Regulators arrive for crypto: is digital identity the answer?
Regulators are getting closer. It is one thing to separate market functions into their parts – custody, aggregators and Prime Brokerage to satisfy institutional compliance departments. It is another to keep regulators happy.
From the Financial Action Task Force go ahead with his advice for compliance with travel rules European markets still evolving in crypto-assets regulatory framework, and the little awkward american infrastructure bill, regulators are slowly tightening their noose, and I fear this may be the start of a multi-year game – with the decentralized finance (DeFi) market now firmly in their sights.
Could digital identity help?
Whenever I’ve been asked what Bitcoin is (BTC) killer app would be in the last 10 years, my answer has always been “digital identity”.
Today the world is at a crossroads. A shift is leading to an ever-increasing and pervasive surveillance of privacy now that money finally follows information on the rails of the Internet. On the other side is a road that sees personal data flowing back into the hands of individuals and out of mega AI databases controlled by a handful of corporations and governments.
It might have been anathema to early Bitcoin purists, but reality bites and, tossing into the mix the growing debate over COVID-19 digital passports, we see clouds of a perfect storm looming on the horizon that is likely to become the key story for years to come.
As central banks everywhere dismiss crypto assets as nothing more than tokens on the roulette table in favor of their own totally ‘innovative’ CBDCs, the excitement over their realization that they can now lead both the monetary policy and surveillance is palpable.
The crypto markets have unfortunately already fallen victim to their own success, putting regulators in a tizzy to boot. The higher these “market capitalization” figures (reaching $ 2 trillion earlier this year), the more regulators irritate. The Chinese simply adopted the hammer approach and all forbidden (aside from their recently launched CBDC, of course) while in the West, regulators are (at best) taking a nuanced approach or are fighting among themselves over who it should belong to.
With the majority of crypto economic activity still passing through major crypto exchanges and over-the-counter offices, the FATF forcing Virtual Asset Service Providers (VASPs) to comply with travel rules may well keep the genius in its bottle for now while these access and exit ramps remain easily identifiable. . But what if, or when, a self-sustaining crypto-economy emerges where the majority go beyond speculation and, instead, get “in” and stay “in”?
Or if DeFi expands beyond its sizeable, but niche, game park?
Fungibility, transparency and “tainted” money
Having spent the last decade or more forcing anonymous “physical cash” out of the system, requiring the reporting of transactions of a few hundred dollars, can you imagine that Satoshi’s original vision of an “anonymous cash system” should really proliferate?
If you want to know the answer to that, just look at what happened when Mark Zuckerberg had the temerity to suggest such a notion through its stablecoin project Diem (formerly Libra) that could have ended up in the hands of three billion users overnight – and Diem has (which should be a regulator’s dream) a digital identity built into the protocol from the start!
Sometimes these guys really can’t see the wood of the trees.
There has already been endless debate over the past few years regarding the fungibility of Bitcoin (or other cryptos) given how they can become “tainted” if or when attributed to malicious use. Blockchain transparency has proven to be a useful tool that is not otherwise available to law enforcement, while hackers have generally found it far from easy to convert their swag. in “useful” fiat, because exchanges blacklist their visible wallet address tracks.
But surely “money” itself cannot be “clean” or “dirty”, “good” or “bad”? Surely it’s just a dumb object (or a database, or a “block” entry)? Surely it is only the identity of a party to the transaction that can be considered (albeit subjectively) good or bad? Not that this is a new debate from a distance. You can go back to an 18th century British law Case to find that everything was discussed (and rectified) a long, long time ago.
Leaving aside Zuck’s true intentions for Diem, luckily I’m not the only one who has my long-held opinion on the role Decentralized Identity (DID) could play in our crypto and non-crypto future.
Sovereign Identity and the Tech Giants
For all the excitement on crypto Twitter likewise a whisper of interest in Bitcoin from any well-known tech brand, the fact that boring old Microsoft begin the exploration of digital identity as the chosen use case for blockchain as early as 2017 has received relatively little attention.
Not that others within the crypto industry weren’t quite as well aware that this would become a vital part of the infrastructure. Projects such as Civic (2017) and GlobalID (2016) have already been in development for a few years and the subject of sovereign identity, whereby the individual – and not a gargantuan central database – retains private control. of his identity and decides for himself who he should share them with rather than with a tech conglomerate, is back on the agenda.
With data protection becoming such an issue for regulators and a challenge for the majority of businesses with an online user base, you would have thought that these ideas would be adopted by regulators and businesses.
And maybe, just maybe, regulators will join us if the crypto industry proves it can build more secure and robust systems. These systems must meet regulatory requirements to identify the parties to the transaction in a peer-to-peer payment – and in doing so, allow more institutional participants to securely enter the crypto markets with their agents. compliance able to sleep at night.
After all, it’s Google and Facebook who have the most to lose if decentralized digital identity prevails. Without our pimp data, they’re royally screwed.
Will the turkeys voluntarily vote for Christmas or will they eventually have to find a way to live with the inevitable in the same way the major telecom carriers must have done in the 90s when they were angry at the idea that upstarts using VOIP such as Skype could get away with activating free telephony for everyone?
My hunch is that the masses, once armed with the right tools, will win in the end, but one thing is certain: the battle lines have been drawn. So grab the popcorn and sit down. This fight is only just beginning and has a few more years to go, but when it’s over, crypto-nerds around the world could finally see the global adoption they crave.
This article does not contain any investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research before making a decision.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Paul Gordon is the founder of Coinscrum, one of the world’s first Bitcoin Meetup groups in 2012, with over 250 events held and over 6,500 members. Paul has been a derivatives trader / broker for over 20 years.