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According to Travis Nelson of Quadrata, more openness and trust in the people you are doing business with might go a long way toward reducing public mistrust.


There are several examples of fraud and deception in the contemporary blockchain media environment. Even if not all of these incidents include cryptocurrencies, like FTX’s theft of consumers’ money, they undermine confidence in the industry as a whole, particularly among politicians and regulators.

Blockchain must incorporate digital identity in order to restore consumer confidence in the sector and encourage thoughtful regulation. This may call for thorough know-your-customer (KYC) and anti-money laundering (AML) inspections in some circumstances. In other cases, it will be evidence of humanity, decentralized IDs that are Sybil-resistant, a credit score, or accredited investor status. In many situations, a digital identity is not required, but we still need to be able to distinguish between the various on-chain transaction types.


The uses of blockchain are expanding

With the launch of Bitcoin in 2009, blockchain technology and its applications have expanded tremendously. With the introduction of smart contracts, new consensus processes, and novel forms of governance, technology has moved in many different directions. Together with bigger participants, such as organizations like BlackRock and JPMorgan Chase, and governments like El Salvador and the Central African Republic, assets have expanded and are now owned by millions of people worldwide.

Digital payment apps have become more prevalent in tandem with the development of blockchain and have a slight head start. Companies like Venmo have eliminated the need for cash as a means of settlement for retail transactions. Although efforts to control cash have increased, it has proven difficult; yet, these centralized payment systems provide greater visibility and additional reporting choices. Individuals are now more likely to encounter back-office procedures that previously only affected a small number of individuals, such as frozen money, account closures, and limited withdrawals, as rules and reporting begin to filter down to consumer apps. In addition, whereas formerly cash revenue had to be reported for taxes, we are now witnessing more direct accounting, with transactions totaling more than US$600 being recorded on mobile applications to the IRS.

Although peer-to-peer payments haven’t been the exclusive focus of blockchain for a while, there is growing interest in regulating both individual digital payments between people and the use of digital assets more broadly. Even more so than IRS filing, institutional participants in the blockchain industry are concerned. For every money they receive, companies are required to do know-your-customer (KYC) and anti-money laundering (AML) checks. Also, students need to be aware that any money they may be mixing with has through these kinds of inspections. Danske Bank has admitted to fraud and agreed to forfeit almost US$2 billion in a case where conventional banking procedures were not followed.

Institutions must take into account asset risks besides fraud. Some token initiatives demand accredited investor status or completely bypass the United States since there is still uncertainty regarding the rules governing digital assets. Entrepreneurs are delaying the launch of any business that is obviously a security that may benefit from blockchain interoperability since it is difficult to get that status on-chain. These guidelines and reporting criteria were created for centralized systems. It is challenging to fully implement them in decentralized systems, and attempting to do so without modification will result in certain blockchain advantages being lost.



The challenge of controlling decentralized systems

The idea that Bitcoin is anonymous is long gone. Blockchain transactions are permanently recorded, making it considerably simpler to trace and analyze them than any cash or bank-to-bank transaction has ever been. Although if certain blockchains are more anonymous and privacy-focused than others, which might be advantageous for end users, it doesn’t imply they can circumvent all rules. Decentralized identity is what is needed in order to apply rules to decentralized networks intelligently.

Bad actors can still carry out transactions after being identified through data mining of public transactions. Furthermore, it makes it difficult for anyone to stop bad actors from engaging with their protocol.

The debate between permissioned and permissionless blockchains is one that is frequently heard, yet it is not a genuine dichotomy. Not all transactions should require permissions, and one set of permissions does not necessarily overlap with another set. Although they are frequently obliged to verify IDs, the corner store is not needed to undertake AML checks when someone buys alcohol, but there is nothing to check if the individual is purchasing a pack of gum. Even if we reach severe legal thresholds where purchasing a pack of gum necessitates AML checks, the consumer shouldn’t be forced to shop at a single location since switching to a different location would have onerous re-onboarding for KYC/AML.

Centralization and a lack of transparency are caused by the challenging nature of blockchain interactions, a lack of clarification from authorities, and the burden of re-identification. We might have institutional actors in the decentralized finance (DeFi) market that wouldn’t be a part of the FTX epidemic if we had a reusable identity and reasonable restrictions.

The first step toward acceptable regulation for DeFi is decentralized identification, but it only addresses the compliance and risk components of identity. Decentralized identification can enable so much more, but it will require a lot of work to construct it in a way that protects users’ privacy and gives them choice over who may view their identity. If done correctly, decentralized identity will aid in bringing clarity and transparency, increasing people’s and institutions’ and governments’ familiarity with the power and interoperability that blockchain offers.