Cardano CEO Charles Hoskinson says that a cross-blockchain decentralized identity layer will be crucial to the survival of crypto.
In a recently-published Q&A session at the 2022 Web Summit held in early Nov. 2022, Charles Hoskinson said that decentralized identities (DIDs) were critical to ensuring compliance without falling victim to exchanges’ interpretations of anti-money laundering laws.
Decentralized identity will prevent loss of crypto
Because centralized exchanges like Coinbase and Kraken need to comply with policies put forth by the international anti-money laundering watchdog the Financial Action Task Force, including the so-called Travel Rule, they may be able to restrict the movement of your crypto off their exchanges, Hoskinson said.
The Travel Rule compels virtual asset service providers to “hold, and transmit required originator and beneficiary information, immediately and securely, when conducting VA transfers” for transactions over the 1000 USD/EUR threshold.
The Financial Action Task Force uses the Travel Rule rule to prevent criminals from using fund transfers for illicit activities. Police can also subpoena transaction records if they suspect illegal activity.
If exchanges interpret the travel rule only to allow a customer to transfer virtual assets between themselves instead of off the exchange into a self-custodial wallet, then the customer essentially loses access to their crypto, Hoskinson said.
He added that a decentralized identity could be overlaid on blockchain transactions, incorporating standards established by the Decentralized Identity Foundation.
“You can do it on a transactional level between regulated entities and non regulated entities. And it just works, and [it’s] seamless, and you pay a transaction fee,” the Cardano co-founder said.
Hoskinson says that many centralized players are aggressively pursuing decentralized identities.
Already, JPMorgan conducted its first DeFi trade using “verifiable credentials” embedded in smart contracts. These credentials governed who was allowed to participate in the transaction. The transaction swapped Singapore dollars for Japanese yen using a permissioned Aave pool.
“It’s going to be one of the most competitive areas in the space in the next 24 months,” Hoskinson said. He hopes that the winner will be a decentralized entity.
Decentralized economic identity critical for economic inclusion
The Cardano co-founder stressed the importance of creating a decentralized economic identity. Such an identity is vital to realize cryptocurrency’s potential as a tool for financial inclusion. Legacy providers of economic identification like credit scores often act as gatekeepers disincentivizing customers from using decentralized finance.
Cardano is running several pilots in parallel with legacy systems to provide microfinance loans to Kenyans in end-to-end transactions, Hoskinson said.
The goal is to be able to send an asset-backed stablecoin or algorithmic stablecoin to somebody in Nairobi, who has a blockchain-based identity and a blockchain-based credit [score] in their Lace wallet, he added.
“It’s about lifting people up out of a circumstance where they’re beholden to an intermediary who basically gets to decide their entire experience,” he said.
When asked about the potential of Dogecoin payments on Twitter, Hoskinson said it would be challenging to scale Dogecoin. He suggested using the BNB Chain since Binance contributed $500 million to Musk’s recent acquisition of the social media platform.
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