by Aubrey Hansen
There was a time, not so long ago when anonymity was one of crypto’s favorite war cries, second only to decentralization and permissionless-participation. The right to exchange goods and services freely, protected by a digital Guy Fawkes mask, untraceable and unstoppable, was one of the driving forces behind the early Crypto-Punk movement.
These days are now long gone. Sure, Bitcoin and Ethereum addresses are still pseudonymous, and it is of course still possible to send crypto assets around the globe without anyone knowing who you are. However, the moment you attempt to cross the big firewall between crypto and fiat, as any legitimate business eventually will, your blockchain-based invisibility cloak suddenly turns itself into a giant breadcrumb machine. The moment you pass even a single KYC\AML process, your identity can be potentially attached to any transaction you’ve ever made.
This leads to a strange and peculiar situation. On one hand, most blockchains follow the open-access, pseudonymous model set in place by Bitcoin, the first Alts, and Ethereum, while on the other hand, these anonymization efforts are completely undone the moment one engages in legitimate, documented business activities. Not only is anonymity undone, but it is also done away in probably the most cumbersome fashion possible. KYC processes can be slow and inefficient, while Source-of-Funds and AML procedures can often be impossible to pass, given the crypto-industry’s wild history.
At the end of the day, we’re stuck with a system that has an outdated anonymity generator on one end, and a bureaucratic set of hurdles to overcome said generated anonymity exactly on the other end. If your favorite hobbies are human trafficking and arms deals, that’s just fine, if not desired as a welcomed fog of confusion. However, if you’re a startup or company interfacing with the blockchain industry, and just happen to accept payments in crypto, this situation is an irritating mess that can get you in serious trouble.
There are several Digital-Identity projects out there, such as Civic, for example, attempting to port real-life identities to the blockchain universe and to make KYC\AML requirements less of a nuisance. IBM follows a similar framework, while the list of blockchain-based eID providers grows by the day. Most, if not all of them, allow users to link their Crypto addresses to some sort of digital wallet which also carries their ID credentials, tying a verified identity to the listed assets. This makes KYC faster and more efficient since you only have to do it once.
Yet, this approach still feels a bit like a giant Rube-Goldberg Machine. Your identity is first obscured and scrambled up by the blockchain, only to be reassembled through a web of corporations and other “trusted” institutions. How is this better than what we had before crypto?
One might ask, why bother with anonymity in the first place if the only things we’re getting out of it are legal headaches and complicated bureaucracies. China, a country not known for being lax on regulation, has produced a few startups asking the same question.
Metaverse, for example, is a smart contract enabled blockchain that comes with an embedded identity layer. In order to fully use the Metaverse system, users are encouraged to tie their blockchain accounts to their identity, creating what they call a “digital Avatar”. This works a bit like the Internet’s DNS system: Following identification, a string of complicated characters (your public key) is represented as a human-readable address that resembles a domain or an email address. Something like [email protected]
This human-readable address can then be used to send and receive encrypted messages and funds, just like a public BTC address, only with the user’s real name and verified identity attached to it. In this example, KYC funnels as we know them from Crypto exchanges and the like are rendered redundant, simply because the user’s identity is already carried by their blockchain address itself, just like it is carried by your standard bank account.
Having your name and credentials baked into your blockchain address might sound suspicious to many in the crypto community, but this is how all payment methods work. If peer-to-peer cash systems want to be part of the global economy, they’ll need to play by the same rules. To truly compete with the established banking sector, blockchain and fintech projects need not only to be faster and cheaper but also make compliance easier – for both users and regulators. Only when using crypto remittances and payments becomes a legal no-brainer for legitimate, well-documented businesses, can we talk about true disruption. Work seems to be in progress, but there’s still a lot to be done.