Shyft's Joseph Weinberg: regulation, not hype, will force decentralized identity into use

Ashton Addison: For viewers who haven't seen your earlier interviews, what is Shyft Network and what is your team focused on?▶ 00:18

Joseph Weinberg: Shyft is a multi-layered public blockchain protocol. It is a layer one and a smart contract layer, and it's focused on identity and identity-related use cases. We call it trusted data architecture: how you provide data across a variety of use cases involving users, counterparty interactions and discovery.

Ashton: You work on digital identity, KYC/AML and the FATF all at once. Is there a priority?▶ 01:51

Joseph: Everything starts with identity. Even if you're sending a Bitcoin or Ethereum transaction, your keys are effectively an obfuscated form of identity. We designed everything around that core of public and private keys, so we can target one use case or another with small modifications and use the same infrastructure very quickly. We also always believed regulations would effectively force adoption. If we build infrastructure that maintains privacy, decentralization and security at the user level, and provide it to the largest exchanges, which already hold all our user data, we can bootstrap decentralized identity infrastructure. That also solves the huge problem of FATF travel requirements and KYC sharing.

Ashton: Digital identity has been promised for years, but I still can't sign in with a blockchain identity. When will that happen?▶ 13:45

Joseph: That was our core premise: we thought differently from everyone who has tried to build identity. There's a reason it hasn't worked, just as mobile wallets took a decade to work. You have to make the product far better than what's already in your pocket, and people think identity isn't much more useful than the credit card they have today. There's no forced requirement, so the user experience has to be 10x better. That's why we said regulations will force adoption. We don't necessarily like it, and we'll try to make sure privacy is maintained, but it's an interesting model to piggyback on for bootstrapping a decentralized identity network. No one loves regulation, and the Wild West was fun, but institutional adoption is coming. Once you have a KYC-backed identity primitive on networks like Shyft, things like credit reputation, credit scoring and institutional DeFi become possible.

Ashton: What is the FATF, and how does it affect the transactions people make?▶ 04:12

Joseph: The Financial Action Task Force is an intergovernmental organization made up of countries around the world. It writes universal standards, such as how KYC is defined and regulated across different countries, so it's effectively a global regulator. It deals with terrorist financing and a lot of the bad things that happen in the financial system, and about two and a half years ago it turned its attention to crypto. It said it would implement the travel rule, the requirement banks already have when sending a SWIFT transaction: you send identity information with the money. So if I move a Bitcoin transaction from one exchange to another, we now need to move Ashton's and Joseph's identity information with it. That's a big departure from how crypto works today. We've spent the last two and a half years working with exchanges on Veriscope, which is, simply put, a decentralized version of SWIFT. It acts as a discovery and coordination layer for crypto transactions, without diminishing user privacy or centralizing the ecosystem. About 45 to 50 exchanges and financial institutions are working on it, and third-party applications are starting to build on top of it.

Ashton: Does the identity requirement apply when withdrawing to a private wallet, or sending to someone else's wallet?▶ 07:22

Joseph: Luckily, no. That was the big thing we argued for. KYC requirements only apply to regulated entities, and the big battle we've had as industry veterans is to keep it that way. I shouldn't have identity attached directly to my personal wallet. It doesn't really help, and we think it would be a regulatory overstep. This applies only to exchange-to-exchange transactions.

Ashton: Exchanges hold everyone's personal information and have been hacked before. How does a decentralized SWIFT protect users?▶ 08:29

Joseph: We took the same approach as "not your keys, not your coins." An exchange about to make a withdrawal uses its public and private keys to sign an encrypted request for information about that transaction. Smart contracts mediate the rules for how counterparties find each other, discover each other and transmit data on a user's request, including user consent from a GDPR perspective. Because everything is signed with keys, there's no central coordination, and users keep ultimate control over their data. You can't move my data unless I agree to it. It all runs over a fully encrypted peer-to-peer network that is distributed across everyone.

Ashton: The industry has grown enormously since we first spoke. How do you build compliance software that will still work when there are far more users?▶ 10:36

Joseph: We took a 10-year view. When we started four or five years ago, almost everyone said it was crazy and would never happen. Only over the last two years did it start becoming clear, and only in the last year did people say this really makes sense. We have about a four-to-five-year build ahead of everyone. We kept it open and generalized, and because we've thought about this for so long, we're helping define the rules with regulators as we go. We've built infrastructure for DeFi and NFTs too. Regulation won't stop, but we can balance it. Hate to say we told you so, but I love it.

Ashton: You recently built the FATF compliance layer for Polkadot. Are you keeping up with all the new protocols?▶ 12:25

Joseph: There's an amazing explosion of innovation, but we care more about applications and use cases. This is EVM infrastructure, so it works anywhere with Ethereum Virtual Machine compatibility. Solana, Avalanche and Polkadot are examples. We want Shyft to be everywhere, whether on layer ones or layer twos. We built the architecture so that your assets, your identity information and all these rules work no matter which chain you're on. We see a cross-chain, interoperable world. It's not about competition at the base layer; we care about application accessibility on the secondary and tertiary layers. As use cases and customers come to us, we'll deploy in more places, so you should see a few more deployments this coming year.

Ashton: What is Shyft working on for 2022?▶ 16:12

Joseph: We've been testing with exchanges for about a year, and we're trying to get that right. The number of transactions that have to become compliant makes this one of the biggest infrastructures to be deployed in the space. It's over 5 million transactions a day, far bigger than Ethereum, across almost 200 countries. Getting that right, especially on security, is incredibly difficult. In January and February you should see a lot of rollouts on the exchange side, and a number of financial institutions are working on global network deployments that should come out in the next few months. We've also spent the last year on an institutional DeFi layer, which starts rolling out in Q1. It could mean institutional staking on the Eth2 side or institutional bond markets. We're building a layer on top of crypto today that gives an opt-in compliance primitive. Any DeFi application can keep its composability and structure, while the capital sitting on the sidelines becomes able to use the ecosystem. That's the biggest internal initiative we have now.