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1. The Travel Rule — Crypto Firms Announce the Formation of the “TRUST” Platform
What happened?
A group of some of the largest crypto firms and service providers in the United States, including Coinbase, BlockFi, and Circle, unveiled the Travel Rule Universal Solution Technology (“TRUST”) platform this week. TRUST is an information sharing platform that allows its members to collect and share user data to help them comply with the “Travel Rule” proposed by the Financial Action Task Force (“FATF”).
You might ask, “is this travel rule like the travel rule in basketball?” The FATF is a global anti-money laundering and countering the financing of terrorism (AML/CFT) watchdog. The rule requires that virtual asset service providers (or “VASPs”, a term used by regulators to denote custodial crypto service providers)(just another term for a custodial crypto service provider) send to counterparty VASPs identifying information on both the sender and the recipient in any transaction worth more than 1000 USD/EUR.
In simpler terms, imagine a Coinbase (a VASP) customer wanted to send 0.5 ETH to a Kraken (counterparty VASP) customer. The Travel Rule requires Coinbase and Kraken to share with each other identifying information about their customers.
The FATF expanded the Travel Rule requirement to crypto businesses in 2019, and VASPs have been working to develop a system through which they can share customer information since. The TRUST platform is their solution; it allows its members to share customer data in an end-to-end encrypted manner and keep the platforms in compliance with the Travel Rule.
What does this mean?
Depending on how it’s implemented, the Travel Rule’s application could impact DeFi either in significant ways or not at all. In traditional financial markets, transmissions of value are necessarily bookended by financial institutions subject to the Travel Rule, but that’s not always the case in crypto.
The critical question for DeFi is whether the Travel Rule applies and how it would apply if and when a VASP’s customer is either receiving or sending assets to an address that a VASP doesn’t control, like a self-hosted wallet or a smart contract.
Applying Travel Rule obligations to addresses that aren’t controlled by VASPs is problematic for several reasons: How would a VASP collect identifying information about their customers’ counterparties, i.e. individuals with whom the VASP may have no relationship? What does it mean to KYC a smart contract? Applying the Travel Rule beyond transactions bookended by VASPs doesn’t make much sense, but it’s nevertheless an outstanding policy issue.
Several jurisdictions have floated and adopted varying forms of the Travel Rule. The “Mnuchin Midnight Rulemaking” attempted to expand Travel Rule-like obligations to transactions involving self-hosted wallets, a novel expansion of requirements that VASPs couldn’t realistically comply with. An Estonian AML Law also has the potential to significantly limit people’s ability to self-custody digital assets.
2. DOJ Announces First Director of National Cryptocurrency Enforcement Team
What happened?
On Thursday, the Justice Department announced that Eun Young Choi will serve as the first Director of the National Cryptocurrency Enforcement Team (NCET). NCET will focus on investigating and prosecuting criminal misuse of digital assets. Director Choi has a long history at the DOJ, including stints as Senior Counsel to Deputy Attorney General and as an Assistant U.S Attorney (AUSA) in the Southern District of New York. In her role as AUSA, she prosecuted Ross Ulbricht.
NCET’s particular focus will be on “virtual currency exchanges, mixing and tumbling services, infrastructure providers, and other entities that are enabling the misuse of cryptocurrency and related technologies to commit or facilitate criminal activity.”
Director Choi stated that her team will “play a pivotal role in ensuring that as the technology surrounding digital assets grows and evolves, the department in turn accelerates and expands its efforts to combat their illicit abuse by criminals of all kinds.”
What does this mean?
Law enforcement is becoming increasingly effective at pursuing criminals exploiting cryptocurrencies. By using tools like blockchain analytics and analyzing the interactions between the custodial and peer-to-peer ecosystems, law enforcement can track, ascertain and apprehend criminals operating within the DeFi and crypto ecosystems.
We support law enforcement’s use of novel approaches suited to DeFi and crypto-markets to achieve long standing law enforcement goals like the prevention of illicit financial activity. Moreover, the more that law enforcement effectively disrupts illicit activity in crypto markets, the sooner that the widely-held false narrative that criminals disproportionately use crypto will die.
Consequently, we consider Eun Young Choi’s appointment, and the formation of the NCET as a whole, as a net win for DeFi.
3. Rep. Josh Gottheimer’s Stablecoin Bill
What happened?
Representative Josh Gottheimer (D-NJ) introduced a bill that would establish government-backed insurance for “qualified stablecoins.” A “qualified stablecoin” could either be issued by an insured depository institution (a bank) or by a nonbank entity that meets certain collateral requirements. For a nonbank issuer, the stablecoin must be backed with collateral equal to 100 percent of the value of all outstanding stablecoins. The collateral may be made up of cash, US government securities, or other assets approved by the Comptroller of the Currency.
The bill specifically states that the OCC would be the primary regulator of qualified stablecoins and would be responsible for issuing rules on leverage ratios, auditing requirements, AML/KYC compliance, etc. That being said, the bill does not limit the ability of the SEC or the CFTC to regulate non-qualified stablecoins if they fall under those agencies’ jurisdictions.
What does this mean?
The bill’s introduction further evidences Congress’s keen focus on custodial stablecoin issuance. It’s encouraging that the bill doesn’t seek to limit the issuance of stablecoins to banks — as per the President’s Working Group on Financial Market’s recommendation — and would instead create a pathway for non-bank issuers to comply with federal regulations.
Moreover, creating an “opt in” framework like this would allow market participants to assess their risk tolerance and choose the stablecoin product that meets their needs and would prevent federal regulation from crushing innovation.
The devil will be in the details, of course, and we will be paying close attention to the lifecycle of this bill. Here as always, we will continue to advocate for policies that support the self-custody of stablecoins and digital assets more broadly.