Real-World Use And Regulation
You learn where blockchains help in identity, supply chains, payments and public goods funding, and where a normal database works better. You also learn how regulators approach the field, with a high-level look at the EU and Turkey.
You Will Be Able To
- Apply a simple test to decide whether a use case needs a blockchain.
- Describe how blockchains are used for identity, supply chains, payments and public goods funding.
- Explain how quadratic funding allocates money to public goods.
- Summarize how regulators classify crypto activity by function and why AML rules matter.
- Outline the high-level approach of the EU MiCA regulation and of Turkey.
Does This Need A Blockchain?
Ten weeks of material may tempt you to see a blockchain solution everywhere. A careful builder starts with the opposite question: does this problem need one? In weeks 1 and 4 you learned that a blockchain gives a shared record, kept by many parties, that no single party controls. That is valuable when several parties who do not fully trust each other need to share data and nobody should own the database.
A short test helps. Do many parties write to the data? Do they lack a trusted middle party, or would they prefer not to depend on one? Does the record need to stay public or verifiable for a long time? If the answer to most of these is no, a normal database, which is faster, cheaper and easier to change, serves better. Researchers Karl Wüst and Arthur Gervais published a well-known flowchart for this decision in 2018. Use the same habit in the capstone.
Real-world projects also meet a second problem. A chain guarantees what is written on it, not whether the input was true. This is the oracle problem from week 8 in another form. Keep it in mind through every example below.
- Many writers?
- Parties do not trust each other?
- No trusted referee?
- Data is on chain or verifiable?
- Then a chain may fit
If any answer is no, a normal database is often better.
Digital Identity
Today most online identities are accounts that a company controls. If the company closes your account, your identity there disappears. Self-sovereign identity proposes that you hold your own credentials in a wallet and present them when needed. Two standards from the W3C describe the pieces. A decentralized identifier, or DID, is an identifier that you control with a key. A verifiable credential is a signed statement from an issuer, for instance a university confirming a degree.
Using the signatures from week 2, a verifier can check that the credential came from the issuer and was not changed, without calling the issuer each time. The blockchain's role is usually small: it can anchor the issuer's public keys or record revocations. The personal data itself stays off the chain, which respects privacy rules and avoids permanent exposure. Zero-knowledge proofs can go further and let you prove a fact, such as being over 18, without showing your birth date.
Related experiments include naming systems such as ENS, which maps readable names to addresses, and proof of personhood projects, which try to show that an account belongs to one real human. Each trades privacy against fraud resistance in its own way.
Supply Chains
A supply chain passes a product through growers, factories, shippers, customs and shops. Each party keeps its own records, and disputes about origin or handling are hard to settle. A shared ledger lets each party add signed events, such as harvest, inspection and shipment, so that anyone downstream can follow the history. Large retailers and logistics firms have run pilots of this kind for food traceability and for goods that must prove their origin.
The weak point is the link between the physical world and the record. A sensor can be tampered with, and a person can scan the wrong item. The chain preserves a false entry as faithfully as a true one. Good designs reduce this risk by using several independent attestations, tamper-evident tags and audits. Honest pilots also report that the harder work is agreeing on data formats and incentives among companies, more than the technology itself.
Payments And Stablecoins
Sending money across borders through banks can take days and involve several intermediaries and fees. A stablecoin (week 8) moves on a chain around the clock, and settlement takes seconds to minutes. People use stablecoins for remittances, for payments between businesses in different countries, and as a store of value in places where local currency is unstable. Rollups (week 9) have cut fees enough to make small payments practical.
The pieces around the chain matter just as much. The recipient usually needs a way to turn the stablecoin into local cash, which is where exchanges and payment firms operate and where identity checks apply. Different from stablecoins are central bank digital currencies, or CBDCs, which are digital money issued by a central bank. They share some technology ideas but are controlled by a public authority, and design choices differ by country.
Funding Public Goods
A public good is something that benefits many people while being hard to charge for, such as open-source software, research or a clean river. Markets tend to underfund them. Blockchain communities have tried new funding methods because transfers are programmable and transparent.
Quadratic funding, proposed by Vitalik Buterin, Zoe Hitzig and Glen Weyl in the paper Liberal Radicalism, is one idea. Many individuals donate small amounts to projects they value, and a matching pool adds extra money. The matching amount grows with the number of different donors, not just the size of their gifts, so a project backed by 100 people receives much more matching than one backed by 1 person who gave the same total. The formula counts breadth of support. Gitcoin Grants has used this method for open-source work.
A second model is retrospective funding, used by Optimism: instead of guessing which work will matter, the community rewards projects after their impact is visible. Both models face a common attack, the Sybil attack, in which one person pretends to be many donors. This links back to identity: proof of personhood tools exist partly to defend funding rounds.
- Quadratic funding: many small donors weigh more than a few large ones.
- Retrospective funding: reward impact after it is shown.
- Sybil resistance: stop one person from posing as many.
Illustrative: each donor gives 1 dollar; total is the square of the sum of square roots of the gifts. Broad support attracts a larger match than one large gift. Source: Buterin, Hitzig and Weyl, A Flexible Design for Funding Public Goods, 2018
How Regulators Approach Crypto
Regulators in most countries do not ask what the technology is. They ask what the activity does. Is the token sold to raise money from the public with an expectation of profit from others' work? Then securities rules may apply. Does it work as a payment instrument or as electronic money? Then payment and money rules apply. Does a firm hold customer assets, run an exchange or give advice? Then licensing, custody and conduct rules apply. This functional approach explains why one token can face different rules in different places.
Anti-money-laundering, or AML, rules have shaped the field strongly. The Financial Action Task Force, or FATF, is an international standard setter. It recommends that virtual asset service providers, such as exchanges and custodians, identify customers and share sender and receiver details for transfers, known as the travel rule. Taxation is the third constant: most countries treat gains from selling or trading crypto as taxable, with details that vary.
Software that anyone can use without a company in the middle is harder to classify. Regulators therefore often focus on the points where crypto meets the regular economy: exchanges, issuers of stablecoins, custodians and the on-ramps from bank accounts. As a builder, ask who the intermediaries are in your design, because those are the parties rules will reach first.
Nothing in this module is legal advice. Rules change, so confirm every point in the official texts and with a qualified lawyer before you launch anything that handles other people's money.
The EU And Turkey At A High Level
The European Union adopted the Markets in Crypto-Assets Regulation, called MiCA, in 2023, and it became applicable in stages during 2024. It creates one set of rules across member states. It sets requirements for issuers of crypto-assets, including a published white paper, and has special rules for stablecoins, which it splits into asset-referenced tokens and e-money tokens. It also requires crypto-asset service providers, such as exchanges and custodians, to be authorized, and an authorization in one member state can serve the whole union. Services provided in a fully decentralized way, with no intermediary, are described in the text as outside its scope, though the exact boundary continues to be discussed.
Turkey has taken a step-by-step approach. In 2021 the central bank banned the use of crypto-assets as a means of payment. A law passed in 2024 then placed crypto-asset service providers under licensing and supervision by the Capital Markets Board (SPK), with anti-money-laundering duties supervised alongside the financial crimes authority MASAK. The details of secondary rules continue to develop.
Take this as a map, not a guide. For a real project, read the current official texts of the regulator in your country and the countries of your users.
| Item | Detail |
|---|---|
| Law | Regulation (EU) 2023/1114 |
| Scope | Crypto-asset issuers and service providers |
| Stablecoin rules apply | 30 June 2024 |
| Full application | 30 December 2024 |
One rulebook across EU member states, with licensing for providers. Source: Official Journal of the EU, 2023
Key Terms
- Decentralized identifier (DID)
- An identifier that you control with a key, defined by a W3C standard.
- Verifiable credential
- A signed digital statement from an issuer that a verifier can check without contacting the issuer.
- Provenance
- The recorded history of where a product came from and who handled it.
- CBDC
- A central bank digital currency, which is digital money issued and controlled by a central bank.
- Public good
- Something that benefits many people and is hard to charge for, such as open-source software.
- Quadratic funding
- A matching method where the number of donors counts more than the size of their donations.
- Sybil attack
- An attack where one actor pretends to be many users to gain extra influence.
- AML and the travel rule
- Anti-money-laundering rules, including the requirement that providers share sender and receiver details for transfers.
- MiCA
- The EU Markets in Crypto-Assets Regulation, which sets common rules for issuers and service providers.
Exercise: Use-Case Test And Regulatory Map
- Pick one use case from this week or from your own work, such as event tickets, diplomas or donations.
- Apply the test from the first section: who writes the data, who distrusts whom, does the record need to be public? Write a clear yes or no with reasons.
- Describe what would be on the chain and what would stay off the chain, and name the main oracle risk.
- List the intermediaries in your design (issuer, custodian, exchange, payment partner) and what each one does.
- Open the official summary of MiCA on the European Union website and the website of the Turkish Capital Markets Board, and note one rule from each that would affect your design.
- Write a half-page memo with your recommendation: use a blockchain, use a database, or use a hybrid, and why.
Further Reading
- Do You Need a Blockchain?, Karl Wüst and Arthur Gervais, IACR Cryptology ePrint Archive, 2017
- A Flexible Design for Funding Public Goods (Liberal Radicalism), Vitalik Buterin, Zoe Hitzig and E. Glen Weyl, Management Science, 2019
- Verifiable Credentials Data Model, World Wide Web Consortium (W3C)
- Regulation (EU) 2023/1114 on Markets in Crypto-Assets, European Parliament and Council, Official Journal of the European Union
- Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, Financial Action Task Force (FATF)