One of cryptocurrency’s biggest selling points is that it grants its users anonymity by pseudonym. The blockchain is designed to be a decentralized and trustless system, meaning no single entity has full control over it. This in turn is what provides users with anonymity, allowing them to conduct transactions without revealing their true identity.
While the data on the activity of crypto wallets is available for the public view online, none of these wallets are directly tied with their owners’ offline identities. Or more so, they are tied, but one would have to go through a lot of digging to find out who these people are in the real world.
However, anonymity on the blockchain has raised a number of eyebrows, significantly from governments worldwide, as the value of illicit use of cryptocurrencies rose to a new all time-high of $20.6 billion in 2022, a study conducted by Chainalysis revealed. So where does the line between right to anonymity and accountability stand?
In general, it could be seen as a tricky situation, as the anonymity provided by such systems tends to step on the toes of the business and legislation of banks and other financial systems. These organizations must follow certain rules like anti-money laundering and know your customer.
The Bitcoin and blockchain space arose out of anarchy and libertarian thinking, which harbors a deep mistrust of authorities and financial institutions. While blockchain technology aligns with these philosophies by allowing for decentralized systems that are not controlled by any central authority or government, this also prevents cryptocurrencies from gaining mainstream adoption where accountability is one of the key requirements.
In addition, anarchy is often associated with chaos and lawlessness, which can pose a further threat to the global adoption and regulation of blockchain technology. Meanwhile, libertarian thinking can sometimes conflict with the need for regulatory oversight to protect consumers and ensure fair competition in the marketplace.
On the other hand, concerns are arising about big tech companies monitoring users’ online activities and potentially violating their privacy for commercial purposes. These worries swing the pendulum in the opposite direction.
This brings up ideas of inventing a “middle ground,” where people who wish to retain their privacy and have complete control over their identity on the blockchain will still be able to do so, but they will also be able to interact with others with trust and certainty and have the possibility of identifying themselves if required. This could also open up more possibilities in easing regulations surrounding cryptocurrencies.
And while all this sounds good on paper, one of the biggest concerns in the virtual space is the use of false identity, or identity fraud—so can this “middle ground” actually be implemented?
In fact, some blockchain systems already have implemented a design that allows for the selective disclosure of information—certain parties like auditors and regulators may be granted access to specific data while other parties may remain anonymous. One such blockchain is Concordium.
Concordium is balancing privacy with accountability through its protocol-level ID layer that ensures that every wallet registered on the blockchain is associated with a real-world identity that has been verified through a third-party ID provider. This way, people and companies can trust one another while remaining private.
It is important to note, however, that the ID layer is under the user’s full control and the amount of personal information one can reveal can be tailored to what is relevant in the situation.
This could be a great way in bringing less strict regulations to blockchains as authorities will be able to access a user’s identity only after possessing a court order or with the use of a legislative mandate. In addition, users have full control and choice to reveal only those aspects of their identities that they wish to be made public, meaning they and their actions can remain as private as they want.
This is made possible through the use of cryptographic techniques such as zero-knowledge proofs. These encrypt data and transactions on the blockchain, making them private and anonymous.
This is the right balance between self-sovereign ID under a user’s own control and privacy—but also trustworthy disclosure of private information and accountability.
I think these are essential features to a well-functioning future economy, much of which will eventually happen in virtual environments.
Lars Seier Christensen is a Danish businessman, entrepreneur and investor. He is the founder of Concordium.
