CipherTrace, Shyft Unveil ID Protecting Solution to FATF Crypto Guidance

A new partnership is creating an anonymous identity scheme to meet regulators and users in the middle when complying with KYC/AML regulations.

FATF’s Crypto Guidance

The Bitcoin community and friends flipped their sats over the Financial Action Task Force’s (FATF) latest nonbinding guidance for keeping tabs on cryptocurrency activity (essentially, the report recommends that cryptocurrency companies monitor user identities and share this information with regulators if called upon). Folks were particularly torn up over FATF’s prescription for crypto’s equivalent of the travel rule, a statute in banking that requires banks to share information on clients when they transfer over $1,000 to another institution.

This, as you could easily reckon, did not go over well with Bitcoin’s cypherpunk faithful. So, blockchain analytics company CipherTrace and attestation platform Shyft are developing an anonymous identity protocol which, the partners claim, will allow crypto service providers to share information without disclosing user identity. This would mean keeping regulators happy without having to sacrifice sensitive client information — unless regulators sniff out wrongdoing, that is.

A Compromise 

According to a press release shared with Bitcoin Magazine, the partnership wants to mediate between government officials, crypto companies and cryptocurrency users by creating a proof-of-knowledge identity protocol that doesn’t relinquish user information. In function, this would resemble something like a zero-knowledge proof, which is a cryptographic function that allows one party to reveal that it knows certain information without conveying the information itself.

The solution involves a smart contract platform with shared access between exchanges and other relevant cryptocurrency service companies. This cryptographically secured tool will facilitate an identity hub that will satisfy FATF’s crypto travel rule while also keeping the true identity and information of each user concealed.

“Our focus is on creating federated standards for identity, which are blockchain agnostic,” Joseph Weinberg, Shyft’s founder, is quoted as saying in the release. “We make sure KYC checks can be transferred across networks in a secure manner without compromising identity information. This program bridges a critical gap between new regulatory standards and existing exchange operations to greatly strengthen the crypto ecosystem with a practical implementation of the FATF’s Travel Rule.” 

This doesn’t mean that exchanges and regulators won’t have access to personal info if they want it, however. The data bridge will allow its overseers to disclose information “when compelled to do so by legal authorities,” though this is already something that happens today (see Coinbase forking over user information to the IRS, for example).

A CipherTrace representative told Bitcoin Magazine that, if seeking info on a non-native person, authorities “would have to file a mutual legal assistance treaty (MLAT) with a cooperative country” to ascertain this personal information. MLAT is a mechanism through which a government can seek information on a foreign individual by going through another governing entity that has records on the individual in question. So, this MLAT procedure would only apply for governments seeking non-natives, while governments could solicit companies directly for information on individuals within their jurisdictions.  

Overall, it’s CipherTrace’s hope that this solution will encourage responsible disclosure of persons of interest without compromising the personal data of your everyday, law-abiding citizen.

“With cryptographically-controlled privacy mechanisms, it is possible to have both anonymity and responsible disclosure of the source of funds for legitimate purposes such as criminal or terrorist investigations and AML compliance,” CipherTrace CEO Dave Jevans said in the press release. “This is the direction that CipherTrace is working on for the future growth of cryptocurrencies globally. We believe that there are technological and regulatory solutions that can preserve privacy while enabling security and compliance.”

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