Decentralised finance industry or DeFi gained a lot of traction since the start of the pandemic. Most of inexperienced crypto enthusiasts don’t have much idea about the blockchain and lack of it’s regulation. As a result a few high profile rug pull scams attracted a lot of mass media attention. And where’s mass media coverage, there’s regulators trying to make regulations work. But here’s a catch.
DeFi considered the “Wild West” of crypto. And there’s many reasons for it. One of the biggest benefit as well as disadvantage it’s anonymous space. Almost anyone could lend and borrow digital money at competitive interest rates. No middle man involved and it’s exactly what established landers could consider as an end to their centuries long questionable business practices.
According to The Block more than $90 billion has been deposited into Ethereum based DeFi. The much awaited US government report about stablecoins provide clear picture about what’s awaiting stablecoins in 2022. But it will be challenge for regulators to create the regulatory standards for decentralised financial industry. DeFi protocols can exist without the formal CEO, and that’s with whom regulators deal the most. DeFi systems are designed without any requirement of KYC (know your customer). Regulators mentioned three key risks:
- Criminal activity: money laundering, terrorism sponsorship, tax evasion, etc.
- Scams: fake tokens, rug pull, etc.
- Systemic risks.
The regulator may come with zero-knowledge proofs. It could be used to provide verification of users eligibility without reveling their identify to a regulated DeFi protocol. With new approach to KYC user could get clearance from established centralized exchange and then use that credential for anonymous transaction on another DeFi exchange. But this approach may not work for decentralised anonymous organizations.
In the United States, multiple federal authorities likely have jurisdiction over aspects of DeFi, including the Department of Justice, the Financial Criminal Enforcement Network, the Internal Revenue Service, the Commodity Futures Trading Commission, and the SEC. The Securities and Exchange Commission identified many DeFi services as closely resembled products & functions in the traditional financial marketplace. Users are eligible to obtain an asset or loan upon posting of collateral; deposit a digital asset and receive a return; web analitics for identification of the high-yielding DeFi instruments; users can earn fees for supplying liquidity or market making, etc. Transactions are recorded on a public blockchain and source code is publicly available. In each DeFi transaction, blockchain displays the blockchain address that sent or received assets, but no identity disclosed.
Don’t forget that trading comes with huge risks and my article strictly for educational purpose.