledger to market, where originator and beneficiary information can be placed on-chain and decrypted by the intended recipient.

The product could be a game changer for FATF compliance, since the recent finalized guidance includes a travel rule, requiring virtual asset providers (VASPs) to transmit originator and beneficiary information during transfers. Traditional banks solved this problem decades ago with a SWIFT system, something of a catch-all database, but CipherTrace and Shyft, along with other industry players like Coinbase and Circle, are looking to field a solution that capitalizes on crypto’s advantages. 

Essentially, the ledger combines anti-money laundering, identification and forensics to create a blockchain network for exchanging identity information. For a VASP to comply with FATF guidance, it would place the encrypted beneficiary/originator information on the ledger, and using proof of knowledge, smart-contract and cryptographic access controls, the other VASP can decrypt the information using a key management protocol. In the case of noncustodial wallets, individuals can upload the information themselves to be compliant.

David Jevans, CEO of CipherTrace, said the method can be thought of as a crypto answer to SWIFT infrastructure, leveraging blockchain to do what crypto does best – expediting and decentralizing transactions.

“We're kind of taking the next generation view of it, which is One, it shouldn't be in clear text, it shouldn't be available for everyone to look at,” he said. “Two, you should be using blockchains to do it. And Three, all of the stuff we've learned from zero knowledge systems can be applied.”

Indeed, the forthcoming product has been in development for over a year, and David Jevans, CEO of CipherTrace, said he’s been in discussions with FATF and other regulators since last year. Jevans he received initial interest in the plan, but the finalization of the guidance has brought more attention.

“It was a lot of support,” he said. “Then I would say in the last week, of course it's gotten a lot bigger.”

And the use case stretches outside of individual VASPs. Governments using blockchain technology have also taken an interest, according to Shyft CTO Chris Forrester. Technology like this could massively expedite the process of updating identity information when someone moves homes or changes phone numbers, Forrester explained.

“This type of thing in a governmental system, where you already are sort of starving for resources and basically anything above what's happening right now, is a great thing because it enables better services for all,” she said.

While the identity proofing technology has a range of uses, Jevans said the CipherTrace and Shyft product may not end up as the sole solution for FATF compliance. If multiple identity blockchains do arise, Jevans said this shouldn’t be a problem since exchanges are accustomed to dealing with multiple chains, as they already do for different cryptos.

The product is not yet available, and neither CipherTrace nor Shyft disclosed a timeline for the roll out of the ledger, but Forrester said they’re ahead of the curve. 

“It would be difficult if you're starting it right now and trying to respond in a matter of months,” said Forrester. “But the fact is is that we've built our particular tech docs and thus the partnerships that we're forging and something much a way ahead of time, and so we're pretty much ready for this type of shift.”