Global Entry for Web3
In 2021, over $14 trillion in trading volume was reported by centralized crypto exchanges, while DEXs also reached over $1 trillion. Crypto allows users to transact across borders, and several countries are incorporating blockchain-based solutions as they move to a digital future. However, as DeFi and Web3 platforms have grown, their security and safety has not been addressed for scale. Their rapid rise has been accompanied by substantial losses due to the recent economic downturn and a loss of confidence in crypto investments given the negative recent events. Customers face a deficit of consumer protection as many crypto projects lack traditional safety measures such as know-your-customer (KYC) processes and anti-money laundering (AML) strategies. As crypto tackles its identity and compliance issues to build trust for consumers and drive adoption, it is important to consider how to incorporate privacy, portability, and accountability in these ecosystems.
Parallel Markets is launching the first-ever regulatorily compliant KYC/AML solution for web3: the Parallel Identity Token (PID). Maintaining the principles of decentralized anonymity, the PID token is a non-transferrable identity token that lives completely on-chain. It does not store or display any Personal Identifying Information (PII), but does supply necessary details to reassure market participants that their counterparties are not subject to sanctions or pose a risk of fraud. Cyber-criminals stole more than $1.3 billion dollars via service hacks in 2022 alone. Every year, more money is lost without the culprits being held accountable, resulting in a diminished sense of security with users. Currently, the largest drivers of crypto adoption are centralized exchanges (CEX) who integrate KYC processes. These regulatory measures issue accountability that lead to consumer confidence which DeFi currently lacks. The PID token facilitates proper regulatory compliance such as Coinbase while maintaining privacy by adhering to critical aspects of a wallet owner's identity. The solution seeks to lead large scale crypto adoption by resolving two major barriers: 1. The lack of accountability and security in Web3; 2. Preserving privacy while interacting across protocols under one personal identity.
The case for identity in Crypto
DeFi is the fastest growing blockchain application because it provides instantaneous access, traceability, and cost-effectiveness, allowing users to overcome economic instability. However, as large scale adoption become increasingly vulnerable to security threats, regulatory questions have arisen worldwide. Despite its revolutionary role in P2P transactions, Crypto fails to address security concerns as bad actors can compromise the safety of all network participants. Such is the case with the USA government banning all wallets who transact with Tornado Cash. Recently the US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned the protocol for its role in laundering $455 million worth of crypto current stolen by North Korean-linked hacking organization Lazarus Group. This has led to legitimate and innocent American users becoming completely banned for using the service and with no clear process of recovering their trapped funds in the protocol.
By enforcing KYC laws, the government holds banks and other financial institutions to high standards, requiring them to validate their customer’s identity. The process, however, is extremely manual, cumbersome, and expensive for all parties involved and still face the issues of inaccessibility, data insecurity, and fraudulent identities. Integrating an identity solution that adheres to government compliance in a efficient and private manner will protect users across all channels. This development is necessary in driving mass adoption of crypto.
A Passport for the Digital World
PID token translates the necessary KYC/AML regulatory compliance and accreditation checks to allow users to interact with other compliant smart contracts. All participating parties must hold a valid PID Token, in the form of a soulbound NFT, to ensure proper accountability for interacting with honest parties. Protocol interactors can utilize their token to verify that the owner is a natural person or business entity and has submitted all information necessary for the KYC/AML review. Tokens may also indicate whether or not the owner is not currently sanctioned or if their address is currently being monitored and even asset 506(c) investor accreditation status. By incorporating the PID solution, protocols can be confident that no value is flowing to or from sanctioned parties without collecting any PII.
The previous attempts of ensuring KYC and AML have failed due to their tremendous complexity and lack of interoperability between projects under one verification. Participants' efforts to accurately validate their identity information are further hindered by crypto projects operating across jurisdictional discrepancies. PID tokens offer users an instant identity verification avenue to operate across projects and eliminates the lack of accountability and security in the present crypto landscape. The applications of the PID token span across the broader ecosystem. Some possible use cases include:
Decentralized echanges can structure of swap contracts with KYC requirements (PID Token)
DAOs can restrict membership to valid KYC credentials (PID Token) for voting and distribution.
NFT marketplaces can limit visibility to wallets with KYC credentials (PID Token) and limit bids to verified sellers or buyers.
Cryptocurrency exchanges can add credibility and accountability to the process by accepting Ethereum from wallets that have KYC credentials (PID Token).
The Belief Behind Parallel Token ID
The PID Token was founded by Parallel Markets, an identity infrastructure company serving over 75 financial institutions across the Web2 and Web3 ecosystems. For the last three years, co-founders Tony Peccatiello, Nicholas Goss, and Brian Muller, along with President & Head of Partnerships Suzanne Elovic, have focused on building portable and reusable identity and are in a unique position to support onchain compliance. Tony has been a strong advocate in “building a robust identity solution to support the expansion of web3” and has experiences as a venture partner at Social Starts where he focuses in media, blockchain, and future of work sectors. Nick previously worked at Latham & Watkins LLP as an IPO lawyer and Credit Suisse on their investment banking team. Brian is a serial entrepreneur with over a decade of experiences running engineering, data science, and product teams across e-commerce, media, and energy industries.
Closing Thoughts
The rapid rise of crypto has been followed with an influx of financial crime and heavy enforcement of regulation. Parallel Markets provides the avenue to ensure regulatory compliance across crypto ecosystems: onchain verifiable ID. As the DeFi, NFT, and DAO landscapes continue to gain traction, all roads point to necessarily compliance requirements being met to ensure trust and accountability for all parties. The PID token provides seamless regulatory onboarding solution that is transferable across ecosystems. With a strong set of launch partners such as Guild, Layer3, Goldfinch, buildspace and others, Parallel Market is set to drive the expansion of web3.
- Paul Veradittakit
DISCLAIMER
Pantera Capital Puerto Rico Management, LP and its affiliates (“Pantera”) makes investments in crypto assets and in blockchain-related companies. Pantera and/or its affiliates or personnel may be an investor in, or have relationships or other business arrangements related to, certain instruments, companies and/or projects discussed herein. This document does not contain any advertisement for Pantera’s investment advisory services, or any other services or products, whether provided by Pantera or otherwise. The information and opinions presented in this document are solely those of Paul Veradittakit; they do not represent, and should not be interpreted as representative of, the views of Pantera or any other individual working for Pantera, and do not represent investment, legal, tax, financial, or any other form of, advice or recommendations. Neither Pantera nor Mr. Veradittakit is acting, or purports to act, as an investment adviser or in a fiduciary capacity with respect to any recipient of this paper. Information contained in this document is believed to be reliable, but no representation is made regarding such information’s fairness, correctness, accuracy, reasonableness or completeness. There is no obligation to update this document or to otherwise notify a reader if any matter stated statement or information contained here changes or subsequently is shown to be inaccurate. Nothing contained herein constitutes any representation or warranty as to future performance of any financial instrument or company. Forward-looking statements should not be relied upon, and performance or outcomes may differ materially from what is contemplated herein. Opinions included here incorporate subjective judgments or may be based on incomplete information. This document does not constitute or contain an offer to sell or a solicitation to buy any securities or a recommendation to enter into any transaction, and no reliance should be placed on this document in making investment decisions.
NEARCON Recap
Congrats to Near for hosting a wonderful developer conference in Lisbon, Portugal. Recently, it started with Near being listed on Coinbase. The conference was very focused on a developer demographic and builders were excited about the community and support from Near.
The quality of the founders was quite impressive and you can see a wide diverse sector distribution through the projects selected for Pitch Fest.
Overall, the sentiment and excitement was quite high and looking forward to what’s to come.
DIGESTS
Fed Hikes Rates to Highest Since 2007; Bitcoin Holds Steady at $19,500
This is the third consecutive time that members of the Federal Open Market Committee (FOMC) raised rates by 75 basis points (0.75 percentage point), signaling how serious inflationary pressures have gotten in the US.
BUSINESS
Stablecoin Issuer Tether Ordered to Produce Documents Showing Backing of USDT
The order relates to a lawsuit that alleges unbacked USDT issuances have caused $1.4 trillion in damage to the market.
Wall Street Bank CEOs Tell Congress They’re Unlikely to Finance Crypto Miners
The chief executives of Citigroup, Bank of America and Wells Fargo were questioned Wednesday at a congressional hearing.
REGULATION
EU Finalizes Legal Text for Landmark Crypto Regulations Under MiCA
A leaked draft of the text, reviewed by CoinDesk, shows the rules could apply to algorithmic stablecoins and fractionalized NFTs.
IN THE TWEETS
NEW PRODUCTS AND HOT DEALS
THNDR Games Launches Play-to-Earn Bitcoin Solitaire Mobile Game
The new game, dubbed Club Bitcoin: Solitaire, aims to increase bitcoin adoption by specifically targeting female audiences and emerging markets.
Bitcoin Lightning-Enabled ‘Listen-to-Earn’ Podcast App Gets an Upgrade
The app’s new model offers a simpler, more intuitive and more transparent way for listeners to earn BTC.
LETS MEET UP
Pantera Asia Blockchain Summit, Singapore, September 27
TOKEN2049, Singapore, September 28-30
Devcon, Bogota, October 11-14
Dublin, October 20-25
Legends4Legends, Amsterdam, October 26-28
New York City, October 1 - November 4
Walks and coffee meetings in San Francisco throughout the year!
ABOUT ME
Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.