We’ve all been there. You see something, hear something, or feel something and want to share that feeling or observation with others. do you answer the phone? send messages? Record voice notes?
Humans thrive on our shared experiences: a captivating concert, the winning goal of a sports game, waking up to the sunrise. It’s satisfying to have an experience and be able to share it with others in real time. Thanks to technology, we can do this even if another person, calling them our adversary, is on the other side of the world.
So why don’t we expect the same level of seamless communication and collaboration across the industry built around this idea – fully interconnected and global reach? Cryptocurrencies were built to democratize access to finance, community, and technology. However, in the current regulatory environment, as government agencies tighten their grip on how customers transact through the world’s Coinbases and Binances, we are experiencing increasing delays as sanctions expand rapidly leading to the connection of cryptocurrencies Sexuality has been severely disrupted.
As a result, cryptocurrency exchanges have encountered an unfavorable hurdle as they attempt to comply (and process compliant transactions with each other) under global regulation. What’s holding our industry back when we need a clear compliance solution? Meet the sunrise question.
The Status of VASPs – and the Travel Rules
If you’ve been following the regulatory environment for cryptocurrencies over the past three years, you may have come across the term “VASP,” which stands for Virtual Asset Service Provider, a term derived from the FATF (Financial Action Task Force).
In addition to developing the acronym, the FATF also acts as a global watchdog for preventing money laundering in financial transactions. The FATF is responsible for the travel rule, a financial regulation that requires banks, cryptocurrency exchanges and other cryptocurrency participants to share data on financial exchange participants (customers) over $1,000/EUR from 2020. Some countries have even lowered the threshold to zero. What is VASP? Broadly speaking, a VASP is a cryptocurrency exchange, liquidity provider or custodian that can be centralized or decentralized.
Related: FATF Brings DeFi to Crypto Service Provider Guidelines
Sunrise is for everyone, right?
So that’s the problem, and why it’s so bad for progress. Compliance needs to be seamless and synchronized. From a crypto compliance perspective, let’s break down what this means and what can go wrong when a VASP issues a request for information about a trading customer to another VASP. VASP “A”, a cryptocurrency exchange, operates in jurisdictions subject to travel rules. According to the “sunrise problem” analogy, VASP A can see the sunrise at their location and wants to be able to talk about it (exchange customer details) with someone who lives in a different place where the sun has not yet risen (VASP B). VASP “B” is located where the travel rule has not yet become a regulatory obligation. Not only is VASP B in a different “time zone”, it has completely different rules. How to solve the predicament of VASP one-in-one disagreement?
VASP A (a cryptocurrency exchange that deposits or sends funds) sends VASP B a “Request for Information”. Returning to the sunrise analogy again, VASP A wants to talk to VASP B about their experience watching the sunrise. VASP A sent a request for this information to VASP B, and VASP B did not respond because the sun had not yet risen to where they were. It could be tomorrow, it could be a year, but for now, VASP A could be out of compliance but still be accountable to its specific regulator. Sunrise problem strikes.
Related: DeFi: Who, What, and How to Govern in a Borderless, Code-Governed World?
Really understand regulation
Over the past few years, platforms across crypto and DeFi have struggled to build solutions that comply with government regulations, such as travel rules. Ideally, these solutions allow VASPs to operate without affecting the way customers normally transact.
The truth is that regulation is no longer an “if” in cryptocurrencies. It’s here – and growing. While the knee-jerk reaction of some in our industry is to undermine regulation, compliance protects customers and exchanges and prevents malicious intent and bad actors from setting the industry back as we move towards mass adoption around the world. The demand is real: According to TechCrunch, cryptocurrency losses soared 695% year over year after massive hacks, such as the $625 million Axie Infinity/Ronin Network exploit last month. The trick is, how do we stay compliant, protect ourselves, and not give up the pseudo-anonymity and level of identity that many of us turn to crypto to experience in the first place?
Related: The Loss of Privacy: Why We Must Fight for a Decentralized Future
How to Solve the Sunrise Problem
The answer is a compliant solution to the travel rules and sunrise issues. If we’re going to be a compliant industry, we have to make sure that regulation (and no friction) is available to all parties involved. To do this, VASPs must be able to process transactions and transmit necessary customer data between each other, regardless of whether one VASP complies with the travel rules and the other VASP has not fully complied with the regulations in its jurisdiction due to staggered implementation.
How do we get there? Solutions such as Shyft Network’s just-launched travel rule solution Verisope and the Decentralized Discovery P2P Data Transfer Network allow for a “historical review” of any crypto transaction involving VASP broadcasts. This feature allows VASPs to obtain information about any transaction, no matter when it occurs, even before the receiving VASP signs off with Veriscope or other travel rules solutions. When new VASPs join, they receive these requests for historical data and can respond with the necessary information to prevent industry barriers between compliant and non-compliant VASPs (aka the Sunrise problem).
Encryption deserves better
If there is a need to democratize compliant access while protecting customer identities on-chain, now is the time. In late March, we learned that the European Parliament voted to impose new sanctions requiring KYC (know your customer) compliance for private, non-custodial crypto wallets. Regulation will soon touch every jurisdiction in the world and everyone in every jurisdiction. If exchanges and clients want to legally transact (and host the processing of transactions), we will need to be able to share key information on current, past and ongoing transactions.
Shared experiences and the ability to communicate ultimately make us human. If crypto is here to help improve finance and humanity, we should provide the best solutions to the most challenging problems. Let’s get ready.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Joseph Weinberg was an early investor in Bitcoin in 2010 and a director of Coinsetter until it was acquired by Kraken in 2016. He knows the world of cryptocurrencies like the back of his hand. Currently, Weinberg is the co-founder of Shyft Network, a blockchain-based trust network that restores trust, credibility, and identity. Passionate about driving the mass adoption of crypto and blockchain, he also serves as an advisor to the OECD and the Financial Stability Board, as well as to governments and regulators around the world.