Regulators are coming for crypto: Is digital identity the answer?

Regulators are coming for crypto: Is digital identity the answer?

The regulators are getting closer. To satisfy institutional compliance departments, it’s one thing to debundle market functions — custody, aggregators, and Prime Brokerage. It’s quite another to make regulators happy.

The Financial Action Task Force is pushing ahead with its guidance on Travel Rule compliance, as well as the still-evolving European Markets in Crypto-Assets regulatory structure and the slightly clumsily-handled U.S infrastructure bill. Regulators are gradually tightening their noose and I fear this could be the beginning of a multi-year starting match. With the decentralized finance market (DeFi) now in their sights, too.

Related: DeFi: What, who, and how can we regulate in a code-governed, borderless world?

Digital identity could be a solution

When asked about Bitcoin’s killer app over the past decade, I always replied “digital identity.”

The world is at crossroads today. The first leads to privacy-invading surveillance that is increasing in number now that the money follows the information onto the internet. The other road leads to personal data being returned to individuals, and not into massive AI-crunching databases controlled only by a few corporations or governments.

Although it might have seemed a scourge to the early Bitcoin enthusiasts, reality is settling in. With the increasing debate about COVID-19 digital passports, we are now seeing the clouds of a perfect storm that will be the main narrative for the next few years.

Central banks all over the world are dismissing crypto assets as chips on the roulette table and embracing their “groundbreaking” CBDCs. The excitement they feel at realizing that they can now manage both monetary policy oversight and monetary policy is palpable.

Unfortunately, the success of crypto markets has already made regulators mad. Regulators have grown more irritable as the “market cap” numbers rise (which reached $2 trillion earlier in the year). While the Chinese have taken the “sledgehammer” approach and banned all (except their CBDC), regulators in the West are either taking a more nuanced approach, or fighting over who it should fall under.

Related: Authorities look to close the gap in unhosted wallets

The majority of cryptoeconomic activity is still going through major crypto exchanges and OTC tables. FATF requiring Travel Rule compliance on Virtual Asset Services Providers (VASPs), may help keep the genie in the bottle while these on/off ramps are easily identifiable. What happens if or when a self-sustaining cryptocurrency economy emerges?

Oder if DeFi outgrows its small, but niche playpen?

Transparency, fungibility and ‘tainted currency’

After spending the past decade trying to force anonymous “physical cash out” of the system, and requiring transactions exceeding a mere few hundred dollars to be reported, can you see the chaos should Satoshi’s original vision for an “anonymous money system” ever become reality?

You can find the answer by looking at the events surrounding Mark Zuckerberg’s Diem (formerly Libra), stablecoin project. It could have reached three billion users within minutes. And Diem has (a regulator’s dream) embedded a digital identity into the protocol design right from the beginning!

Similar: Stablecoins pose new problems for regulators as mass adoption is looming

These guys sometimes don’t see the forest for the trees.

Over the past years, there has been much debate about Bitcoin’s (or any other crypto’s) fungibility. This is due to how they could become “tainted”, if or when traced back to illicit use. The transparency of blockchains has proved to be an invaluable tool that law enforcement agencies do not have access to. However, hackers have found it difficult to convert their “useful” fiat currency as blacklists on exchanges make it very difficult for them to return their wallet addresses.

However, “money” cannot be “clean”, “dirty”, or “good” or even “bad”. It’s only a “block entry” or dumb object. It’s not the identity of transacting parties that can be considered good or bad, but subjectively. This is not a new debate. It’s possible to go back to an 18th century British legal case and see that it was all argued over (and remediated) long ago.

While I don’t know Zuck’s real intentions for Diem but, I am not the only one who has long held an opinion about the role decentralized identity (DID), might play in our crypto- and non-crypto futures.

Similar: Privacy theft and data protection can be achieved by decentralizing identity

Self Sovereign Identity & the tech giants

Despite all the hype surrounding crypto Twitter, even the whispers of interest in Bitcoin by any well-known tech brands, the fact that boring old Microsoft began exploring digital identity as its preferred use-case for “blockchain”, as far back 2017 has received relatively little attention.

It’s not that other members of the crypto industry were unaware that this would be a crucial piece of infrastructure. Already projects such as GlobalID (2016) and Civic (2017) are well-established. The topic of Self Sovereign Identity is high up on the agenda. This allows the individual to retain private control over their identity and decides who they share them with, rather than an enormous central database.

You would have thought that regulators and companies would embrace these ideas, given the fact that data protection is now a major concern for regulators.

If the crypto industry can prove that it can create safer and more reliable systems, regulators may join us. These systems must meet regulatory requirements to identify transacting parties in peer-to-peer payments. This will allow more institutional participants to enter the crypto markets while their compliance officers can rest easy.

If decentralized digital identity prevails, it is the Googles and Facebooks who have the most to lose. They’re utterly screwed if they don’t have our data to pimp.

Related: The Data Economy is a Dystopian Horror.

Already, dissent is being voiced in relation to the W3C’s current Call for Review on Decentralized Identifiers v1.0.

Will turkeys vote for Christmas? Or will they have to accept the inevitable, just as major telcos did in the 90s when they were furious at Skype’s VOIP-utilising start-ups that they thought could get away with providing free telephony to everyone?

My belief is that the masses will win the battle once they are equipped with the right tools. But one thing is certain: The battle lines have been drawn. Grab your popcorn and relax. The fight is still in its infancy and will continue for a while. But, once it’s over, crypto geeks all around might finally see the global adoption that they have hoped for.

This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Paul Gordon is the founder and CEO of Coinscrum. It was one of the first Bitcoin Meetup groups to be established in 2012. There have been over 250 events and more than 6,500 members. Paul has been a derivatives broker/trader for more than 20 years.

2021's Most Anticipated Growth & Wealth-Building Opportunity

Join Thousands of Early Adopters Just Like You Who Want to Grow Capital and Truly Understand Cryptocurrency Together

Amy Jimenez

Amy Jimenez– Services My name is Amy Jimenez, and I am the main writer behind the"" for the ground-breaking and most fragile bits of knowledge into the most recent news in the services sector. I began my voyage of work as an autonomous investment advisor. I had around 4 years of involvement in this field. I am a free soul so; my energy for investigating the world has taken me to the countries over the globe and allowed me to report for a part of the best news affiliations. At present, I am a full-time manager as experienced in the account and began to utilize my capacities.

2021's Most Anticipated Growth & Wealth-Building Opportunity

Join Thousands of Early Adopters Just Like You Who Want to Grow Capital and Truly Understand Cryptocurrency Together

Close Bitnami banner