Governments around the globe are implementing more rules when it comes to digital assets and cryptocurrency. Do these rules help the common user or is it just giving more ways to control the “small guy”?

As a Canadian, I am very much aware of the amount of control the government is attempting to have over its citizens, but it’s hard to keep up with what is going on around the world. Governments are begging for stricter regulations on digital assets, claiming it will help with illicit activities, and protect investors, but does that also give the governments and overseeing organizations too much control over money, and privacy?

Japan announced on May 30, 2023, that it’s implementing the “Travel Rule” to all virtual assets, but what does that mean?

What is Travel Rule?

The Travel Rule came into effect in May of 1996 under the official name of “Bank Secrecy Act (BSA) rule [31 CFR 103.3(g)]”. This rule requires all financial institutions to pass on certain information to the next financial institution, in certain funds transmittals involving more than one financial institution.

To put it simply, the United States Department of the Treasury Financial Crimes Enforcement Network (FinCEN) made it a global law that you needed to be verified that you are you, you have the funds you’re claiming you have, and that you’re sending it to a reputable receiver. They only are concerned with transactions that are over $3,000.

How does this relate to cryptocurrency?

Cryptocurrency is being adopted around the world as a new way to hold funds. Since exchanges are facilitating the movement of money, legally they have to abide by a law that’s older than crypto itself, The Travel Rule.

In 2021 Coinbase and several other crypto exchanges came together and helped create a solution for the crypto space. They chose to call their variation of the Travel Rule, “TRUST Rule” or “TRUST” which stands for Travel Rule Universal Solution Technology.

As stated by Notabene, TRUST is “an industry group formed to advance compliance with the Financial Action Task Force (FATF) anti-money laundering guidelines for virtual asset service providers (VASP).”

Their goal is to “prevent illicit transactions involving cryptocurrency”.

Who is FATF?

FATF or the Finacial Action Task Force is a global anti-money laundering, terrorist, and proliferation financing. They research different methods which money is laundered and terrorism is funded. They attempt to make a global approach to ensure global standards are in place to mitigate risks.

What does TRUST do?

TRUST monitors cryptocurrency transactions that are performed on VASP (Virtual Asset Service Providers). According to Notabene, the TRUST board will assess transactions performed between VASPs. They do not monitor non-custodial wallets, such as MetaMask and Ledger.

How does TRUST work?

The TRUST solution comprises two key components designed to address the Travel Rule:

Centralized Bulletin Board: TRUST incorporates a centralized bulletin board that serves as a means to identify the correct counterparty involved in the transaction. This enables the Originating Virtual Asset Service Provider (VASP) to identify the Beneficiary VASP accurately. The bulletin board acts as a central hub for VASPs to locate and verify the counterparties involved in a transaction.
Encrypted P2P Channel: TRUST utilizes an encrypted peer-to-peer (P2P) channel to securely transfer the necessary Travel Rule data from the Originating VASP to the Beneficiary VASP. This channel ensures the confidentiality and integrity of the information exchanged during the transaction, providing a secure means of communication between the two parties.

Here's how the TRUST solution works in practice:

The Beneficiary VASP provides a crypto deposit address to the receiving customer.
The Beneficiary VASP registers and hashes the crypto deposit addresses it owns, along with proof of address ownership, on the TRUST bulletin board.
The Beneficiary Customer shares the deposit address with the Originating Customer.
The Originating Customer shares the beneficiary address with the Originating VASP.
If the transaction exceeds $3000, the Originating VASP posts the beneficiary address on the US Travel Rule Working Group (TRWG) board.
The Beneficiary VASP privately acknowledges to the Originating VASP that the address belongs to them.
The underlying Bitcoin or Ethereum transaction is then sent.
The Originating VASP securely transmits personally identifiable information (PII) and the transaction hash to the Beneficiary VASP through the encrypted P2P channel.

Who is TRUST?

TRUST is a special network managed by Coinbase that includes more than 35 Virtual Asset Service Providers (VASPs), such as Coinbase, Bitgo, Shakepay, Netcoins, and Gemini. To join TRUST, VASPs have to go through a careful assessment process. This assessment makes sure that the members meet strict standards for security, privacy, and following the rules. It's all about keeping the Travel Rule data safe. However, because it can be complicated to set up, not all members are actively using TRUST right now.

Which other countries have implemented TRUST?

According to the FATF site, there are over 200 jurisdictions that are implementing the recommendations of FATF. In a post by Coinpost, on May 30, 2023, they listed 21 countries that are implementing TRUST to monitor their digital asset transactions. This list included Japan, United States of America, Albania, Israel, Canada, Cayman Islands, Gibraltar, Singapore, Switzerland, Serbia, the Republic of Korea, Germany, Bahamas, Bermuda, Philippines, Venezuela, HongKong, Malaysia, Mauritius, Luxembourg, and Liechtenstein.

Does TRUST breach users’ privacy?

No, TRUST itself does not breach users' privacy. The primary purpose of TRUST is to enhance security and compliance with regulations, such as the Travel Rule. It provides a secure network and protocols for Virtual Asset Service Providers (VASPs) to share necessary information during cryptocurrency transactions while maintaining confidentiality.

However, it's important to note that the implementation and usage of TRUST by VASPs may involve the exchange of personal information as required by regulatory obligations. VASPs are responsible for handling user data in compliance with applicable privacy laws and regulations. It is crucial for VASPs to establish proper data protection measures and privacy policies to safeguard user information and respect individuals' privacy rights.

Ultimately, TRUST itself is designed to facilitate secure transactions and compliance but should be implemented and used responsibly by VASPs to protect user privacy.

What does this mean for transactions involving cryptocurrency?

Ultimately, it means all digital asset transactions which are completed using a custodial wallet will be monitored. This also means that Ponzi scams and shit coins will be wiped out or less easily accessible as all parties sending or receiving assets through VASPs will need to be verified. Stricter regulations can contribute to the overall financial stability of the crypto market. By implementing measures that enhance transparency and accountability, governments can mitigate risks associated with market manipulation, excessive speculation, and the potential systemic impact of large-scale crypto asset movements.

Does this mean the government is going to have more control over my funds?

Unfortunately, power corrupts people. As we witnessed throughout 2020, sometimes there are choices made by governments that teeter on encroaching on personal freedoms and undermine the principles of decentralization and financial sovereignty that cryptocurrencies were designed to uphold. We can only hope that everyone can still respect everyone’s privacy and spending choices. Stricter regulations may inadvertently compromise individual privacy. Requiring the disclosure of personal information for all cryptocurrency transactions raises concerns about the potential misuse or mishandling of sensitive data. Governments must strike a delicate balance between addressing security concerns and protecting individuals' right to privacy.

When is TRUST going to start monitoring my transactions?

Many countries around the globe decided in February of 2022 to begin implementation of TRUST in June of 2023. Exchanges in Canada started implementing the new regulations shortly after February 2022, but they were given a deadline of June 2023.

To summarize

TRUST is an overseeing body to monitor digital asset transactions to ensure that the person sending the money is who they’re saying they are, they have the funds they’re claiming they have, and the person receiving it is a verified entity. TRUST is implemented by Coinbase and several other crypto exchanges, worldwide.

Do Crypto Regulations Breach Privacy?