The Travel Rule, on-chain

Graduate · enrolled learners

This lesson opens with BTC-e, 2017.

What happened

BTC-e was a cryptocurrency exchange that operated for years as one of the primary places criminal proceeds were laundered, moving funds tied to ransomware, the theft from the Mt. Gox exchange, identity theft, corruption and drug trafficking. In July 2017 the US Financial Crimes Enforcement Network assessed a 110 million dollar civil penalty against BTC-e and a 12 million dollar penalty against an operator, finding it had willfully violated US anti-money-laundering law: it was not registered, ran no meaningful anti-money-laundering program, filed no suspicious-activity reports, and, critically, obtained and retained almost no information about its customers or the parties to their transfers. Because no institution in the chain of a BTC-e transfer held who the sender and receiver actually were, funds could move between people with the identifying information that the law requires to travel alongside a transfer simply absent. BTC-e is what a system looks like when the originator and beneficiary information that is supposed to accompany a transfer is nowhere held at all.

The decision point

The Travel Rule is the requirement that when value moves between institutions, identifying information about the originator and the beneficiary travels with it, so that a transfer is never a movement of money detached from who sent it and who receives it. On-chain this collides with a basic fact: a blockchain transfer carries addresses, not identities, so the ledger records that one address paid another and says nothing about who controls either, which is exactly the identifying information the Travel Rule exists to supply. The rule therefore places the obligation on the institutions at each end, the originating and beneficiary service providers, to attach and pass the identity the chain omits, rather than treating the on-chain transaction as self-describing. BTC-e is the demonstration of the failure mode: an institution that holds no information about its customers or their counterparties makes the Travel Rule impossible to satisfy and becomes the point where funds move with their origin and destination erased. So the decision an institution makes is to hold and transmit originator and beneficiary information itself, because the chain will not, and a transfer whose parties no institution can name is a laundering channel by construction.

Recorded loss

$110,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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