Coinbase and other crypto exchanges are designing a P2P system for sharing user info under FATF rules

An effort is underway that has brought together U.S. crypto exchanges to design a collective solution for complying with Financial Action Task Force (FATF) rules on sharing customer data.

Coinbase — which is said to have kicked off the initiative — is among the companies participating in a group effort that, if fully realized, would effectively centralize compliance with the so-called travel rule for the regulated exchange ecosystem. During an online conference focused on travel rule solutions last week, Coinbase's chief compliance officer Jeff Horowitz unveiled the project and said the working group expects to publish a white paper in the coming weeks.

The FATF standards released last summer mandated that crypto exchanges — known in this context as virtual asset service providers (VASPs) — share information about their customers as money moves between them. The travel rule seeks to prevent money laundering and terrorism financing by requiring that exchanges gather and transmit sender names, account numbers (in this case, the sender's wallet), location information, recipient name and recipient account number (the recipient's wallet).

The travel rule has long been a staple in the traditional banking world, wherein the SWIFT infrastructure links institutions together and allows them to share customer information securely. However, most crypto industry leaders have agreed that the digital asset space will require a crypto-native solution rather than a recreation of SWIFT.

Efforts to address these requirements began to take shape last fall, and companies are going public with their respective solutions to the FATF mandates. 

The group of exchanges is pursuing an arrangement by which they would jointly maintain a peer-to-peer information network operated under a governance framework. According to a source familiar with the discussions, other members of the working group include exchanges Gemini, Kraken and Bittrex.

When reached, Bittrex confirmed its involvement, with a spokesperson telling The Block: "Bittrex is an active member of the United States Travel Rule Working Group (USTRWG)."

Noah Perlman, chief compliance officer at Gemini, also confirmed the firm's involvement.

"As a member of the initiative's steering committee, this industry-led solution will allow an efficient and transparent way for U.S. VASPs to comply with current FinCEN travel rule requirements," he said.

Coinbase declined to comment when reached but acknowledged the existence of the pending white paper.  Kraken did not respond to requests for comment by press time.

During the Global Digital Finance (GDF) event, Horowitz broke the problem into two pieces: a governance layer controlling who can be part of the network, and a technology layer that determines how participants share information.

As of now, the plan is to create a closed system that would induct members over time. It's an approach that diverges from other solutions looking for a more open, decentralized approach. Still, Horowitz indicated during his remarks that feedback collected after the white paper's release could lead to adjustments to the proposal.

"The way we've approached this is it's going to be done through a centralized bulletin board that is going to be maintained by this working group," Horowitz explained.

The VASPs will post to the bulletin board to see who may own an address, and once another participant claims an address, the two parties can engage in peer-to-peer sharing of the necessary information. This approach ensures that the information isn't stored somewhere — exposing that data to possible hackers — but is instead transmitted directly from the sending VASP to the receiving VASP.

Horowitz said the goal is for the solution to be able to scale, since FATF's guidance implies a global solution will be necessary down the line. However, as it stands, the working group will be something of a gatekeeper at the start, judging which VASPs can join the consortium and, in turn, use the information network.

Horowitz said the initiative would begin with a "phase one" wherein only U.S.-based exchanges that are FinCEN-registered money transmitters would be able to participate.

Still, Horowitz said there are plans to expand internationally over time as regional regulations become more uniform. Currently, Coinbase is trying to make sure U.S. regulators are on board with the proposal. According to Horowitz, members of the working group will be meeting with the U.S. Treasury Department and the Financial Crimes Enforcement Network.