Implementing Compliance to Build the Crypto Ecosystem

There’s a spectrum for implementing compliance on the blockchain, and it’s represented by two distinct ends: asset compliance and protocol compliance.

Asset Compliance

On one end of the spectrum, we have asset compliance. This involves wrapping cryptocurrencies and tokens in a compliance structure that allows those assets to operate within the existing blockchain infrastructure and work within established protocols and applications. The critical advantage of asset compliance is adaptability; any cryptocurrency or token can be compliant. This is an important point: cryptocurrencies and tokens aren't inherently compliant when created. They need to be tailored or adjusted to fit the regulatory frameworks and, simultaneously, to work and take advantage of the benefits of the existing blockchain infrastructure.

This adaptability allows users to leverage the existing infrastructure while ensuring their activities comply with relevant regulations. The benefit is clear: it contributes to scalability, using blockchain interoperability and composability while simultaneously following regulations. The downside, however, is that it doesn’t follow the traditional model and may take a while for incumbents to realize the value in asset compliance.

Notably, Keyring, our portfolio company, is pioneering asset compliance. They have identified the utility to incumbents and enhanced liquidity through asset access to foster significant adoption and growth in the onchain space. In this sense, Keyring provides a framework for asset compliance that can be likened to the blood and nervous system of the onchain anatomy, connecting and coordinating the movement within the ecosystem.

Protocol Compliance

On the opposite side of the spectrum, we find protocol compliance. Protocols designed with built-in compliance ensure that people using them, not the asset, are inherently compliant. They provide a protective moat for users, creating a secure environment for operation.

It also contributes to the overall expansion of the crypto space. Independent projects utilize protocol compliance in areas where specific regulatory or legal requirements are crucial from the onset. These projects don’t directly rely on the benefits of interoperability or composability. Importantly, protocol compliance focuses on growing the protocol through a familiar framework, paving the road for more traditional businesses to move onchain while maintaining necessary compliance. 

The upside to protocol compliance is that a more traditional compliance model provides the necessary user protections that help scale the protocol. The downside is the inability to benefit from interoperability and composability directly, but there are solutions to this in terms of portable decentralized identities that could bridge this gap. However, even with these solutions, it is hard to leverage the full benefit of blockchain technology.

Another portfolio company, Holonym, provides protocol compliance tooling that allows protocols to focus on themselves and grow through traditional compliance. Holonym provides the compliance basis for protocols to build the blockchain ecosystem’s skeletal and muscular structure, adding more foundation and capability.

TLDR: The Compliance Spectrum

Implementing compliance on the blockchain involves a range of options designed to cater to various needs and applications - it's not a binary choice but a matter of balance. Asset compliance offers greater adaptability and scalability and is well-suited for projects that value on-chain interoperability and composability. Conversely, while more inwardly focused and traditional in its scalability approach, protocol compliance provides a familiar regulated environment. 

Both asset and protocol compliance are essential as they collectively constitute the blockchain ecosystem needed to develop and grow the body of the onchain economy.