Decentralized finance (DeFi) has been a quickly rising sector of the cryptocurrency business, but it surely has additionally confronted important regulatory challenges. With regulators struggling to maintain up with the tempo of innovation, the shortage of readability round regulations tends to create uncertainty for DeFi initiatives.
Cointelegraph spoke to Alastair Johnson about regulatory challenges going through the DeFi business. Johnson is the CEO of an identification “super-wallet” known as Nuggets that seeks to ship verified self-sovereign decentralized identities to customers. He stated that one of many fundamental regulatory challenges is the anonymity of DeFi platforms, which makes it troublesome to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.
Although privacy is a cornerstone of DeFi, regulatory compliance is crucial to guard customers and be sure that DeFi platforms are working throughout the regulation. “Regulatory compliance will involve implementing AML /KYC procedures,” Johnson stated. “This can be done without compromising user privacy by using non-correlatable peer Decentralized Identifiers (DIDs) and zero-knowledge proofs. In addition, auditable data can be encrypted to protect the participant’s private keys but still in accordance with regulatory requirements.
“DeFi platforms can incorporate privacy-enhancing technologies like zero-knowledge proofs and homomorphic encryption to protect user privacy while still adhering to regulation,” he added.
According to Johnson, DeFi platforms can take measures to make sure compliance with regulations whereas sustaining their decentralization. He defined that “DeFi platforms can incorporate decentralized identity solutions to verify the identity of users while still maintaining decentralization. These solutions can use blockchain-based identity protocols, such as Decentralized Identifiers (DIDs) and Verifiable Credentials (VCs), to provide secure and privacy-preserving user identification — enabling DeFi platforms to continue to innovate and grow while still complying with applicable regulations.”
Speaking on the influence of regulation throughout the area, Johnson famous that rising regulation within the DeFi sector might have each optimistic and detrimental impacts. While regulation might present legitimacy and shield customers from fraudulent actions, extreme and burdensome regulation might stifle innovation and reduce competitors, undermining the decentralization and trustlessness of the DeFi ecosystem.
Related: Sen. Warren vows reintroduction of AML invoice that extends to DAOs and DeFi
In the long run, balancing privacy, regulation and decentralization will proceed to be an ongoing problem for the DeFi area. However, Johnson stated he hopes that by embracing privacy-preserving applied sciences, implementing self-regulatory measures, and collaborating with regulators, DeFi platforms can discover methods to steadiness the necessity for regulatory compliance with the rules of privacy and decentralization that underpin the DeFi ecosystem
