Visual Proof Method Explained
Visual proof can be a screenshot or a video clip shared by the wallet user displaying the address the wallet user wants to send or receive their virtual assets with the virtual asset service provider (VASP).
The VASP will verify that the address displayed matches the desired address. If the addresses match, the transaction will receive the go-ahead.
Visual Proofs are one of the easiest wallet verification methods available to self-hosted wallet owners; however, it is also the most susceptible to risk.
Why Would a Cryptocurrency User Need
to Provide Visual Proof?
The Financial Action Task Force’s (FATF’s) Recommendation 16 proposed that cryptocurrency exchanges and virtual asset businesses within FATF member countries would need to reassess how crypto assets were transferred.
For compliance purposes, VASPs will need to adhere to country-specific rules when transacting with self-hosted wallets as part of their anti-money laundering (AML) efforts.
Recommendation 16 stipulates that when a virtual asset transfer involves only one obliged entity on either end of the transfer, countries should still ensure that the obliged entity adheres to the requirements of Recommendation 16 concerning their customer.
For example, when an ordering VASP, or other obligated entity, sends virtual assets on behalf of its customer (the originator) to a beneficiary that is not a customer of a beneficiary institution but rather an individual who receives the virtual asset transfer to a self-hosted wallet.
But How Does It Work?
A Complete Visual Proof Step-by-Step
From the Wallet User’s Perspective:
- The wallet user accesses their account at the VASP and initiates the withdrawal process by inputting the wallet address and amount.
- Next, the wallet user will take a screenshot (or a video, depending on the VASP’s requirements) of their wallet, displaying the desired withdrawal address.
- This visual proof is then forwarded to the VASP, who then scrutinises its validity. If the addresses match, the transaction will proceed. This process can take anywhere from minutes to hours.
From the VASP’s Perspective When Using 21 Travel Rule:
- In the Self-hosted Wallets tab of the 21 Travel software, VASPs are to click on Visual Proof. In the pop-up block, they will complete the wallet address and virtual asset as per the wallet user’s withdrawal request.
- Next, the VASP will upload the already scrutinised visual proof provided by the wallet user and add the proof to the software.
- The wallet proof will be saved, and the transaction can proceed accordingly.
This process can also be automated using 21 Travel Rule’s API and machine learning to recognise the address and assess its risk potential.
What Are the Pros?
- Familiar and easy to perform for wallet users,
- Works with every wallet.
What Are the Cons?
- Screenshots and video clips are sensitive to fraud as they can be tampered with,
- Time-consuming and error-prone as the image or video needs to be examined by a VASP staff member,
- Transfer turnaround time is slowed down due to the manual inspection element, resulting in a bad user experience,
- Difficult to automate due to the vast amount of self-hosted wallets available,
- Encourages address reuse due to the VASP trying to avoid inspections, which is bad for the customers and the VASPs privacy.
To learn more about self-hosted wallet verification methods, read Self-hosted Wallet Verification Methods: An Overview.