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Study on Dissolution of Technology-Regulation Gap for Implementation of Global Travel Rule

The Travel Rule refers to the financial flow tracking system used in the financial sector for recording the information about the parties of transactions in order to prevent illegitimate use of funds, such as money laundering. Since 2019, the Financial Action Task Force (FATF) has included the transactions of virtual assets in the Travel Rule. Although the transactions of blockchain-based virtual assets, including Bitcoin, are so common these days, the global booming of the virtual assets has not brought about a stable transaction system.

“People say different things about the issue of regulating virtual assets. What is most concerned about by the financial regulatory authorities is the illegitimacy of transactions. The blockchain ecosystem opens the details of financial transaction, but it thoroughly keeps the anonymity of the traders. That is where illegitimacy can take place, including money laundering or the illegal trading of drugs and guns.” Then, what about prohibiting the anonymity? That’s not so simple. Kibae Kim, the Principal Research at KAIST Korea Policy Center for the Fourth Industrial Revolution, explains how the stakeholders can cooperate about this issue.

|Preemptive Response to Blockchain as an Essential Part of the Fourth Industrial Revolution|

Four points of the technology-regulation gap in virtual assets
While the existing financial institutions record the details of financial transactions and the real names of the transmitters and receivers to protect them legally, blockchain is based on anonymity. The policy study conducted by his group focused on the structural factors to the gap between the technological operating principles of blockchain and the regulations and rules, and the methods for reducing the gap. The research group presented four structural factors as well as corresponding alternatives, as described below.
First, if the individual virtual asset exchanges have different Travel Rule standards, they will persist on their own standards, seeking their own profits. Therefore, an integrated multi-channel system should be introduced to increase the compatibility so that the conversion among the standards can be freely carried out.
Second, the free conversion among the standards alone is not enough to realize the prevention of money laundering, which is the ultimate goal of the regulations. Therefore, it is proposed to create a modular structure for the mutual operation between the financial authorities and the individual exchanges so that the analytical details of the messages (financial transaction information) can be easily shared between them based on message simplification.
Third, the free conversion among the standards and the shared module for preventing money laundering have the limitation of high complexity. Hence, minimum standards should be prepared to share the message forms between the exchanges.
Fourth, the current regulatory system based on the existing financial system is vulnerable to the new situations where ‘personal wallets’ become popular and cryptocurrency is used for actual trading. Therefore, new Travel Rule scenarios should be prepared in consideration of the new possible situations.

Proposal of pace-setting policies for implementing virtual asset regulations
Virtual assets are at the core of the Fourth Industrial Revolution as well as the controversy. The significance of the present study is that the practical technologies and guidelines for implementing the regulations were presented so that South Korea can lead the global agendas. Dr. Kim said, “We have preemptively presented the points of cooperation in relation to the field of virtual asset regulation in which everybody sees the need but the stakeholders are not so cooperative with each other.” He added, “I am so thankful to the World Economic Forum (WEF) for conducting the joint study with us so that we can take the lead in this field.”

Principal Researcher.Kibae Kim
2021 Annual Report

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