This week, it was revealed that the U.S. Commodity Futures Trading Commission laid charged against three BitMEX executives for violating the Bank Secrecy Act (BSA) due to the exchange’s allegedly weak anti-money laundering and know-your-customer (KYC) policies.
This was a major blow for BitMEX and all those involved, but it also showed the hand of the regulators who suddenly clamped down on one of the biggest exchanges in the space. One area of concern has always been AML and KYC for such regulators.
This now calls into question whether DeFi will soon feel the same heavy hand come down upon it as this decentralized space, included decentralized exchanges, are known to have very little in the way of AML and KYC procedures.
While many DeFi protocols appear to believe that they can evade regulators simply by becoming fully decentralized, there are increasing doubts as to whether this is true — and in any case, DeFi protocols have come under fire recently for operating with a high degree of centralization, with 12 out of 15 top projects maintaining ‘God Mode’ admin keys.
Bad for DeFi
Approaching the charges against BitMEX and lining them up against DeFi, angel investor and blockchain consultant Adam Cochran broke down the issues in a Twitter thread.
He explained that while decentralization cannot be regulated or fall under the gambit of such regulations, regulators could target the core developers who hold the admin keys and the domain providers hosting the front-end interfaces of DEXs:
“If that happened to a protocol, a large bulk of users would stop using it and not interact with the contract directly, essentially killing the protocol,” he said. “The takeaway here is that a protocol isn’t outside the reach of the government, there is always pressure points that can be applied.”
The core issue here is rather than trying to avoid regulation by going fully decentralized, these platforms should actually seek out the regulators, Cochran added: “There is a difference between wanting sovereignty and privacy over your funds vs enabling criminal activity.”
In the future?
DeFi may well be safe for now if one considers the timeline. These charges against BitMEX have come long after the company started acting against the regulator’s wishes, and DeFi is still a much newer, and less understood space.
Chief Investment Officer at Apollo Capital Henrik Andersson told Cointelegraph that “considering the time it took to bring this [BitMEX] case, I don’t believe DeFi cases will be brought in the short term.” He added that DeFi projects should essentially keep calm and carry on:
“DeFi projects need to continue focusing on building unstoppable financial infrastructure by free and open code.”