Public blockchains make transactions transparent enough to be tracked, audited, and regulated, but this visibility may come at the expense of user privacy. Traditional compliance systems often address liability issues by identifying people, but this could undermine one of the original promises of cryptocurrencies: the ability to transact without revealing a person’s identity by default.
According to panelists at CoinDesk’s Consensus Conference in Miami earlier this week, these tensions can increasingly be resolved through an on-chain “smart layer” that combines hybrid blockchain architecture with wallet address-level monitoring. The idea is to spread the work across different parts of the system. Private permissioned networks can provide institutions with the accountability and trustworthiness they need, while public permissionless chains can provide liquidity, and blockchain forensics tools can help platforms screen transactions at the wallet address level without automatically linking each user to a real-world identity.
Rajeev Bamra, global head of digital economy strategy at Moody’s Ratings, said the traditional intelligence layer can answer three questions: “Who? What are they doing? Can I trust the record?” Banks, custodians, clearinghouses and credit rating agencies have already solved these questions in the traditional financial world, he said.
Bamra estimates that the current size of the institutional digital finance market is about $35 billion, while annual flows through traditional financial clearinghouses exceed $200 trillion, with growth of “over 100 or 150%” in the past 18 months. He predicts that blockchain architecture will not be uniformly public or private, but hybrid. “Private permissioned networks will provide accountability and trustworthiness,” he said, while “public permissionless networks will bring liquidity that private permissions don’t have.”
Pauline Shangett, chief strategy officer at non-custodial exchange ChangeNOW, firmly supports the user side’s point of view. “Bitcoin, at its core and origins, is a semi-anonymous digital cash,” she said.
ChangeNOW does not enforce KYC by default, and it partners with AML providers and blockchain forensics companies to monitor traffic at the wallet address level. “All this blockchain forensic infrastructure allows us to map not the people passing money through our system, but their addresses,” Shanget said.
When law enforcement comes to ChangeNOW, the company provides transaction data without doxxing the people behind the transactions, Shanget said. She said the compromise allowed the platform to offer registration-free swaps while still maintaining internal accounting systems and cooperating with authorities when illicit funds are moved through the service.
On the regulatory front, Bumra said that cross-border frameworks such as EU cryptoasset market regulation and the US Genius Act raise the same fundamental questions around asset quality, segregation and liability, but there are huge differences at the normative level. “We see convergence in regulatory intent but fragmentation in reality or execution,” he said.
Shanget ends with a framework for regulatory accountability, which she proposes cuts to the heart of where accountability actually lies.
“The agencies that should be responsible for the regulatory framework and its adoption are the ones dealing with emissions, not transmission,” she said.
