We have all been there. You see something, hear something, or feel something, and want to share that feeling or observation with someone else. Do you
We have all been there. You see something, hear something, or feel something, and want to share that feeling or observation with someone else. Do you pick up the phone? Send over a text? Record a voice note?
Humans thrive in our shared experiences: a captivating concert, the winning goal of a sports match, waking up to watch the sunrise. There’s something fulfilling about having an experience and being able to share it with someone in real time. And due to technology, we can do that, even if another person, call them our counterpart, is halfway across the world.
So why wouldn’t we expect the same level of seamless communication and collaboration across an industry built around that very idea — total interconnectivity and a global reach? Crypto was built to democratize access to finance, community and technology. And yet, in the current regulatory climate, as government agencies tighten their grasp on how customers transact via the Coinbases and Binances of the world, we are experiencing growing delays amid rapidly expanding sanctions that are causing a major break into crypto’s connectivity.
As a result, crypto exchanges are experiencing a detrimental roadblock when attempting to comply (and process compliant transactions between each other) amid global regulation. What’s holding our industry back in a time when we need clear compliant solutions? Meet the Sunrise Issue.
The current state of VASPs — and the Travel Rule
If you have been following crypto’s regulatory landscape in the last three years, you’ve likely come across the term “VASP,” which stands for Virtual Asset Service Provider, a term born from the FATF (Financial Action Task Force).
Beyond crafting acronyms, the FATF acts as a global watchdog agency for preventing money laundering in financial transactions. The FATF is responsible for the Travel Rule, a financial regulation that requires banks, crypto exchanges and other crypto players, as of 2020, to share data on participants (customers) in financial exchanges exceeding 1,000 USD/EUR. Some countries have even reduced the threshold to zero. What constitutes a VASP? Broadly speaking, a VASP is a cryptocurrency exchange, liquidity provider or custodian that can be centralized or decentralized.
Related: FATF includes DeFi in guidance for crypto service providers
The sunrise is for everyone, right?
So here’s the issue and why it’s so detrimental to progress. Compliance needs to be seamless and simultaneous. From a crypto compliance standpoint, let’s break down what that means, and how when a VASP posts a request for information on transacting customers to another VASP, issues can arise. VASP “A” (a crypto exchange) operates in a jurisdiction where Travel Rule compliance is required. According to the “Sunrise Issue” analogy, VASP A can see the sunrise in their location and wants the ability to talk about it (exchange customer details) with a counterpart who lives in a different place, where the sun hasn’t yet come up (VASP B). VASP “B” is located where the Travel Rule isn’t yet a regulatory obligation. VASP B is not only in a different “time zone,” it has different rules altogether. How to solve the dilemma when there is one compliant and one non-compliant VASP?
VASP A (a crypto exchange where money is being deposited or sent) sends an “information request” to VASP B. To return to the Sunrise analogy again, VASP A wants to talk to VASP B about their experience watching the sunrise. VASP A posts a request for this information from VASP B, who doesn’t respond because the sun has not yet come up where they are. It could be tomorrow, it could be a year, but for now, there is a misalignment that is leading to potential non-compliance for VASP A, which will still be held accountable to its specific regulators. The Sunrise Issue strikes.
Related: DeFi: Who, what and how to regulate in a borderless, code-governed world?
Getting real about regulation
Over the past few years, platforms across crypto and DeFi have been hard at work building compliant solutions to government regulations like the Travel Rule. Ideally, these solutions allow VASPs to operate with no interruption to how their customers would normally transact.
The truth is that regulation is no longer an “if” in crypto. It’s here — and it’s growing. And though the knee-jerk reaction among some in our industry is to villainize regulation, compliance protects customers and exchanges and is put in place to protect against malicious intent and bad actors who set the industry back in our journey towards global mass adoption. This need is real: according to TechCrunch, crypto losses have spiked 695% on year following massive hacks, like last month’s $625 million Axie Infinity/Ronin Network exploit. The trick is, how do we remain compliant, protect ourselves and not give up the level of pseudo-anonymity and identity that many of us turned to crypto to experience in the first place?
Related: The loss of privacy: Why we must fight for a…
cointelegraph.com