Safeguarding the ever-evolving crypto space
27 June 2022
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Author: David Pan, Head of Solutions Consulting, ADVANCE.AI

David Pan is an experienced leader in Artificial Intelligence, Financial Crime and Compliance, evangelising regulatory technology for banks as well as AI/Machine Learning to help unlock the human potential. Well versed in business, technology and management, David is a strong mentor, creative problem solver and thought leader. With 13 years of experience working across the United States and APAC markets, he's a driver for change. He graduated from INSEAD's Global Executive MBA program in 2022.

David Pan

David leads the Solutions Consulting team at ADVANCE.AI. He shared on safeguarding the crypto community at the Crypto Expo Asia, 22-23 Jun 2022 held at Singapore's Raffles City Convention Centre.


Firstly, I'd like to address the topic many have been thinking of when it comes to crypto: scams. Scams in the crypto industry may have been the talk of town lately, especially with market volatility – companies and investors are keen to protect themselves from potential losses.


Scams in crypto are not new, they have been around for as long as crypto has been around. Stories around crypto are typically cases of survivor bias where we hear only of success stories – people invest in an alt coin and the next thing you know, they become millionaires. We rarely hear about the other thousands of investors who got rug pulled, for example from SQUID coin or other scam projects in the crypto space.


How regulations entered the decentralised currency dream


Because crypto is often seen as the next "get rich quick" scheme, and many invest in cryptocurrencies or crypto companies because of the hype without understanding what it's all about – while we see the crypto industry taking off with the large number of new investors jumping on the bandwagon – the stage is also set for malicious actors. That's one reason why it's inviting a lot more scrutiny, and we are seeing more and more regulations coming into play within the crypto space.


Realistically speaking, it may be a fine balance between putting on safety guard rails and maintaining the original intentions of crypto as the industry moves forward.


The idea for a cryptocurrency was based on a simple concept that started in the 1980s, that it would be a currency that didn't require centralised entities, i.e., banks, and regulations that came along with those establishments. Some countries, in the name of protecting public interest, have outlawed cryptocurrencies. Others understand that by making crypto illegal would have a direct impact on innovation as well as their economy. Realistically speaking, because it may be difficult to achieve a wide enough userbase for mass adoption if left unregulated, it's probably going to be a fine balance between putting on safety guard rails and maintaining the original intentions of crypto as the industry moves forward.


Everyone can help to safeguard crypto


Everyone has a part to play: it starts with educating the investors, so they know about what types of products they are investing in and doing their own due diligence. Crypto exchanges also have the responsibility of putting in solutions and technology that can help them detect potential laundered money, scam funds, or tainted funds from interacting within the exchanges. It's also on the technical solution vendor's end to stay abreast of policies and industry changes. Last, but not least, the public/private partnerships with the regulators to protect overall public interest. ADVANCE.AI is in a good position to help.


Fundamentally, it's not just a Know Your Customer (KYC) problem – crypto changes very quickly, new regulations are being launched alongside new developments, including the implementation of the Travel Rule. Sometimes, it may feel like a game of cat-and-mouse – part cyber security, part anti-fraud, part Anti-Money Laundering (AML) mixed with some sanctions and geopolitics. With ADVANCE.AI's ecosystem or partnerships with Ekata for identity scores, with Coinfirm for Know-Your-Wallet and on-chain blockchain and analytics, we are able to bring tools together and orchestrate them in a seamless manner throughout our platform, offering the right solution at the right time for our crypto customers. No one vendor can do all of it, orchestrating a crypto industry centric solution through our vibrant partner eco-system brings a much wider set of tools to the fight.


With ADVANCE.AI's ecosystem or partnerships, we are able to bring tools together and orchestrate them in a seamless manner throughout our platform.


Shedding light on the Travel Rule



The Travel Rule is an interesting development. In a way, it's contradictory to crypto because crypto started off with being decentralized and anonymous. What is the Travel Rule about? Essentially, for transactions above a certain dollar value, the organisation or business that's responsible for that transaction must capture personal identifying information (PII) of the parties involved so you need to know the originator of the transaction, the beneficiary paying out to who is receiving it. So the virtual assets service providers (VASPs), as the terminology goes for crypto exchanges, have an obligation to flag transactions of a certain dollar value – the threshold differs slightly but the rule is similar across jurisdictions.


Why is it necessary? The Travel Rule does add an additional layer but it sheds a bit more light on the transcations, giving VASPs the capability to understand the nature of transactions flowing through their organisation. And that allows them to better understand their customers and understand their transaction flows.


Many would argue that the Travel Rule goes against the principles of anonymity and privacy – and how much of that do you give up in order to be compliant and make sure your exchange is not being abused by bad actors. For example, for laundering tainted proceeds from fake vaccine cards, proceeds from hacking, etc. One prominent example is the Ronin Bridge Hack. Although examples like these form a very small percentage percentage of total crypto transactions globally. Overwhelmingly, the majority of transactions are good; it's really that small percentage that kind of ruins it for everyone. Because of its far-reaching impact, regulated VASPs will have to find a balance between privacy, anonymity and safeguarding the global financial system.


Travel Rules are not easy to implement because it's never one party in a transaction. 


Fundamentally, Travel Rules are not easy to implement because it's never one party in a transaction. You have the sending institutution and the receiving institution. And with the Travel Rule, the sender needs to also capture information from the receiving party, and you have to be able to capture that information somehow. It doesn't just add friction to the process, but also, when you think about a crypto transaction it used to be that you could just paste a wallet address and then your transaction is sent. But now you have to start asking questions and capturing additional information so I think the crypto community is probably seeing this as an intrusive measure. So, again, it goes back to the shared social responsibilities and making sure what we're doing is compliant.


What could happen next


I think we'll likely see an international messaging standard for VASPs and it could be similar to how the SWIFT network works for banks globally, which is the international financial messaging network. They would follow a similar messaging logic that will capture the details needed based on the Travel Rule and I think that could be something that will lessen the burden on the individual exchanges – as VASPs come together and form this standard that could be followed. Another development is that vendors would start to look into that space and solve the painpoint through technology. In fact, ADVANCE.AI is already working with partners on how to minimise friction and be less intrusive while being compliant with the Travel Rule.


I think we are looking at a few questions as an onboarding solution provider, but importantly: how do you do KYC in a Web3 world because Web3 is about the decentralized internet? An area of potential development like Soulbound tokens and self-sovereign identity (SSI) naturally come to mind as we tackle the decentralized identity question. Imagine a world where, you do your KYC once and own your metaverse identity in your crypto wallet.


ADVANCE.AI is already working with partners on how to minimise friction and be less intrusive while being compliant with the Travel Rule.


What kind of safeguards and frameworks will regulators start to put in? I'd say it's not just about additional information on data sources; how crypto is evolving is a key consideration to how tech providers, crypto companies and consumers can plan ahead.


It used to be that we must buy our coins from CeFi (centralized finance) as they held on to our coins, kind of like a bank. There's a company with salaried staff behind it. Then several years ago we saw the prominence of DeFi (decentralized finance) where investors can simply trade and buy coins from decentralized exchanges tapping into Liquidity Pools run by automatic market maker algorithms. Now, we're starting to see GameFi take off, play to earn.


But those jumping into GameFi are no longer your average crypto investors. They could be a much younger crowd. So then it would be interesting to see how regulators respond and how they might try to regulate GameFi. Will players need to give up their anonymity if they're playing to earn? How does that play into taxable earnings with capital gains? How will we be able to protect companies and the players – if possible, without causing much friction? These are the questions the community and ADVANCE.AI as a tech partner are considering as the industry evolves.


Watch this space as we share on more developments in crypto.




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