Compliance

For institutions, reputational damage and legal complications could arise if their blockchain systems were inadvertently used for criminal activities.

Regulatory bodies might impose penalties on such institutions if they were to fail to create sufficient controls to prevent these activities.

Most institutions have nuanced compliance requirements. Therefore, many institutions need flexible blockchains that can meet these needs.

Interacting with Criminal Actors

In permissionless systems, the counterparty on a trade is unknown. If a user performs a swap on a decentralized exchange on a permissionless blockchain, such as Ethereum or the Avalanche C-Chain, the origin of funds that are received are mostly unknown.

To solve this problem, each Avalanche L1 can restrict who can interact with the blockchain. Only a whitelist of accounts can issue transactions. One could build a blockchain where only accounts that went through a KYC process are permitted.

Interacting with Illegal Services

An additional risk to consider is that businesses may operate within an environment prone to illicit activities, or they may inadvertently become involved in such actions. In a permissionless system, any individual has the capability to deploy any contract, regardless of its compliance with the legal framework.

Avalanche L1s can limit who deploys smart contracts on the blockchain. Consequently, those involved in the creation of contracts can be held accountable. This level of control reassures institutions, ensuring that all protocols they engage with are fully compliant with existing laws.

Beyond compliance advantages, this approach helps to maintain a blockchain free from an excess of smart contracts that could otherwise congest the system.