Council Post: How Compliance Will Catalyze On-Chain Finance

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As regulation crystalizes, DeFi participants will discover innovative ways to comply with it, thereby repositioning the entire industry.

If DeFi wants to grow, it needs to evolve from primarily pure crypto assets today into onboarding vastly greater numbers of real-world assets on-chain and delivering real blockchain benefits. These real-world assets include instruments like stablecoins pegged to fiat currencies and tokenized assets like bonds, stock and real estate.

Permissioned designs, which comply with broader financial regulation and can map local laws, are the next frontier of DeFi. For instance, they leverage so-called “verifiable credentials” and “zero-knowledge proofs.” The former allows verified users to share compliance data with a third party in a tamper-proof way, and the latter enables them to provide proofs and guarantees without revealing personal information.

Last but not least, protocols can translate national laws into code. While it’s difficult for government agencies to follow bank-internal compliance implementations and procedures, DeFi protocols can just point to their code. This transparency should make it easier, not harder, for compliant DeFi companies to acquire the necessary licenses to transact assets.

 

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