The Crypto-TradFi Disconnect
Inside the average crypto regulatory consultation meeting, a distinctive pattern emerges: throngs of TradFi lawyers and ex-financial services personnel dictating how crypto asset activities will be carried out in the future. This highlights the parallel worlds within crypto – integrators and mainstream adopters on one hand, and technological innovators on the other.
Crypto technologists might think regulation and compliance don’t concern them, but this stance threatens today’s crypto users. The recent Coinbase data breach, which exposed personal customer data gathered during the Know Your Customer (KYC) process, is a stark reminder of the risks. The company has set aside between $180 million and $400 million to reimburse customers defrauded during subsequent social engineering attacks.
The Urgent Need for Privacy-Enhancing Technologies
The crypto world responded by pointing out that technology solutions exist to make mass data collection redundant. Decentralized digital identities and zero-knowledge cryptography can prove claims without exposing sensitive data. If businesses don’t possess customer data, they can’t compromise it.
This isn’t just about centralized exchanges and neo-crypto intermediaries; it’s about the entire crypto ecosystem. Exchanges remain core on- and off-ramps, and KYC isn’t the only data-heavy requirement they’re exposed to. The UK’s Travel Rule and Cryptoasset Reporting Framework will neatly label and package users’ transaction data, real-world identities, and addresses under corporate and public authority data guardianship.
Crypto Users Are in Danger
The rise of physical “wrench attacks” on known crypto asset holders in France and elsewhere should ring alarm bells. Failing to build in privacy-enhancing technologies within crypto intermediaries and applications is a disaster waiting to happen. It’s increasingly inexcusable not to question how crypto-native technologies could achieve equivalent outcomes.
How Crypto Technologists Can Lead
The good news is that the crypto industry has a track record of introducing techno-regulatory innovations. Proof-of-reserve systems have become commonplace, and privacy pool concepts explore maintaining onchain privacy while adhering to compliance expectations. Solutions are emerging to bring critical legal functions entirely onchain.
We need more technology advocates and techno-lawyers who can marry technological innovation with regulatory needs. If we don’t, current regulations being finalized will be based on legacy systems and rulemaking, ignoring crypto-native factors.
Merging the Old World and the New
Crypto regulatory frameworks risk being legislated by those with the old world as their default scope of reference. We must act fast to represent more tech-based and crypto-native views in regulatory engagement. Otherwise, we’ll be saddled with rules that fail to innovate and tailor to the unique properties and potential of the crypto asset sector.
It’s time for crypto technologists to join the regulatory conversation and champion privacy-enhancing technologies and crypto-native solutions. The future of crypto depends on it.
