DeFi vs Regulation: Round One
Due to their decentralized nature, the crypto and DeFi markets have always been complicated subjects when it comes to legislation.
It is currently becoming a big mess: in the last few months, we have seen legislators in Europe, and more recently in the US, struggling to bring compliance and control in the space, mostly because they are trying to regulate wallets like bank accounts. Let me tell you: it is not going to work that way. Blockchain participants are not financial institutions and the information is either private or public, for all participants. If a law is not applicable, I guess it loses its meaning at some point.
Debates about the Infrastructure Bill in the US are really fun (and scary) to follow because the capabilities of the technology are not considered at all. How could blockchain participants declare to the IRS if they don’t know who their counterparties are? In the same way, discussions about MiCA and new rules for AML in Europe are going in the wrong direction. Why? Because wallets are actually browsers for the internet of value, not vaults. Controlling your own wallet (as a sole owner of the private key) doesn’t prevent other parties from sending tokens to you, or even taking them back! Wallets don’t contain the tokens, they are just access points. What if someone else (person or smart contract) has access as well?
So, what is the solution? The answer is simple: identities on the blockchain.
Let’s dream about a secure system to identify investors, agents, assets, and things on the blockchain. This system would ensure the confidentiality of data, and at the same time, ensure the eligibility of the identity owners for the permissioned tokens or permissioned DeFi protocols they want to use. One or several wallets could be connected to each onchain identity. It would act as a compliance layer on top of wallets.
The good news is that we have made this system, it’s called ONCHAINID. It is already used for the management of €8B+ of tokenized compliant and controllable securities on public blockchain networks.
ONCHAINID is a blockchain-based identity system that allows users to create and manage self-sovereign identities on DLT. This identification solution allows the enforcement of regulatory legal and other compliance processes and rules on digital assets or on any other web-based system that requires identity validation. The main added value of ONCHAINID is that it enables compliance and identity verifications within the pseudonymous framework of public blockchain networks.