U.S. crypto exchanges have a plan for the travel rule. Now they just have to get along

This week, 25 U.S.-based crypto firms finally published a long-awaited white paper describing a messaging platform they plan to use to comply with new global money-laundering rules. Now comes the hard part: getting along.

The Financial Action Task Force (FATF), an influential multi-government organization focused on policing money laundering and terrorist financing, has said that what it calls “virtual asset service providers” (VASPs) — mostly crypto exchanges — must share information about the senders and recipients involved in VASP-to-VASP transactions larger than $1,000.

The so-called travel rule, introduced last summer, has inspired the development of multiple proposed messaging platforms, including Netki's TransactID, CipherTrace's Travel Rule Information Sharing Architecture (TRISA) and the Binance-favored Shyft Network. But the freshly proposed system from the so-called United States Travel Rule Working Group (USTRWG) may have a leg-up, given that 25 exchanges — including big players like Coinbase, Gemini, Bittrex, Kraken, BitGo, Circle and BitFlyer — have already bought in.

"Network effects are going to play a large factor in which of the many emerging travel rule solutions ultimately reach mass adoption," said Chris Metcalfe, senior product manager at crypto custody provider BitGo. "Due to the number of prominent VASPs signaling that they will integrate with the USTRWG solution BitGo feels confident that this solution will be one that can't be ignored."

The system is structured as a centralized bulletin board where two VASPs could claim addresses to initiate a transaction. They would then will use a peer-to-peer encrypted platform to transmit the necessary information. The approach resembles the traditional financial system’s messaging platform, called SWIFT.

Who’s the boss?

Whether or not the USTRWG’s approach wins out, though, creating the technical infrastructure won't be biggest challenge when it comes to complying with the travel rule, according to industry sources. Governance will be. Getting competing crypto firms to work together to develop and maintain a single, centralized information sharing platform will not be straightforward. 

If the working group’s proposed messaging network does become the dominant platform in the U.S., the consortium will need to make group decisions, for instance to set standards and determine which other firms will be allowed to participate in the network.

In its new white paper, the USTRWG describes a governance structure that will be rolled out in phases. In the first phase, the members will create formal agreements outlining responsibilities for building and implementing the new platform. At first, only the working group’s 10 steering committee members will use the network.

Once the steering committee has agreed on a memorandum of requirements for incoming members — which should be established in the coming months — they will open the network to other members, which must be U.S. registered virtual currency institutions subject to the Bank Secrecy Act. 

The steering committee may eventually be replaced as the governance body. According to the white paper, an independent industry body or outside consortium could in the future be established to “administer the governance framework for the technology layer, as well as to coordinate consensus among members on appropriate network policies and procedures.”

The idea is to eventually look like other consortia in crypto, according to Joanna Marathakis, director of AML & sections Circle Internet Financial, a member of the working group. "USTRWG isn't truly centralized. It is operating similar to the consortia that govern various cryptocurrencies (including USDC) whereby multiple firms all have a say in the development of the solution, but also the ongoing governance of the network."

For now, the full list of the 25 USTRWG members has not been made public. The 10-member steering committee, which includes Circle, features representation from smaller industry players as well as larger ones, according to Marathakis.

"All members have insight into the discussions at the steering committee level, and have a say in the development of the solution," she said. "All firms can be as involved or uninvolved in the decision-making process as they like, and we've had some really good discussions based on points raised by some of the smaller VASPs."

David Zacks, CCO at BitFlyer, said membership has grown rapidly, and the group owes its momentum to the diversity of perspectives within the working group.

"I would encourage other entities that are subject to the Travel Rule requirements to join the USTRWG," he said.

Correction: A previous version of this article referred to Chris Metcalfe as CCO of Bitgo. The correct title is senior product manager at BitGo.