by Colin Hablützel, Bitcoin Suisse Online Product Owner
Bitcoin Suisse has implemented a process called “proof-of-ownership” to ensure compliance with the so-called “Travel Rule” from the Financial Action Task Force (FATF) and the Swiss AMLO-FINMA.
This step is important for several reasons – first and foremost because it can help to promote the adoption of cryptocurrencies and advance the industry as a whole. In a world where everyone can be his or her own bank (if so desired), proof-of-ownership is the application of the Travel Rule that helps bring together individual crypto holders and intermediaries who offer services related to cryptocurrencies.
In this piece, we take a closer look at how Bitcoin Suisse has implemented this proof-of-ownership process and why this is an important step forward for crypto-financial services.
As a recap, the Travel Rule is a requirement which ensures that Virtual Asset Service Providers (VASPs) are able to check the sender and beneficiary information of a transaction to comply with anti-money laundering regulations– at any time.
In the traditional banking world, this requirement is solved using the SWIFT system or other information transmission protocols, where the identity of the sender and beneficiary is sent with the transaction, based on information obtained during the KYC process of an intermediary.
In the crypto world, solving the Travel Rule requirement requires another approach, since the sender and receiving addresses are not linked to the sender and beneficiaries. Usually these addresses are pseudo anonymous and mostly only disclosed among the transacting parties in a separate manner, which is not part of the transaction on the blockchain.
In Switzerland, application of the Travel Rule is taken very seriously and financial intermediaries who facilitate crypto transactions must adhere to its requirements.
On the surface, this seems to impose additional burden on crypto companies who wish to be compliant. However, there is another side as well.
Travel Rule compliance helps to make crypto compatible with the requirements of more conservative companies that might not otherwise wish to have anything to do with crypto assets.
Of course, the advent of cryptocurrencies means that now any individual person can be his or her own bank with the help of financial intermediaries. Now, equipped with a crypto wallet in hand, a person can transmit funds digitally, with transactions which are then settled on a globally shared financial ledger.
This is the beauty of cryptocurrencies.
At the same time, some businesses which could use cryptocurrencies for everyday needs find it hard to accept personal transactions from private wallets out of regulatory or compliance concerns. If there was an easy way to bridge private wallets with business applications using cryptocurrencies, they would feel much more comfortable.
By implementing proof-of-ownership and taking steps to comply with the Travel Rule, Bitcoin Suisse is helping to build this bridge.
Proof-of-ownership with Bitcoin Suisse
At Bitcoin Suisse, we decided to create a simple yet sure way for clients to prove – with one single transaction – that the funds being transferred are indeed theirs and not coming from an anonymous third-party – thus making transactions compliant with the Travel Rule.
Part of the challenge is making this process universally applicable since different cryptocurrencies (and different wallet providers) provide different possibilities for transmitting information about transactions.
How to tackle this challenge?
The only common denominator among all currencies and all wallets is the transaction amount itself. So – it is possible to require a small amount to be added to a transaction and so fulfill the requirement of the Travel Rule.
This is what we decided to do.
By asking clients to send a very specific amount to us within a limited time frame, we can be reasonably sure that the person sending funds is the client which passed our onboarding process – according to standards set out under the Swiss AML framework.
This method is the simplest and least intrusive way to be compliant while allowing us to keep on supporting our clients with the same level of service.
Looking to the future
While we have solved the general challenge with the generic implementation of the proof-of-ownership process, there is still much to do.
For now, this process is still somewhat manual and puts most of the responsibility on users themselves. In the future, the challenge of Travel Rule compliance for transactions between VASPs will be solved with protocols such as the OpenVASP. This will ensure all transactions between intermediaries will be handled seamlessly and without any work needed from clients.
On a protocol level, some blockchain networks also provide ways for even simpler verification of transactions – with a push of a button.
At Bitcoin Suisse, we strive to implement the OpenVASP protocol in the near future and at the same time continue to improve our proof-of-ownership process.
In doing this, we will continue to serve our clients and push adoption of cryptocurrencies in business forward.