Following the rule

The FinCEN Travel Rule is a touchstone of banking’s know-your-customer principles: You have to know who’s sending money to whom. That’s the opposite of crypto logic, where anonymous transactions are baked in. But now the crypto industry, which is reeling from heightened SEC scrutiny, wants to show it can put some trust back into the equation.

The acronym for the Travel Rule Universal Solution Technology spells it out. A new association that includes Coinbase, Anchorage Digital, Circle and Robinhood says its technology will let them comply with the Travel Rule.

TRUST can work, it argues, without abandoning the crypto vision of a trustless world.

“We’re eager to show that this is a practical solution” to a problem that’s truly challenging for crypto, Coinbase Chief Legal Officer Paul Grewal told Protocol.

• Identifying “whether there's a financial institution on the other side of a transaction” is “relatively easy when you're talking about traditional fiat payments.”
• “That’s not the case with permissionless blockchains,” he said. “There's no way to understand whether a wallet address on the other side of a transaction belongs to a financial institution or to an individual or anybody else.”
• By becoming part of the TRUST network, exchanges will be able to verify each other’s addresses before facilitating transactions.
• The network also includes two important design features: It will not store “sensitive kinds of customer information, either on the TRUST platform itself or with any kind of third party,” Grewal said. Any information shared on the network will be encrypted, and addresses will be hashed before they are shared, he said.

Encryption and data security will be crucial. When it comes to crypto, the kind of personal information that potentially can get hacked is “quite literally, digital gold,” said Michael Fasanello, director of Training and Regulatory Affairs at the Blockchain Intelligence Group.

• “There is a fine balance to be struck” between data transparency to help combat financial crimes and “maintaining the privacy of customers who expect their personal data to be even more secure in an increasingly dangerous virtual environment,” he said.
• Grewal said each member of the TRUST network must “commit to certain core security and privacy standards before they're able to participate.”
• TRUST has received “an extraordinarily positive reaction” from FinCEN, he said, adding that the technology is “actually quite beneficial for law enforcement” in the event of formal inquiries. FinCEN could not immediately be reached for comment.

Crypto wants to be trusted. It’s a tricky balancing act, trying to convince the feds they’re not letting criminals in, while maintaining the privacy of their users. “We developed an elegant solution,” Grewal argued. But also one “that recognizes that blockchain is fundamentally different.”

— Benjamin Pimentel (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

A MESSAGE FROM NOVOPAYMENT

As the race to financial innovation accelerates, Banking-as-a-Service is carving out an essential role within it. Not a bank but not a standard fintech, Banking-as-a-Service falls between the two, utilizing strengths of each to create something new. Read Demystifying Banking-as-a-Service to gain insight on how BaaS connects the digital economy.

Learn more

On the money

The SEC is probing the relationship between Binance and two of its affiliate trading firms. The regulator is looking at how and if the crypto exchange giant discloses to its customers its ties to the trading firms, citing ethical concerns of bias.

On Protocol: Plaid’s policy chief John Pitts gave Tomio Geron his predictions for the top fintech regulation fights of 2022.

Madison Dearborn is acquiring MoneyGram in a deal worth $1.8 billion. The offer, at $11 per share, is 50% higher than the closing price of MoneyGram shares, with Madison planning to refinance MoneyGram’s outstanding debt after the deal closes.

Mastercard is expanding its consulting service to include crypto and digital currencies. The payments giant plans to help banks “navigate the adoption of digital currencies,” with a focus on providing central banks with a testing platform for potential CBDCs.

Fidelity Charitable saw a donation increase of 1,082% in crypto gifts. The nonprofit affiliate of Fidelity Investments, also the largest grant-maker in the U.S., received $331 million in digital assets last year through DAFs, as compared to $28 million in 2020.

JPMorgan Chase says it is the first lender in the metaverse. (We’re not counting ABN Amro’s Second Life branch, opened in 2006.) The largest bank in the U.S. opened a customer space in Decentraland called the Onyx lounge. The bank also released a white paper to help businesses explore opportunities in the metaverse, citing high client interest.

Stablecoin regulation has seemingly become a partisan issue in the Senate Banking Committee. Democrats highlighted the risks around consumer protection if stablecoins were to be issued by entities other than banks, while Republicans argued for a less restrictive approach to innovation.

Fintech grows up

Marqeta and Plaid are making it easier for consumers to authenticate bank accounts and move funds between them, the first official product partnership between two fintech trailblazers that already share some business customers.

Marqeta, which issues cards for companies like Block and Uber, will use Plaid’s data-aggregation software to enable faster ACH transactions and account verification for Marqeta cardholders, the company said Tuesday.

Their alliance underlines the rapid expansion of fintech, said Alex Johnson, director of Fintech Research at Cornerstone Advisors.

“It’s a timing and market maturity thing,” he told Protocol. “We are just now reaching the stage where there are multiple, mature layers of fintech infrastructure in place to help new companies quickly spin up new financial experiences.”

Read the full story.

Just one question for Gadi Mazor, CEO of BioCatch

Before becoming a tech entrepreneur, Mazor served in the Israeli Defense Forces’ Unit 8200, a signals intelligence arm known for its code-cracking capabilities.

What fintech trend is most troubling for you?

Cryptocurrency is a hot topic right now, and will only get more popular as it becomes mainstream and access expands to more people. What’s exciting is that crypto is driving new markets and bringing new problems to solve. It is also the Wild West. I’m concerned about the malicious activity and potential for fraud that exists in a deregulated economy.

A MESSAGE FROM NOVOPAYMENT

As the race to financial innovation accelerates, Banking-as-a-Service is carving out an essential role within it. Not a bank but not a standard fintech, Banking-as-a-Service falls between the two, utilizing strengths of each to create something new. Read Demystifying Banking-as-a-Service to gain insight on how BaaS connects the digital economy.

Learn more