The relationship of self-sovereign identity and CeDeFi is more than a symbiotic one. Not only do the two benefit from each other, in fact, each of them would also have difficulties thriving without the other:

• SSI is a necessary component of CeDeFi. Without ways to create and manage SSIs, CeDeFi will not be able to meet KYC and AML needs together with decentralisation expectations. SSIs create a bridge between traditional data-heavy interactions and an anonymous DeFi approach.
• CeDeFI will provide the financial infrastructure which is required for global SSI adoption. SSI adoption relies on the ability of SSI owners to get paid for their data and participation, as well as create entirely new business models through the blend of previously uncombined datasets. Thus, there’s a need for fast, secure, and usable technology, as well as for the legislative framework for data-asset interactions.
• CeDeFi and SSI providers should cooperate to ensure the best user experience and security of all participants. Once the SSI has proven itself on one of the riskiest applications — the financial one — it’ll easily cater to other industries.

Authors & contributors: Fraser Edwards (Chief Executive Officer, cheqd), Ankur Banerjee (Chief Technology Officer, cheqd), James Taylor (Chief Business Development Officer, Unizen), and Ghost of St. Miklos (Community Contributor, Unizen).

To deal with the lawlessness of new digital assets such as coins and tokens on decentralised networks, countries can either decide to try and regulate them or simply prevent access to them.

1. Blanket ban

The idea of technology functioning outside of a countries’ jurisdiction and legal framework is a difficult pill to swallow. Furthermore, the oversaturation of different types of coin, token and stablecoin makes keeping up from a regulatory perspective a huge challenge.

As such, in 2013, China banned its banks and financial services from making transactions using Bitcoin, and in January 2018, China’s leading internet-finance regulator issued a notice requiring Bitcoin-mining companies to ‘orderly’ stop their business. Recently in 2021, China has made all cryptocurrency transactions illegal.

This method of giving crypto a full Red Light is effective to a certain extent, in the sense it removes the problem rather than dealing with it. Although, it does not make any inroads into progressing cryptocurrency. Moreover, it pushes cryptocurrency into being used in a black-market, beyond the visibility of the State — which is not a desirable outcome either.

2. Target Law on middlemen

In 2017, the European Parliament amended the fourth Anti-Money Laundering Directive to incorporate Virtual Currency Provisions. Article 32a of the Directive was amended to ensure that ‘Member States put automated centralised mechanisms in place […] which allow for the timely identification of any natural or legal persons holding or controlling payment accounts, and bank accounts held by a credit institution within their territory’.

The objective of the amendment was to ensure that money laundering could not occur through exchanges or custodian wallet providers, making these third-party sites accountable for the persons in their user-base.

Similarly, the UK has recently implemented a new rule known as the ‘Travel Rule’ which requires that any virtual-asset transfer of above £1,000 must be accompanied by detailed personal information of both the originator and beneficiary.

Currently, this would be achieved through an exchange or custodian doing KYC on its users and making this information available.

Again, this type of regulation has worked to a certain extent. However, given the inconsistency of regulation amongst countries, users can simply hold and exchange their coins and tokens through services in countries where it is allowed. Or, use a decentralised exchange (DEX), which does not rely on a centralised middleman but facilitates peer-to-peer transactions.

In this way, the regulation only has a limited effect.

3. Target Law on tokens

Most countries around the world have Securities laws, which digital assets such as crypto may fall under. The strength of the Securities Law and the nuances in the detail determine whether an exchange token will be able to be launched, exchanged and stored in that jurisdiction.

The USA for example has a strong Securities Law, based on many years of legal precedent, and notably the famous Howey Test. This does have a degree of effect on regulating tokens, since the SEC has not been shy to crack down on creators of tokens that constitute securities, based in the USA.

However, Securities Law differs vastly around the world. So a token constituting a Security in the US does not mean that it will constitute Security in other jurisdictions and vice versa.

This means that tokens that are prevented from being held in one country can quite easily be held, and given a green light in another, diluting the strength of global regulation on cryptocurrency.

At cheqd, we believe that there is a fundamental misalignment between the will to regulate digital assets & crypto and the practicalities of regulating digital assets & crypto.

And for this reason, countries need to look beyond the law to regulate — and take proactive steps to encourage safer, more trustworthy systems which are regulated by the network architecture itself.

What if the parties in the transaction itself had verified digital identities, and could share a verified proof that they were a verified, actual person? And this was done in a privacy-preserving manner.

Upon entering a transaction, the originator could create a direct channel with the beneficiary, sharing a Verifiable Credential, entirely off-ledger to maintain privacy. Below £1000 this could just be a proof of being an actual, verified person, and above £1000 this could be an actual exchange of personal information.

Such an architectural shift would enable greater compliance with new regulations, enabling trusted transactions by default. It would also disincentivise criminals from using the token for illicit activities because there would be a much higher risk when transacting alongside a verified identity.

At cheqd, by bridging cryptocurrency and tokens with digital identity, our technology opens up a range of new options to achieve trust, transparency and regulatory compliance in transactions. This not only makes crypto and tokens safer, but also more commercially viable for real-world use cases and transactions in regulated industries, such as financial services.

cheqd can potentially create a world in which most countries do not have to pick Red Light or Green Light, but can find a strong middle-ground.

In blockchain ecosystems, the Node Operator runs what is called a node. A node can be thought of as a power pylon in the physical world, which helps to distribute electricity around a wide network of users.

Bonded tokens are those present in the active pool.

Bonded tokens = staked tokens by Node Operator + delegated tokens by a user.