Which Wallet Verification Method Should VASPs Choose?

Verifying self-hosted wallet ownership is an important part of Travel Rule compliance for virtual asset service providers (VASPs). From manual signatures and AOPP to Satoshi Tests and visual proofs, each method offers different levels of assurance, automation and customer convenience. Understanding their differences helps VASPs choose an approach that meets their compliance requirements while accommodating different wallets and blockchain networks.

Key Takeaways

• Cryptographic verification provides verifiable evidence of wallet control, while visual proof requires additional caution due to the risk of manipulation.
• AOPP automates cryptographic verification for compatible wallets without requiring an on-chain transaction.
• Satoshi Tests demonstrate the ability to initiate a transfer from an address but involve network fees and transaction processing.
• Multiple verification methods help VASPs accommodate different wallets and technical requirements.
• Wallet verification complements Travel Rule compliance but does not replace customer due diligence, sanctions screening, transaction monitoring or required information exchange.
• 21 Analytics supports AOPP, manual signing, the Satoshi Test Portal and visual proof within its Travel Rule compliance solution.

What Are the Main Self-hosted Wallet Verification Methods?

VASPs can use several methods to verify control of a self-hosted wallet. The main approaches are AOPP, manual signatures, Satoshi Tests and visual proof. They differ in how evidence is obtained, the level of assurance provided and the amount of manual intervention required.

1. Address Ownership Proof Protocol (AOPP)

AOPP streamlines wallet verification through a standardised workflow. Compatible wallets generate and submit cryptographic proof, reducing manual steps without requiring an on-chain transaction or manual verification as the process is automated. 

2. Manual Signing

Manual signing requires the customer to sign a message using their wallet. The VASP validates the signature against the relevant address and message to establish control of the associated signing capability.

It avoids on-chain transactions and fees, but compatibility varies between wallets and blockchain networks.

3. Satoshi Tests

A Satoshi Test requires the customer to send a small amount of cryptocurrency from the address being verified. The VASP checks the transaction on the blockchain to establish that a transfer was initiated from that address.

This method provides transaction-based evidence but involves potential network fees, confirmation delays and additional reconciliation.

4. Visual Proofs

Visual proofs involve submitting screenshots or other images of a wallet interface, address or transaction history.

Although straightforward to implement, visual evidence can be manipulated and does not independently prove control of the associated private key. Additional checks may therefore be necessary.

Which Self-hosted Wallet Verification Method Should VASPs Choose?

The most appropriate verification method depends on the VASP's regulatory obligations, technical environment, supported wallets, transaction volumes and risk appetite.

There is no universal method that is optimal for every transaction. VASPs should assess the available options against their operational and compliance requirements.

Is Cryptographic Verification Better than Visual Proof?

Cryptographic verification generally provides stronger evidence of control than visual proof because the evidence can be validated against the relevant address and message or transaction.

However, the quality of the result depends on how the method is implemented. The VASP must ensure that the proof relates to the intended address and verification request.

Visual evidence may still have a role where cryptographic methods are unavailable, but it requires additional caution because it can be manipulated.

Is AOPP Better than a Satoshi Test?

AOPP and Satoshi Tests provide different approaches to wallet verification.

AOPP facilitates cryptographic proof through an automated workflow without requiring a verification transaction on the blockchain. A Satoshi Test uses an actual transaction to demonstrate the ability to initiate a transfer from an address.

For compatible wallets, AOPP can reduce the need for manual intervention and avoid the network fees associated with a Satoshi Test. 

How Does Self-hosted Wallet Verification Fit into Travel Rule Compliance

The FATF's Travel Rule framework focuses on the collection, transmission and handling of required originator and beneficiary information associated with qualifying virtual asset transfers. The exact obligations depend on the jurisdiction implementing the framework.

When a customer withdraws assets to a self-hosted wallet, the VASP may need to establish who controls the destination address and apply the relevant risk-based controls.

Wallet verification can support this process by providing evidence of address control. It does not replace the other controls required to assess the transaction.

A comprehensive compliance process may include:

• Establishing and verifying customer identity as required.
• Obtaining appropriate evidence of control of the destination address.
• Assessing the relevant parties and addresses against applicable sanctions requirements.
• Identifying suspicious activity and potential financial crime risks.
• Retaining the evidence and decisions required under applicable rules.
• Collecting and transmitting the required originator and beneficiary information when the relevant obligations apply.

VASPs should also distinguish between transfers involving self-hosted wallets and transfers between VASPs. The information available and the applicable obligations can differ between these scenarios.

Selecting an appropriate wallet verification method is therefore one part of designing a Travel Rule compliance framework that is secure, proportionate and operationally effective.

How 21 Analytics Supports Self-hosted Wallet Verification

21 Analytics provides Travel Rule compliance software designed to help VASPs manage transfers involving other VASPs and self-hosted wallets.

Its wallet verification capabilities include AOPP, manual signing, the Satoshi Test and visual proofs, offering different approaches to establishing control of a destination address. These methods help VASPs accommodate different wallet capabilities and verification requirements.

21 Travel Rule also supports an on-premises deployment model, allowing organisations to retain control over their environment and sensitive customer information. This is an important consideration when evaluating the security and data protection implications of Travel Rule infrastructure.

By supporting multiple verification methods, 21 Analytics helps VASPs address different wallet compatibility and operational requirements within their broader compliance processes.

To learn more about the platform and its self-hosted wallet verification capabilities, visit the 21 Travel Rule product page or request a demo.