DeFi vs. Regulation: How Regulation Can Rip DeFi of Its Value

DeFi is making financial inclusion easier by each day. But there is a growing need to conduct this financial service in a regulated environment. This regulatory measure is to provide security for both the users and the exchange developers. But the values of DeFi can rip off due to regulation.

Has Peer-to-Peer Helped?

The existence of peer-to-peer payment methods in the cryptocurrency space gives individuals access to similar traditional banking opportunities. As a result, decentralized finance (DeFi) sprouted from this blockchain financial model. This makes it easy for individuals to transact, save, lend and manage their finances across borders.

However, there are debates on how this financial inclusion should flourish despite monitoring activities. Individuals should be allowed to have full access to decentralized inclusion while users are protected from suspicious financial activities.

But regulating a decentralized system without losing its core decentralization attributes is nearly an impossible task. However, some measures are enacted to ensure legit financial activities. These are done to keep criminal activities in check and trace individuals or groups associated with them. An example is the Know Your Customer (KYC) measures.

KYC is a fundamental measure to examine individuals’ risk and legal composition to abide by the Anti-Money Laundering (AML) laws. These were constituted to discourage criminals from laundering through unlawful activities such as human trafficking and terrorism.

These AML regulations force financial institutions to reveal their customers’ identities, monitor their transactions, and file reports for financial suspicions.

Is DeFi Posing Any Challenge to The Regulators?

There is a growing concern about the adherence of decentralized applications (DApps) to the constituted financials laws and regulations. This is because there is no central entity taking responsibility for activities occurring on the platform.

An instance is a fraud using decentralized exchange (DE) to launder people’s funds. Then, we will request to know who’s responsible for reportage, who we should sanction, and the developer’s fault with the code.

These questions go without answers, but the Financial Action Task Force (FATF). These policies reveal that decentralized applications, decentralized exchanges, and decentralized finance applications should abide by the FATF laws. This will help put money-laundering activities in check.

An instance of probing into DeFi is the case of Bitcoin Mercantile Exchange (BitMEX). Despite being a centralized platform, the implications of the probing from the Commodity Futures Trading Commission have huge impacts on the future of DeFi. That means that DeFi platforms are required to operate based on regulatory guidelines or face potential prosecution.

Privacy Over Regulation: Will Privacy Be Compromised?

It is noteworthy to understand that regulations are targeted at businesses. As such, peer-to-peer transactions receive little attention from the regulators. Except that you have participated in money laundering activities. This may coarse the exchange to identify you and notify the regulatory body.

At this investigative stage, the exchange can provide the law enforcement bodies with specific personally identifiable information (PII) when requested. This is one of the key reasons users fill the KYC form for centralized exchanges. Nut decentralized platforms don’t comply completely. However, will decentralized platforms reveal such vital information to abide by the regulatory rules?

Are Users in Charge?

The inviting advantage of decentralization is the unfiltered access to financial services, which draws a lot of the population into the crypto space. But with the growing economic concerns to enact regulatory measures that will help prevent crimes, there may be a need for decentralized applications creators to allow selective information sharing.

As such, the creator will develop an in-built security phase that allows you to select what kind of information you want to share. This makes the compliance goals easy. However, forming compliance in the decentralized environment is more than magic or technical know-how.

Although accessing the DApps based on permission due to the digital identity can solve regulatory problems. Not only that, it will secure crypto’s future economy and make total financial inclusion an efficient effort.

Will DeFi Become the New Banking Model?

Despite the ongoing debate regulating blockchain decentralization core attribute, there is a continuous adoption of the decentralized technology birthing DeFi, DE, and DApps. There will be continuous modeling for DeFi, and its adoption will keep increasing. As such, you may enjoy full access to financial services while your platform form compliance with the regulatory body of each region.


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