Is digital identity the answer? Regulators are closed. One is to split the market functions into their business areas – custody, aggregation and main brokerage – to accommodate institutional compliance departments. It’s another way to keep managers happy.
From the Financial Action Task Force Push with Travel Rule Compliance Guide to the still developing regulatory framework for European markets in the US Crypto Assets and Infrastructure Act, something’s clumsy, regulators are tightening their noose, and I’m afraid this could be the Start of a. his longstanding joke – with decentralized financial markets (DeFi) is also in his sights.
Related: DeFi: Who, what and how do you regulate in a limitless, code-managed world?
Can digital identity help?
Whenever I am asked what Bitcoin’s (BTC) killer application has been going to be over the past 10 years, my answer is always “digital identity”.
Today the world is at a crossroads. A crossroads that leads to heightened surveillance and invasion of privacy as money eventually follows information down the tracks of the internet. On the flip side, a number of companies and governments are putting personal data back into the hands of individuals and from vast AI-powered databases.
It may have been a consequence for the early Bitcoin purists, but reality has bitten, and as we add the growing debate about COVID-19 digital passports into the mix, we will likely become the clouds of a perfect storm on the horizon as the main story will be for years to come.
With central banks everywhere scrapping crypto assets as mere chips on the roulette table in favor of their own “disruptive” CBDCs, they can feel the excitement that they can now conduct both monetary and regulatory policy.
Unfortunately, the crypto markets have fallen victim to their success so regulators are struggling to get started. The higher this “market cap” (which hit $ 2 trillion earlier this year), the angrier regulators get. The Chinese are simply taking a sledgehammer approach and forbidding everything (except, of course, their recently launched CBDC), while in the West regulators (preferably) take a nuanced approach or otherwise argue with each other about whose goal it will go under.
Related: The authorities are trying to close the gap on non-storage wallets
With the bulk of the crypto business activity still flowing through major crypto exchanges and OTC desks, the FATF has enforced compliance with the Travel Rule for Virtual Asset Service Providers (VASPs), which can now stay in its bottle for the genie Up / down ramps are still easily identifiable. But what if or when a self-sustaining crypto-economy emerges that goes far beyond speculation and instead “comes in” and “stays inside”?
Or if DeFi outgrows its large niche?
Durability, transparency and “contaminated” currency
After trying for the past decade or so to get anonymous “physical cash” out of the system and reporting transactions over a few hundred dollars, you can imagine that Satoshi’s early vision of an “anonymous cash system” has really evolved ?
If you want to know the answer to that, just look at what happened when Mark Zuckerberg had the courage to propose such a concept through his Diem (formerly Libra) stablecoin project that fell into the hands of three billion users overnight Could have been – and Diem had (what’s a manager’s dream) a digital identity that was built into the log from the start!
Related: Stablecoins pose a new dilemma 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 cryptocurrencies) because they can become “toxic” if or when they come from illegal use. Blockchain transparency has proven to be a useful tool that law enforcement agencies don’t use, while hackers have a hard time converting their swag back into fiat.
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)? Surely it is only the identity of one party to the transaction that can be viewed as good or bad (albeit subjective)? Not remotely, this is a novel argument. You can go back to an 18th century British legal case and find that it was all challenged (and fixed) a long time ago.
Fortunately, if I ignore Zuck’s true intentions for Diem, I’m not alone in my longstanding view of the role decentralized identity (DID) can play in both the crypto future and our non-cryptocurrency.
Related: Decentralized identity is the way to fight data theft and privacy
Sovereign identity and technology giants
For all the crypto Twitter fuss, even a faint interest in Bitcoin from every known tech brand, the reality is that boring old Microsoft is exploring digital identities as the chosen use case for “blockchain” as of 2017. relatively little attention.
Not that others in the crypto industry don’t know this is going to become an important part of the infrastructure. Projects like Civic (2017) and GlobalID (2016) have several years of well-developed development and the topic of Sovereign Identity, where individuals – not huge central databases – keep private control of their identity and decide for themselves who they want to share it with a tech conglomerate, is back at the top of the agenda.
With privacy becoming an issue for regulators and a challenge for the majority of businesses with online user bases, one might think these ideas would be popular with the public.
And maybe, just maybe, regulators will join us when the crypto industry proves it can build more secure and robust systems. Such systems must meet the regulatory requirements in order to identify the parties involved in peer-to-peer payments – and thus enable more institutions to safely enter the crypto market with private individuals. Your compliance officer can sleep at night.
After all, Google and Facebook are the biggest losers, so the decentralized digital identity will prevail. Without pimping our data, they were completely wrong.
Related: The data economy is a dystopian nightmare
Whispers about dissent currently is one of the responses to the current call for verification of decentralized identifiers (DID) v1.0 by the World Wide Web Organization (W3C).
Will the turkeys vote for Christmas on purpose, or will they eventually have to find a way to live with the inevitable, as the big telecommunications companies did in the 1990s when they backed the idea that emerging companies using VoIP like Skype skip activation? Free Cell Phones for Everyone?
My guess is that the masses, once armed with the right tools, will eventually prevail, but one thing is certain: the limits have been drawn. So grab some popcorn and sit back. This battle has only just begun and is still a few years away, but with its end, crypto enthusiasts everywhere can finally see the global adoption they have dreamed of.
Paul Gordon is the founder of Coinscrum, one of the world’s first Bitcoin Meetup groups in 2012 with over 250 events and over 6,500 members. Paul has been a derivatives broker / trader for over 20 years.