Could Regulation Turn Permissionless Blockchains Into Two-Tier Networks?

The original appeal of a permissionless blockchain was brutally simple. It promised that users didn’t need anyone’s permission to participate.

People could send transactions, build projects, validate blocks, or launch apps without needing permission from banks, governments, or network administrators.

Regulation is now challenging that core idea more than ever. I don’t think permissionless blockchains will just vanish. Instead, it’s more likely, and more interesting, that they’ll turn into two-tier networks.

One layer would stay open to everyone, while another layer would have verified identities, approved wallets, restricted assets, and controls for institutions.

This might seem like a compromise, but it could end up being a key dividing line for the crypto world.

The Problem Is Not That Permissionless Blockchains Are Broken

The Basel Committee’s 2024 paper clearly explains why institutions are concerned. Since permissionless networks involve unknown participants, it’s hard for banks to do due diligence, ensure accountability, or provide oversight. Pseudonymous addresses also complicate KYC, AML, and sanctions compliance.

But here is where I disagree with the idea that the answer is to put permissioned controls directly into the base network.

Doing that would solve a regulatory problem by changing one of the blockchain’s most valuable features. It’s better to apply the rules at a higher level instead.

A 2025 University of Basel study came to a similar conclusion: compliance doesn’t always need a gatekeeper for the whole platform. Instead, controls can be added higher up, depending on the asset or app.

This difference is important. Regulated institutions should be able to work in a compliant setting without making the whole network exclusive.

We Are Already Seeing the Two-Tier Model

This isn’t just a theory. The BIS recently pointed out that tokenized money market funds run on public, permissionless blockchains but use wallet allow-lists to limit who can hold or transfer tokens directly for regulatory reasons.

That’s a small-scale version of the model: an open blockchain with some restricted activities. I expect we’ll see more examples like this.

The real issue begins when those restrictions go deeper into the network.

If a financial product needs verified users, that’s understandable. If an app needs KYC, that’s fine too. But if regulators start expecting validators, the base infrastructure, or the network itself to decide who can transact, that’s a much bigger change.

At that point, we’re not just regulating crypto; we’re changing the very structure of permissionless networks.

This Is Where Fragmentation Becomes Dangerous

There’s another reason this matters to me. Blockchain fragmentation is already a problem. A July 2026 BIS report shows that the rise of many layer-1 and layer-2 networks is splitting up infrastructure, liquidity, and assets both across and within chains.

Now, think about adding regulatory fragmentation on top of that. A wallet approved in one setting might not work in another. Institutions could access some assets that regular users can’t. Liquidity might split between compliant and non-compliant places.

At the end of the day, we might end up with blockchains that are public in name but divided in practice. That’s not the direction I believe crypto should go.

Vitalik Buterin’s argument for credible neutrality is relevant here: base-layer infrastructure should remain neutral, while concerns about bad actors should be handled at higher layers.

I agree with that principle.

Regulation is on the way, and there’s no use pretending otherwise.

But regulation doesn’t have to turn permissionless blockchains into permissioned ones.

A better approach is to keep the network open while putting rules around the vehicles that use it.

If we make that distinction clear, institutions can join in without undermining crypto’s original design. But if we get it wrong, we could end up with well-regulated blockchains that have lost their permissionless nature.

And at that point, we should be honest and admit we’ve created something entirely different