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The Swiss Travel Rule. How Financial Institutions Could Force Users To Bank Their Cryptocurrencies With Them.

In our previous installment talking about FATF Red flags, it was mentioned that:


“(… there is) a not-so-subtle undertone of the need for VASPs (Virtual Asset Providers) also understood as financial institutions, to be in full control of your assets or provide full oversight as we will see later.”


Developments in products provided by centralized exchanges, decentralized exchanges and the experiments in decentralized finance have already proven possible to create a financial system with all the modern components like derivatives and insurance as well as being regulation compliant with privacy transaction technology.


However, one implementation of the travel rule has taken a darker turn. Switzerland, a jurisdiction formerly known as private conscious has decided to approve transactions only to “registered addresses” meaning addresses that Virtual Asset Providers already know who it belongs to. These rules not only add unnecessary bureaucracy which consequently adds more friction to the users of this new technology. It also adds more dangers to regular users to criminal’s prying eyes. The argument is unsurprisingly similar to the end-to-end encryption argument. As long as there is sensitive information being transmitted from one party to another, there is a higher likelihood that this information will end up in the hands of unscrupulous parties.
This particular Travel Rule privacy vulnerability was shown when the European Union stopped the use of the travel rule to jurisdictions like the US where EU’s privacy standards won’t be fulfilled. That’s why the travel rule is now incompatible for information sent outside the European privacy shield.


Even with uniform EU standards across the world, no privacy shield or privacy protection is perfect. secure Centralized systems can leak sensitive information.


According to Compound Finance’s Jake Chervinsky, next June (June 2021) the FATF could adopt the Swiss Travel Rule as the global standard for cryptocurrency transactions. A bleak possibility undoubtedly.


With the Adoption of the Swiss Travel Rule, Self-Custody Would Be Considered High Risk. Forced Adoption Of Centralized Exchanges Would Be The Rule.


In line with the September 2020 FATF report, the adoption of the Swiss Travel Rule for cryptocurrencies, self-custody, meaning owning your own private keys would be considered risky, in spite of the fact that most legitimate cryptocurrency users and companies prefer self-custody over the use of custodians for obvious reasons. Whether this is a move to force financial institutions to take over the control of cryptocurrencies or it is a move purely motivated by regulation is uncertain, the fact is that the biggest winners of such a flawed implementation of the travel rule would be financial institutions, once again. So adoption of a harmful implementation of the travel rule like the Swiss implementation could inflict significant damage to a new and promising technology like Blockchain.

Published by: Saxemberg on Oct. 13, 2020