by Anies Khan and Felix Machart, Mar 19, 2024

We’re thrilled to announce that Greenfield is co-leading Keyring’s $6M seed funding round alongside Gumi Cryptos Capital. Keyring addresses the crucial challenges of regulatory compliance and market liquidity by empowering financial organizations to engage with compliant counterparts when participating in DeFi. Leveraging zero-knowledge (ZK) technology, Keyring guarantees institutional-grade privacy and security for sensitive data.

As discussed in our previous research article, we are strong believers in DeFi and the tokenization on public permissionless blockchains to transform global capital markets. 

Industry leaders like Blackrock recognize a comprehensive range of benefits including increased efficiency (e.g., faster settlement times, reduced operational cost) and the facilitation of new financial products (e.g., composability and increased liquidity). EY’s 2023 study reveals financial institutions’ heightened interest in engaging with DeFi, with a substantial number intending to tokenize assets within the current year. 

The problem – the compliance-privacy dilemma on public blockchains

Major TradFi entities are deploying blockchain technology for digital asset custody, stablecoin adoption, and exploring CBDCs, while also expanding digital asset offerings to cater to both retail and institutional clients. But as of now, participation from TradFi players remains largely confined to gaining exposure through direct token holdings or traditional financial instruments like ETPs or, more recently, ETFs, as well as to use cases within private-permissioned blockchains.

This is due to the fact that financial institutions that want to participate in DeFi face an array of challenges: They must adhere to compliance and regulatory requirements such as implementing Know Your Customer (KYC) procedures, Anti-Money Laundering (AML) measures, Countering the Financing of Terrorism (CFT) protocols, Office of Foreign Assets Control (OFAC) compliance, and adhering to the Travel Rule as recommended by the Financial Action Task Force (FATF) to prevent illicit financial activities and maintain the integrity of the financial system.

These requirements can differ across jurisdictions adding another layer of complexity.  Additionally, many jurisdictions lack clear regulatory frameworks yet when it comes to crypto and are in the process of developing these, leading to additional uncertainty and complexity. 

Therefore financial institutions have to operate within the tension of the fundamental properties of public blockchains — such as permissionlessness, pseudonymity, transparency — and the imperative to comply with regulatory requirements as well as making sure that privacy is maintained when participating in DeFi – which is a major hurdle for adoption. 

The solution – utilizing zk proofs to attest compliance on-chain 

Founded in early 2022, Keyring Network is pioneering to tackle the outlined challenges with its institutional-grade compliance solutions for public blockchains. At its core, Keyring’s platform seamlessly integrates zero-knowledge proofs to conduct off-chain KYC, KYB, and AML checks. It stores only proofs of compliance on-chain while safeguarding users’ identities therefore ensuring privacy while enabling interaction with permissioned assets within DeFi. This innovative approach directly addresses the privacy-compliance dilemma.

On top of that: Keyring’s modular architecture is adaptable to diverse regulatory landscapes, offering flexible compliance policies tailored to specific requirements. By implementing an asset-level compliance approach, Keyring facilitates the integration of permissioned tokens into DeFi ecosystems, enhancing participation without compromising liquidity.

In order to get a more detailed insight into how Keyring makes all this work, we’ve summarized the platform’s key components:

• Compliance policies:
  Keyring implements comprehensive compliance policies, which dictate the rules for interacting with assets within its ecosystem. These so-called admission policies, managed by an entity or protocol, encompass a set of verifiable base rules,  both on-chain and off-chain, such as refresh rates for ongoing compliance, approved attestors, grace periods, and failsafe mechanisms.
  Additionally, individual users can enforce policies by setting minimum compliance standards for transactions with their counterparts. These policies allow for stricter compliance requirements than the standard admission policies, enhancing transaction security and integrity within the network.
• User verification & proof of compliance:
  When users encounter compliance barriers within Keyring-guarded smart contracts, they undergo an onboarding procedure to demonstrate adherence to the asset compliance policies. This involves connecting their non-custodial wallet to Keyring and submitting encrypted personal documents for identification. Off-chain and on-chain compliance checks, facilitated by Keyring’s external compliance partners, verify the user’s compliance claim. A decentralized network of attestors ensures the accuracy of compliance assertions, enabling the issuance of zero-knowledge proofs for on-chain transactions. By configuring trading wallets to meet admission policy requirements, users can securely interact with Keyring-guarded contracts while maintaining confidentiality.
• Enforcement of compliance barriers:
  Keyring allows compliance to be enforced at three distinct levels, providing a high degree of flexibility: The asset, protocol, or blockchain level. At the asset level, existing tokens can be utilized through methods like forking or wrapping existing tokens with permissioning. Alternatively, new permissioned tokens can be created. These wrapped tokens enable participation in DeFi while ensuring compliance, as they can for instance participate in liquidity pools, provided both tokens adhere to the same admission policy.
  Moving to the protocol level, permissions can be integrated directly within protocols, creating walled gardens like Aave Arc, or by establishing permissioned protocols such as those seen in centralized compliance solutions like Coinbase.
  Finally, compliance can be enforced at the blockchain level by validating compliant transactions within the blockchain’s mempool, as seen with Flashbots, or by operating permissioned blockchains, where only whitelisted transactions are permitted, exemplified by platforms like Quorum.

The Team – experts at the crossroads of TradFi, DeFi compliance and zk

Keyring’s solution stands as the premier and most flexible ZK compliance tool, tailored to the specific DeFi risk appetites of financial institutions. The collective background of the founding team solidified our conviction: 

Mélodie Lamarque and Alex McFarlane bring forth extensive expertise and insight at the intersection of TradFi and crypto/DeFi compliance. Mélodie’s background in investment banking and venture capital, notably at JP Morgan and VC Hedosophia, provides her with a profound understanding of financial institutions’ requirements within the crypto space. Alex’s six-year tenure at Nomura’s trading desk, focusing on digital assets, offers invaluable insights into compliance challenges. Having previously studied and implemented digital asset solutions, both are acutely aware of the pain points and obstacles encountered by institutions venturing into DeFi. Their tech team consists of Rob Hitchens, a smart contract expert, and Justin Martin, a seasoned developer who built zk systems and open-source cryptographic primitives at the Ethereum Foundation. With their robust networks within TradFi and a skilled technical team proficient in smart contracts and zero-knowledge technology, Keyring is well-positioned to pioneer.

For financial institutions seeking to navigate DeFi’s compliance challenges, explore Keyring’s pioneering solutions at keyring.network.