The regulatory risks for the DeFi sector as a “haven for money laundering” are increasing.

According to a recent report The rapid growth of decentralized finance and income agriculture is likely to attract regulatory attention.

A joint research paper by the global management consultancy BCG Platinion and has shown this DeFi’s rapid growth in 2020 has created money laundering potential that will put it under regulators’ radar.

Since the beginning of this year The dollar value of cryptocurrency hedges backed through DeFi platforms has increased more than 1200% to $ 9 billionAccording to data provider DeFi Pulse.

The regulatory risks for the DeFi sector as a “haven for money laundering” are increasing.
The regulatory risks for the DeFi sector as a “haven for money laundering” are increasing.

DeFi is naturally permissionless and decentralized, which means that unlike centralized exchanges, there are no KYC (know your client) requirements for users. According to the report, the company operates well outside of state and regulatory scrutiny and raises concerns about illegal access to financial services.

Ciphertrace commented on the report in its newsletter as follows:

“Because DeFi protocols are designed not to contain permission, anyone in any country can access them without having to comply. As a result, DeFi can easily become a money launderer’s haven. “

DeFi protocols believe they can escape the regulatory threat by moving to full decentralizationThis means that regulators couldn’t close the platforms even if they wanted to.

howeverThe scope and governance of the DeFi protocols are very different when fully decentralized. Some protocols, like Uniswap, have received significant venture capital backing in this case from highly centralized companies, Andreessen Horowitz and Union Square Ventures.

It is feared that global regulators may turn their attention to the DeFi sector as it grows in size. This could include using decentralized identity and address verification services to blacklist certain users.

Fiat will also have to enter the ecosystem at some point, which usually happens through traditional centralized exchanges that are increasingly regulated.. One of the regulations of the Financial Action Task Force (FATF) is the “Travel Rule” that requires Virtual Asset Service Providers (VASPs) to collect and transmit information about customers during transactions.

This can lead to the creation of massive black and white lists of blockchain addresses associated with specific tokens, exchanges, protocols, and even users. Yes Fiat ramps such as B. centralized exchanges cannot transmit crypto to addresses associated with the DeFi sector. As a result, DeFi protocols can be forced to adopt KYC and other regulations.

The investigation found that the FATF’s current recommendation is this If the DeFi protocol is sufficiently decentralized and the agency that supports it does not take part in daily operations, it cannot be classified as a Virtual Asset Service Provider (VASP). and therefore you are immune to the travel rule.

But as Ciphertrace suggested:

“Judging by the current larger KYC regulatory trends and other compliance requirements such as the FATF travel rule, the DeFi sector could eventually fall under the jurisdiction of global regulators as it grows.”

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