Regulators are looming. It is one thing to split the market functions into their own parts - custody, aggregator and prime brokerage - in order to meet the requirements of institutional compliance departments. Keeping regulators happy is another matter.
From the Financial Action Task Force (FATF) advancing its travel rule compliance guidance, to the still-developing regulatory framework for cryptoassets in the European market, and the US Infrastructure Act, regulators are slowly tightening their ropes, I fear, This could be the start of a multi-year rivalry - with the decentralized finance (DeFi) market now firmly on their radar.
Will digital identities help?
Over the past 10 years, whenever I've been asked what Bitcoin's killer app would be, my answer has always been "digital identity."
Today, the world stands at a crossroads. A detour led to growing privacy-invasive surveillance, and now money is finally following information into the orbit of the Internet. Another path is to put personal data back in the hands of individuals, rather than large AI databases controlled by a handful of companies and governments.
Early Bitcoin purists may be disgusted by this, but the reality is harsh, and coupled with the intensifying debate over digital passports for the new crown epidemic, we will see the dark clouds of a perfect storm coming. key narratives of the year.
With central banks dismissing cryptoassets as little more than chips on the roulette table in favor of their own utterly "groundbreaking" CBDCs, there is a palpable sense that they realize they can now implement money policy and regulation.
Unfortunately, the crypto market has become a victim of its success, leaving regulators in disarray. The higher these "market capitalization" numbers -- which hit $2 trillion earlier this year -- the more jittery regulators get. China has taken a sledgehammer approach, banning everything (except the recently launched CBDC), while in the West, regulators have taken a nuanced approach (at best), or fought each other over whose jurisdiction it should fall.
With the majority of cryptoeconomic activity still flowing on major crypto exchanges and OTC platforms, FATF is mandating virtual asset service providers (VASPs) to comply with the travel rule. Perhaps this will keep the genie in the bottle for now, but these accesses are still easy to find . But what happens if or when a self-sustaining crypto economy emerges where most people stop speculating and instead "get in" and "stay in it"?
Or what if DeFi grows beyond its sizable niche?
Fungibility, transparency and "tainted" currencies
We've been forcing anonymous "physical cash" out of the system for the past decade or more, requiring reporting of transactions over a mere few hundred dollars, can you imagine the "anonymous cash system" originally conceived by Satoshi Nakamoto When it does spread, will it cause much commotion?
If you want to know the answer, just look at what happened when Mark Zuckerberg boldly floated the idea with his Diem (formerly known as Libra) stablecoin project that could drop $3 billion overnight users — and Diem has, by design, shoehorned a digital identity into the protocol from the start.
These people sometimes really can't see the forest for the trees.
In recent years, there has been an endless debate about the fungibility of bitcoins (or other cryptocurrencies) because they can become "tainted" if traced to malicious use. Blockchain transparency has proven to be a useful tool that law enforcement agencies do not have at their disposal, and hackers have mostly found it far from easy to convert their stolen goods into "useful" fiat currency as exchanges record their visible wallet addresses blacklisted.
But surely "money" itself cannot be "clean" or "dirty", "good" or "bad"? Surely it's just a dumb object (or database, or "block" entry)? Surely only the identities of the transacting parties can be considered (albeit subjective) good or bad? This is not a novel debate. You can go back to 18th century English legal cases and find that this has all been argued (and corrected) long, long ago.
Leaving aside Zuckerberg’s real intentions for Diem, thankfully I’m not alone in my views on the role decentralized identity (DID) may play in the future of crypto and non-crypto people.
Self-Sovereign Identity and Tech Giants
While interest in bitcoin by any well-known tech brand would generate excitement on crypto-twitter, the fact that Microsoft began exploring digital identity as early as 2017 as its "blockchain" use case of choice received little attention .
It’s not that others in the crypto industry don’t similarly recognize that this is going to be a critical piece of infrastructure. Projects like Civic (2017) and GlobalID (2016) have been in development for several years, and the topic of self-sovereign identity is once again being taken seriously, so that individuals - rather than a large central database - maintain private control over their identities , to decide with whom (not the tech conglomerate) to share that information.
With data protection becoming an issue for regulators, and a challenge for most companies with an online user base, you'd think these ideas would be embraced by regulators and companies.
Maybe, just maybe, if the crypto industry proves it can build safer, stronger systems, regulators will join us. These systems need to meet regulatory requirements for identifying counterparties in peer-to-peer payments, and by doing so, allow more institutional players to safely access crypto markets and give their compliance officers rest at night.
After all, Google and Facebook have the most to lose if decentralized digital identities prevail. Without our data, they are screwed.
Various objections have been heard in response to the current World Wide Web Consortium's (W3C) review call for version 1.0 of the Decentralized Identifier (DID).
Will turkeys vote for Christmas on purpose, or will they eventually have to find a way to deal with the inevitable, like the big telcos did in the 90s? At the time they strongly opposed the idea that startups such as Skype using VOIP might make free phone calls available to everyone.
My hunch is that with the right tools, VW will win in the end, but one thing is for sure: the battle lines have been drawn. Grab your popcorn and sit down. The fight has only just begun and will continue for years, but when it is over, cryptocurrency fans around the world may finally see the global adoption they have always dreamed of.
Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. Readers are requested to establish correct currency concepts and investment concepts, and earnestly raise risk awareness.