According to blockchain analytics firm CipherTrace, the explosion of decentralized finance (DeFi) is now firmly under the radar of regulators and concerns are growing that it could become a magnet for criminal or nefarious activity.
DeFi has become an 11 billion dollar market, in which the know-your-customer (KYC) protocol does not seem to exist, leaving the field open to a significant risk of potential manipulation.
DeFi perspectives
Hypothetically, there are several compelling reasons DeFi could benefit potential money launderers, said Dave Jevans, CEO of CipherTrace. DeFi is such a young space that it's hard to tell if the type of money laundering business typically associated with cryptocurrency mixing services will migrate there.
“Some mixing services, when they get enough volume, trigger an outbound fraud and basically stop working. This is how a hacker group makes money; they will charge low mixing rates and wait until there are a few tens of millions pending, and then run away ”.
Another risk for users using crypto mixers is the possibility that the service itself is blocked by law enforcement and funds seized. “We have seen a series of kidnappings and arrests.
Well, if your money was there at the time, I assure you, you won't get it back, ”Jevans said. And while the fees on Ethereum-based DeFi apps are getting ridiculously high, it's still cheaper than using a mixer, Jevans added.
“Mixers are expensive,” he said. “I would argue that mixers - and that's just my opinion - have a disproportionately large amount of criminal activity running through them. While DeFi has a lot of people who want to get into the next investment trend, ”Jevans said.
DEXs are very different from mixers because the flow of funds through them is transparent and visible on the blockchain, said Elliptic's Robinson.
No KYC
DeFi platforms make a particular contribution to the global KYC cryptocurrency landscape, the general topic of the report released Thursday by CipherTrace. But DeFi is undoubtedly on the regulatory radar.
So DeFi platforms are thinking of complying with the KYC regulation right away like Bitcoin Revolution? Jevans doesn't think so. “From what we've experienced over the past couple of months, they don't want to have anything to do with KYC,” Jevans said.
“They just say they are writing software, and while they get profitable funds, they don't 'manage' it. But it is interesting to see what the governance of the platforms is, which often comes from companies supported by venture capital ”.
Indeed, the CipherTrace report suggests this could be one avenue a regulator like the SEC could pursue. “While the operations of DeFi exchanges are decentralized, the scale of decentralization of governance varies greatly.
For example, Uniswap has received venture capital investments from Andreessen Horowitz and Union Square Ventures, ”the CipherTrace report states. "At the end of the day, all governance is centralized in a for-profit company."
