The buzz around DeFi today has continued to grow. From Twitter to Discord and several blockchain communities, decentralized finance is predicted to be the future of finance. In many ways, this is true. DeFi can disrupt the financial industry by removing the need for middlemen. It also allows users to interact with products in an open and borderless environment.
This innovative nature of DeFi market is why it’s so great. However, it has also attracted the attention of regulators. As a result, regulators have started imposing challenging requirements on DeFi platforms. One of these requirements is Know Your Customer (KYC) compliance.
The KYC Challenge for DeFi Platforms
Some regulators believe the decentralized nature of DeFi makes it a likely tool for illegal activities. They are bothered it can become a platform for money laundering and other forms of criminal financing. This worry made the Financial Action Task Force (FATF) update its guidance in June 2019. Now, virtual asset service providers (VASPs) will be treated the same way as traditional Financial Institutions.
What does this mean for blockchain users?
This regulation forces DeFi platforms to obey the same KYC rules as banks. Of course, the KYC compliance requirement affects the entire DeFi innovation. First, a selling point of DeFi is user anonymity. As a result, some users fear that using KYC processes by DeFi platforms would weaken that feature. Similarly, users believe that any form of KYC would make DeFi platforms centralized. This centralization would contradict the entire point of DeFi.
The Road to Compliance
This issue raises a critical question. How can DeFi platforms stay on the good side of the law and yet remain attractive?
Contrary to what many people think, DeFi platforms that comply don’t have to lose their appealing attributes. Instead, there are ways for DeFi platforms to implement KYC protocols while staying decentralized.
One solution is the use of third-party providers like DLTify and CRD Network. These providers allow DeFi platforms to become KYC compliant while retaining anonymity. Similarly, they ensure that DeFi platforms remain truly decentralized. For instance, CRD Network helps DeFi platforms perform KYC on users without storing personal data on the platform’s database. This way, users can validate their accounts while remaining anonymous. At the same time, platforms can become compliant with KYC rules.
Benefits of KYC for DeFi Platforms
If DeFi platforms obey KYC rules using third-party providers, there are many benefits:
A Safer DeFi Market
An unregulated DeFi market is dangerous for users. Users can easily get caught up in rugs-pulls, unethical transactions, and legal issues. Hence, by bringing about a market-wide KYC compliance, the space is safe for investors. Third-party KYC providers are instrumental to this process of making the market safe. For instance, in helping conduct KYC, DLTify’s technology enables DeFi platforms and DAOs to access relevant data of their user bases and ensure that users are compliant.
DeFi Mass Adoption
KYC compliance in the DeFi market could help stimulate increased adoption. With KYC checks, access by DeFi platforms to the larger financial market can be improved. For instance, big platforms like PayPal and Robinhood require Uniswap, the largest DeFi platform, to implement compulsory KYC checks before integrating its services. Thus, KYC could help DeFi platforms attract more corporate customers.
By implementing KYC checks to collect verified customer data, platforms can better protect user accounts in the event of lost details. Similarly, they become better equipped to guard against the threat of account hacks. In addition, KYC providers like DLTify and CRD Network ensure users’ data are adequately protected. For instance, DLTify performs the necessary KYC checks of users through a GDPR and AML compliant process. Furthermore, this process allows users to remain anonymous.
The DeFi market will witness bigger growth in the coming years. Unfortunately, this means their regulation would likely increase too. The best decision for DeFi platforms now is to remain on the law’s good side and adopt the required KYC processes.