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Solving The “Sunrise Issue” Is The Key To Unlocking Mass Crypto Adoption

We’ve all been there. You see something, hear something, or feel something and want to share that feeling or observation with someone else. Do you pick up the phone? Send a text message ? Record a voice note?

Humans thrive on our shared experiences: an engaging concert, the winning goal in a sports game, waking up to watch the sunrise. There’s something rewarding about having an experience and being able to share it with someone in real time. And thanks to technology, we can do that, even if another person, let’s call them our counterpart, is on the other side of the world.

So why wouldn’t one expect the same level of seamless communication and collaboration in an industry built around this very idea: total interconnectivity and global reach? Crypto was designed to democratize access to finance, community, and technology. And yet, in the current regulatory climate, as government agencies tighten their grip on how customers transact through the world’s Coinbases and Binances, we are experiencing growing delays amid rapidly expanding sanctions that are causing a major disruption in crypto connectivity.

As a result, crypto exchanges face a detrimental hurdle when trying to comply (and transact compliant transactions among themselves) under global regulations. What is holding our industry back at a time when we need clear and compliant solutions? Meet the Sunrise problem.

The current state of VASPs – and the travel rule

If you’ve been following the crypto regulatory landscape over the past three years, you’ve probably come across the term “VASP,” which stands for Virtual Asset Service Provider, a term originated from the FATF (Financial Action Task Force).

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Beyond creating acronyms, the FATF acts as a global watchdog for the prevention of money laundering in financial transactions. The FATF is responsible for the Travel Rule, a financial regulation that requires banks, crypto exchanges and other crypto players, from 2020, to share data on participants (customers) in financial exchanges exceeding 1,000 USD/EUR . Some countries have even reduced the threshold to zero. What is a VASP? Broadly speaking, a VASP is a cryptocurrency exchange, liquidity provider, or custodian that can be centralized or decentralized.

Related: FATF includes DeFi in guidance to crypto service providers

Sunrise is for everyone, right?

Here, then, is the problem and why it is so detrimental to progress. Compliance must be transparent and simultaneous. From a cryptographic compliance perspective, let’s break down what this means and how, when a VASP issues a request for customer transaction information to another VASP, issues can arise. VASP “A” (a crypto exchange) operates in a jurisdiction where compliance with travel rules is required. Using the “Sunrise Issue” analogy, VASP A can see the sunrise at their location and wants to be able to talk about it (exchange client details) with a counterpart who lives in a different location, where the sun hasn’t set. still up (VASP B). VASP “B” is located where the Travel Rule is not yet a regulatory requirement. VASP B is not only in a different “time zone”, it has completely different rules. How to resolve the dilemma when there is a compliant VASP and a non-compliant one?

VASP A (a crypto exchange where money is deposited or sent) sends an “information request” to VASP B. Going back to the Sunrise analogy, VASP A wants to talk to VASP B about his experience watching the sunrise of the sun. VASP A posts a request for this information from VASP B, which does not respond because the sun has not yet risen where they are. It could be tomorrow, it could be a year from now, but right now there is a misalignment leading to potential non-compliance for VASP A, which will still be held accountable to its specific regulators. The Sunrise Issue hits.

Related: DeFi: who, what and how to regulate in a world without borders and governed by a code?

Become aware of the regulations

Over the past few years, crypto and DeFi platforms have worked hard to create solutions that comply with government regulations such as the travel rule. Ideally, these solutions allow VASPs to operate uninterrupted in the way their customers would normally transact.

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The truth is, regulation is no longer an “if” in crypto. It’s here — and it’s growing. And while the knee-jerk reaction of some in our industry is to vilify regulation, compliance protects customers and exchanges and is put in place to protect against malicious intent and bad actors that set the industry back on its path. towards mass adoption globally. This need is real: according to TechCrunch, crypto losses have soared 695% year over year following massive hacks, like the $625 million Axie Infinity/Ronin Network exploit last month. The trick is how do you stay compliant, protect yourself, and not give up the level of pseudo-anonymity and identity that many of us turned to crypto to experience in the first place?

Related: The Loss of Privacy: Why We Must Fight for a Decentralized Future

The answer is compliant solutions that solve the travel rule and the Sunrise show. If we want to be a compliant industry, we need to make sure regulation is possible (and frictionless) for all parties involved. For this to be possible, VASPs must be able to process transactions – and pass the necessary customer data – between them, whether one VASP is compliant with travel rules and the other is not yet fully compliant. made to the regulations of their jurisdiction due to staggered implementation.

How can we get there? Solutions like Verisope, a Travel Rule solution, and a newly launched decentralized discovery P2P data transmission network by Shyft Network allow “historical feedback” on any crypto transaction involving a VASP broadcast. This feature allows VASPs to obtain information about any transaction, regardless of when it occurred, even before the receiving VASP logs into Veriscope or another Travel Rule solution. When a new VASP joins, it receives these historical data requests and can respond with the necessary information, thus avoiding the industry roadblock (aka Sunrise Issue) between compliant and non-compliant VASPs.

Crypto deserves better

If there ever was a need to democratize access to compliance while protecting customer identities on-chain, it’s now. At the end of March, we learned that the European Parliament voted on implementing new sanctions that would require KYC (know your customer) compliance on non-hosted private crypto wallets. The regulations will soon affect every jurisdiction in the world and every person within every jurisdiction. If exchanges and clients want to trade (and host trades) legally, we will need to be able to share key information for current, past, and ongoing trades.

Shared experiences and the ability to communicate are ultimately what make us human. If crypto is here to help improve finance and humanity, we deserve the best solutions to the toughest problems. Let’s be ready.

The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Joseph Weinberg was an early investor in Bitcoin in 2010 and a director at Coinsetter until it was acquired by Kraken in 2016. He knows his way around the cryptocurrency world. Currently, Weinberg is the co-founder of Shyft Network, the blockchain-based trust network that reclaims trust, credibility, and identity. Passionate about advancing the mass adoption of crypto and blockchain, he is also an advisor to the OECD and the Financial Stability Board as well as governments and regulators around the world.

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