The need for increased protection and Travel Rule compliance are two lessons DeFi should take from recent events, Notabene CEO Pelle Braendgaard said.
Notabene is doing its part by providing a SaaS solution that helps crypto companies and financial institutions manage regulatory and counterparty risk in crypto transactions.
Braendgaard can spot an important digital innovation. A coder by trade, he developed the first website for the British Virgin Islands. He converted the first online service for lawyers from dialup to a web- and Netscape-based community system. Involved with cryptography for more than 20 years, Braendgaard worked on early crypto, digital payment, and self-sovereign identity projects.
One mistake many bitcoin and ethereum adherents make is they have a blind spot for the technology in its most pure form, Braendgaard said. They lose sight of how to integrate it into the real world and make it useful for everyday people.
Braendgaard has bucked that trend throughout his career. In 2014 he was part of the founding team at Mondome, which connected bitcoin exchanges for remittances.
His next step was joining uPort as its CTO. uPort is developing a user-controlled, mobile-based identity platform that allows users to verify themselves with third parties.
Using ethereum’s blockchain, uPort allows users to interact securely with ethereum smart contracts and dApps.
Why regulations like the Travel Rule are a must
Purists must realize that if digital currencies are to learn the widespread adoption they envision, they need to be regulated before they can be brought into the financial system, Braendgaard said. And they’ll never get there unless there’s a reliable way of determining who is on the other side of the transaction.
Enter the Travel Rule, which dictates that VASPs and other institutions must share relevant information from transactions to prevent fraudulent activity.
“The Travel Rule is the regulators telling the industry to build this because they expect them as a licensed crypto institution to be able to have proper record keeping and also to be able to block a transaction going to, let’s say, a North Korean general or some hacker group,” Braendgaard said. “This is something that the industry has been struggling with, but we thought we were the best team for it because it combines digital identity (or decentralized identity) the way that we’re solving it, together with transaction flow.”
Such a solution is needed if crypto is finally moving out of the basement and into the real world. Without it, even Braendgaard, who completed his first bitcoin transaction 13 years ago, is still afraid of losing money due to the lack of information sent in transactions. Popular money transfer options have it; crypto needs it too.
Rebuilding trust is priority one.
The crypto sector must rebuild trust, and helping folks more safely move money is a great place to start, Braendgaard said. Institutions must rebuild it with each other, customers, and regulators. That needs to be the focus for 2023-24.
The FTX snafu is so upsetting because we’ve been here before. Mt Gox. ICOs.
“We weren’t keeping these bad players accountable early on,” Braendgaard said. “There were so many warning flags, but everyone was making money. I think the best thing for consumers is, in many cases, not to control their keys because we see again and again and again people who lose their crypto wallets.”
Stop us if you’ve heard this before, but let’s hear a story about a new technology that promises to replace the old and revolutionize the industry. It will replace (insert bank/brokerage/credit card name here). Regulation? Bah. Join the wave and ride it out.
That’s how industries shoot themselves in the feet.
“A lot of the shortcuts we’ve taken as an industry over the last years have been because we got into this cat-and-mouse game with the regulators,” Braendgaard said.
“But now let’s work together with the regulators because if our ultimate goal is to get five or six billion people using crypto, we can’t keep playing this game; we can’t keep letting the next FTX get away with it. We need to build safer tools and build something where if I’m keeping most of my money in a USD/USDC wallet, then I’m not going to lose all of my funds because I accidentally click something wrong.”
The companies building that better future
Many companies are developing that necessarily better future, Braendgaard said, mentioning Fireblocks and Chainalysis as two. Chanalysis has done the most to promote bitcoin and ethereum as safe environments.
FBI agents love bitcoin because it’s easier to trace transactions than it is via SWIFT. He added that no one is trying to shut bitcoin down because Chainalysis did an excellent job educating law enforcement about it.
Don’t believe the talk about banks shunning crypto either, Braendgaard said. He often speaks with large banks that are busy developing digital asset divisions. A couple may have slowed the pace down by a quarter or so. Most said they could deal with the risk as long as they had the right tools.
“After Celsius and Three Arrows, I heard from quite a few banks who said ‘the crypto industry. They don’t understand counterparty risk. We do. Now it’s time for us to come in and show how it’s done,” Braendgaard said.
“Maybe there’s a little bit of slowdown for a year. But I think, in general, they haven’t stopped building. They haven’t stopped their plans. Their plans are long-term. Right now, we have crypto-native companies and financial institutions, but in a couple of years, it’s just financial institutions.”
Notabene’s Travel Rule Compliance Solution lets VASPs send and receive Travel Rule data transfers, set rules to instantly identify and block potentially suspicious transactions, and automate counterparty due diligence. Users can verify self-hosted wallet ownership and manage related transfers through a dashboard.
Via Notabene’s Marketplace VASPs can bring relevant risk data points from their blockchain analytics service and sanction screening provider to their Travel Rule flows so they can make data-driven decisions. VASPs can also plug in custody services to connect Travel Rule flows and blockchain transactions.
Notabene investors include F-Prime, Comply Advantage CEO Charlie Delingpole and Blockfi’s VC arm.