The regulators are getting closer. It is one thing to unbundle market functions into their parts – custody, aggregators, and prime brokerage – to keep the institutions’ compliance departments happy. Keeping regulators happy is another.
From the Financial Action Task Force pushing their travel rules compliance guidelines to the still-developing European markets for crypto assets regulatory framework and the somewhat clumsy U.S. infrastructure law, regulators are slowly tightening their noose, and I’m afraid this could be the beginning of a multi-year staring match – with the market for decentralized finance (DeFi) firmly in its sights.
Related: DeFi: Who, what and how do you regulate in a borderless, code-controlled world?
Could digital identity help?
Whenever I’ve been asked what Bitcoin’s (BTC) killer app is for the past 10 years, my answer has always been “digital identity”.
Today the world is at a crossroads. A twist is leading to ever-increasing and privacy-invasive oversight now that money is finally following information down the tracks of the internet. On the other side is a road where personal information is being returned into the hands of individuals and from vast AI databases controlled by a handful of corporations and governments.
It may have been an abomination to early Bitcoin purists, but reality bites, and as we add the growing debate about COVID-19 digital passports into the mix, we see the clouds of a perfect storm on the horizon, likely the Will be a key narrative for the years to come.
With central banks dismissing crypto assets as chips everywhere on the roulette table in favor of their own thoroughly “breakthrough” CBDCs, the excitement over their realization that they can now conduct both monetary policy and oversight is palpable.
Unfortunately, the crypto markets have already fallen victim to their success, adding further excitement to regulators. The larger that “market cap” got (which hit $ 2 trillion earlier this year), the more itchy regulators got. The Chinese have simply taken the sledgehammer approach and banned everything (except their recently launched CBDC, of course), while in the West regulators (at best) take a nuanced approach or argue with one another over whose jurisdiction it should be under.
Related: Authorities are trying to close the gap in non-hosted wallets
With the bulk of the crypto business activity still flowing through the major crypto exchanges and OTC desks, the FATF, which enforces travel rules on Virtual Asset Service Providers (VASPs), could keep the ghost in the bottle for the time being On / off ramps remain easily recognizable. But what happens if or when a self-sustaining crypto-economy emerges in which the majority goes beyond speculation and instead gets “in” and stays “in”?
Or when DeFi outgrows its sizeable niche playpen?
Fungibility, transparency and “rotten” currency
After spending the last decade or more pushing anonymous “physical cash” out of the system, which required reporting transactions over a few hundred dollars, you can imagine how much Brouhaha satoshi’s original vision of an “anonymous cash system” was “Should actually spread?
If you want to know the answer to that, just take a look at what happened when Mark Zuckerberg had the audacity to propose such an idea through his Diem (formerly Libra) stablecoin project that fell into the hands of three billion users overnight could have landed – and Diem has (which should be a regulator’s dream) a digital identity that was built into the protocol from the start!
Related: Stablecoins pose new dilemmas for regulators as mass adoption emerges
Sometimes these guys can’t see the forest for the trees.
In the past few years there has been an endless debate about the fungibility of Bitcoin (or other cryptos) as they can be “tainted” if or when they are attributed to nefarious use. The transparency of blockchains has proven to be a useful tool that is otherwise unavailable to law enforcement agencies, while hackers have mostly found it far from easy to convert their swag back into “useful” fiat as exchanges blacklisted their visible wallet address paths set.
But “money” itself cannot be “clean” or “dirty”, “good” or “bad”? Surely it is just a stupid object (or a database or a “block” entry)? Certainly only the identity of an acting party can (albeit subjectively) be viewed as good or bad? Not that this is remotely a new debate. You can go back to an 18th century British legal case and find that it was all discussed (and corrected) a long, long time ago.
Aside from Zuck’s real intentions for Diem, luckily I was not alone in my longstanding opinion on the role decentralized identity (DID) could play in both our crypto and non-crypto futures.
Related: Decentralized identity is the way to fight against data and privacy theft
Self-sovereign identity and the technology giants
With all the excitement on crypto twitter of just a faint interest in Bitcoin from a well-known tech brand, the fact that boring old Microsoft started researching digital identity as its chosen use case for “blockchain” back in 2017 has turned out to be relatively little Attention.
Not that others in the crypto industry didn’t equally know that this was going to become a critical part of the infrastructure. Projects such as Civic (2017) and GlobalID (2016) have been in development for several years and the topic of Self Sovereign Identity, in which the individual – not a gigantic central database – retains private control over his identity and decides for himself who to use it Sharing with a technology conglomerate is back at the top of the agenda.
With privacy becoming such an issue and a challenge for the majority of businesses with an online user base, you would have thought these ideas would be embraced by regulators and businesses alike.
And maybe, just maybe, regulators will join our side when the crypto industry proves it can build more secure and robust systems. These systems must meet the regulatory requirements for identifying transaction parties in a peer-to-peer payment – and thus enable more institutional participants to enter the crypto markets securely, while their compliance officers can sleep at night.
After all, it is the Googles and Facebooks that have the most to lose if the decentralized digital identity prevails. Without pimping our data, they are royally fucked.
Related: The data economy is a dystopian nightmare
There is already a murmur of dissent being is in response to the recent World Wide Web Consortium (W3C) call for review for Decentralized Identifiers (DIDs) v1.0.
Will the turkeys willfully vote for Christmas or will they ultimately have to find a way to live with the inevitable, as the big telecommunications companies had to do in the 1990s when they hit upon the idea that VOIP-using upstarts like Skype could get away with it to enable free telephony for everyone?
My guess is that once the masses are armed with the right tools they will eventually win, but one thing is certain: the lines of battle have been drawn. So grab the popcorn and sit back. This fight is just beginning and has a few more years to go on, but when it’s over, crypto nerds everywhere could finally see the global acceptance they dream of.
This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect 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 organized events and over 6,500 members. Paul has been a derivatives trader / broker for over 20 years.