As DeFi continues to explode through 2020 and attract the attention of not only those looking to disrupt the financial sector, but also those looking for a quick buck, regulators are sure to start taking note. Regulatory scrutiny on a sector that is currently running wild with stories like SushiSwap and other billion-dollar protocols would not bode well.
It was regulatory concerns that played their part in the collapse of ICOs, another sector that was full of promise in disrupting the traditional VC model. Now, another fear is looming in the DeFi sector that would have regulators cracking down with great force — money laundering.
A joint research paper by global management consulting firm BCG Platinion and Crypto.com has indicated that the rapid growth in DeFi in 2020 has created the potential for money laundering which will bring it under the radar of regulatory authorities.
The DeFi space is not entirely new, or just a phenomenon of 2020, but it’s rapid rise in 2020 and the accumulation of billions of dollars in crypto collateral locked into the sector has propelled it forward.
Currently, there is said to be about $9 billion locked in and this represents a 1,200 percent increase since the start of the year. The main issue here is that with DeFi, there is no KYC, and with avenues for billions of anonymous dollars to flow, there is every chance for nefarious uses.
It operates largely beyond the realms of government and regulatory control which raises concerns about illegal access to financial services according to the report.
Commenting on the report in its newsletter, Ciphertrace noted:
“Since DeFi protocols are designed to be permissionless, anyone in any country is able to access them without any regulatory compliance. As a result, DeFi can easily become a haven for money launderers.”
In fact, the bigger issue is the pure defiance in a decentralised space where some DeFi protocols believe that they can avoid regulation entirely by going this route — rather than looking to comply.
Skirting the rules
As it stands, the current FATF recommendation is that if the DeFi protocol is sufficiently decentralized and the entity behind it is not involved in daily operations, it may not be classified as Virtual Asset Service Providers (VASPs) and therefore will be immune from the Travel Rule.
But as Ciphertrace noted:
“Judging by the current regulatory trends of greater KYC and other compliance requirements such as the FATF Travel Rule, DeFi could eventually fall under the scope of global regulators as it grows in scale.”