Public blockchains, by design, offer unparalleled transparency: every transaction is recorded on a shared ledger, traceable by anyone. This openness has been hailed as a foundation for trust in decentralized finance, but it also creates tension with the need for user privacy. At a panel discussion during Consensus Miami, industry experts from Moody's Ratings and ChangeNOW argued that the two goals are not mutually exclusive. By leveraging hybrid blockchain architectures and address-level monitoring, they said, it is possible to maintain privacy for individuals while ensuring accountability for institutions.

The panel, titled 'Onchain Privacy and Identity,' brought together Rajeev Bamra, a strategist at Moody's Ratings, and Pauline Shangett, Chief Compliance Officer at ChangeNOW. They explored how the crypto ecosystem can evolve to meet both the privacy expectations of users and the compliance requirements of regulators. The discussion comes at a time when institutional interest in digital assets is surging, yet many institutions remain hesitant due to concerns about transparency and legal risk.

Institutional digital finance: growth and scale

Bamra opened the discussion by highlighting the rapid growth of institutional digital finance. Over the past 18 months, he noted, the sector has expanded by 'over 100 or 150 percent.' This growth reflects increasing adoption by traditional financial firms, including banks, asset managers, and insurance companies, which are exploring tokenized assets, stablecoins, and decentralized lending platforms. However, Bamra also provided a sobering context: the current size of institutional digital finance is roughly $35 billion. For comparison, traditional clearing flows exceed $200 trillion. In other words, while the growth rate is impressive, the absolute value remains a tiny fraction of the global financial system.

This gap highlights both the potential and the challenges ahead. For digital finance to truly integrate with mainstream markets, it must overcome hurdles related to scalability, security, and—crucially—regulatory compliance. Privacy and accountability are at the heart of that challenge. Regulators demand the ability to trace transactions to prevent money laundering, terrorist financing, and other illicit activities. Users, on the other hand, expect that their personal financial data will not be exposed to the public. The solution, according to the panelists, lies in thoughtful system design.

Hybrid blockchain architecture: the best of both worlds

One approach gaining traction is hybrid blockchain architecture, which combines elements of public and private blockchains. In a hybrid system, certain data can be kept off-chain or encrypted, while other data remains transparent for verification. This allows institutions to maintain privacy for sensitive business information while still enabling regulators or auditors to access the data through permissioned channels. Bamra noted that Moody's has been exploring how hybrid models can be used to rate the creditworthiness of tokenized assets without exposing proprietary trading strategies.

For example, a hybrid blockchain might record only hashes of transactions on the public ledger, with the full details stored on a private, permissioned chain. When a regulator requests information, the relevant participants can reveal the decryption keys or grant access to the private chain. This approach preserves the immutability and security of the public ledger while providing the privacy that businesses require. It is not a new concept, but it has gained urgency as more traditional institutions enter the crypto space.

Address-level monitoring vs. identity mapping

Pauline Shangett of ChangeNOW offered a complementary perspective from the exchange side. ChangeNOW is a non-custodial cryptocurrency exchange that allows users to swap coins without creating an account. This model inherently protects user privacy, but it also raises compliance challenges. To address this, Shangett explained that ChangeNOW uses address-level monitoring rather than identity-based tracking. Instead of asking for personal information like a name or passport, the platform monitors wallet addresses for suspicious activity.

'We map wallet addresses, not identities,' Shangett said. 'This allows us to respond to compliance and law-enforcement needs without compromising the privacy of our users.' She emphasized that this approach is both practical and effective. By analyzing onchain data—transactions, timestamps, and linkages—ChangeNOW can flag addresses that appear to be associated with scams, hacks, or other illicit activities. When law enforcement requests information about a particular transaction, the exchange can provide the relevant address details without having collected any personal data.

This method aligns with a growing trend in the crypto industry: using blockchain intelligence tools to maintain compliance while respecting privacy. Companies like Chainalysis and Elliptic have built businesses around analyzing onchain data. The key insight is that accountability does not require full transparency. As Shangett put it, 'You can have privacy and still be accountable if you design the system correctly.'

Regulatory context and the path forward

The United States and other jurisdictions are still developing comprehensive regulatory frameworks for digital assets. The European Union's Markets in Crypto-Assets (MiCA) regulation, for example, includes provisions for both transparency and privacy. In the U.S., agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission are grappling with how to apply existing securities and commodities laws to crypto. The panel at Consensus Miami suggested that solutions like hybrid architectures and address-level monitoring could help bridge the gap between innovation and regulation.

Bamra pointed to Moody's recent work on rating tokenized money market funds, such as those launched by Fidelity and BlackRock. These funds issue tokens that represent shares in the underlying money market. To assign a credit rating, Moody's needs to verify the assets and track their movement, but it does not necessarily need to know the identity of every token holder. This is where hybrid architecture shines: the fund can publish a hash of its holdings on a public blockchain, while the full list of assets is maintained privately and shared with the rating agency.

'We are seeing that institutional adoption is possible without sacrificing either transparency or privacy,' Bamra said. He noted that the growth in institutional digital finance has been concentrated in highly regulated products, such as securities tokens and stablecoins. As the market matures, he expects hybrid models to become the norm for most institutional use cases.

Challenges and criticisms

Not everyone agrees that hybrid architectures and address-level monitoring are sufficient. Privacy advocates argue that any form of monitoring, even at the address level, can eventually lead to de-anonymization. With enough onchain analysis, it is possible to cluster addresses and infer identities. Shangett acknowledged this risk but noted that ChangeNOW's system is designed to minimize data collection. 'We never ask for personal information unless required by law, and even then, we only share what is necessary,' she said.

Another challenge is the scalability of these solutions. Hybrid blockchains can be more complex to operate, and address-level monitoring requires sophisticated software. Smaller exchanges and projects may lack the resources to implement them. However, the panelists expressed optimism that open-source tools and industry standards would make these technologies more accessible over time.

Historical context is also relevant. The debate over privacy versus transparency in finance predates blockchain by decades. In traditional banking, privacy is protected by bank secrecy laws, but institutions are required to report suspicious activity to authorities. The crypto industry is essentially building a new system from scratch, which allows it to experiment with novel solutions. The panelists at Consensus Miami believe that the lessons learned from early experiments will inform the next generation of onchain infrastructure.

As the panel concluded, both Bamra and Shangett emphasized that the goal is not to create a completely anonymous or completely transparent system. Instead, it is to build a system that can adapt to different needs: allowing users to control what they share while enabling institutions to meet their compliance obligations. In the words of Shangett, 'Privacy and accountability are not opposites. They are two sides of the same coin, and we have the tools to balance them.'

Source: Coindesk News