For governments to consider bitcoin a legal currency, they’d need to be able to implement appropriate anti-money laundering (AML) and know-your-customer (KYC) laws to protect citizens.
After all, what government wants to lose control over currencies used within its borders?
Both South Korea and Japan, for example, are crypto-friendly countries, but they’re also cracking down on anonymous cryptos. Both governments cite money laundering and speculation-driven market price fluctuations as driving factors behind the decision.
Meanwhile, the crypto community is pushing for improved privacy. The lightning network is a prime example and is seeing big improvements and growth. These "second layer" solutions allow transactions to occur off-chain in major blockchains like Bitcoin and Ethereum. This doesn’t provide full anonymity, but it does allow for transactions that aren’t stored on the blockchain main net.
This sidechain concept is a double-edged sword, however. On one hand, the second layer allows financial institutions to integrate proprietary data into the blockchain without compromising it. On the other hand, private parties can also execute non-traceable trades.
Whether this most recent push for privacy helps or hurts the mainstream (and government) acceptance of cryptocurrency remains to be seen. But even if bitcoin is never accepted as a universal currency, financial institutions can't afford to rest on their laurels. The underlying blockchain technology is going to disrupt the industry — and banks need to be ready for it.
Daniel Hoffmann, co-founder of Hedge, contributed to this article.