In the wake of late 2020, the cryptocurrency industry began to experience major sanctions, in December 2020, SEC levied sanctions against Ripple Labs and its officials accusing them of conducting unregistered securities offerings. The case revolves around whether or not Ripple's cryptocurrency XRP is a security. SEC has gone on to levy sanctions against other platforms like BlockFi, FTX founder, Kraken, and more recently Binance and Coinbase.
The perception of the crypto and decentralized finance (DeFi) space as being unregulated or operating in a regulatory vacuum is outdated, especially with the crackdowns going on since late 2022 on pioneer and “giant” crypto platforms, more crackdowns are coming soon to the crypto world, which is why it is important to become aware of the deliberate compliance processes that need to be undertaken. Compliance regulations are not without concerns, concerns about consumer protection, financial stability, anti-money laundering (AML), counter-terrorism financing (CTF), tax evasion, and other issues drive these regulatory measures. As a result, it is essential for participants in the crypto and DeFi industry to understand and adhere to the compliance standards required to operate within legal constraints.
Why Compliance Regulations Are Needed In DeFi
Privacy and anonymity are key features of Defi, however, it is important to ensure that users are protected from unethical practices. Compliance regulations are rising in DeFi and as mentioned earlier these regulations are not without valid concerns. It might seem that Defi and major or centralised regulatory bodies are opposing bodies, but DeFi might need to essentially submit to compliance for the purpose of strong intentions to stay relevant in the finance world and not just be a fad.
DeFi needs the presence of regulations because;
1. DeFi Needs To Protect Its Users
DeFi engages a vast and diverse user base, from seasoned or expert crypto enthusiasts to newcomers. Regardless, all kinds of users need protection, DeFi thrives on anonymity and might be quite unstable with the different kinds of crypto coins popping up each day, everyone is rushing on to the next big project or coin, so they do not lose out, it is so easy to get defrauded and encounter huge losses, a phenomenon that is sadly becoming synonymous with the crypto world, which should not be made a norm. Adherence to compliance safeguards users against potential risks and fraud, fostering trust within the ecosystem.
2. DeFi Needs To Take Control Of Illicit Activities
DeFi is not centralised and it is literally what it means, the decentralised nature of the crypto world, creates avenues for illicit activities. Compliance regulations act as a shield or cover against vices like fraud, money laundering, unethical standards, as well as the financing of organised crime. This is what regulatory bodies like SEC seek to fight against, it is important that dealings with crypto platforms be evaluated if executives refuse to actually compromise with compliance.
3. DeFi Needs Logietivity And Acceptance
At this point, maybe we should all agree, that DeFi and the crypto world have come to stay, however, a legitimate badge will be the universal acceptance of compliance across all DeFi platforms. It lends legitimacy to DeFi platforms regardless of whatever forward-thinking platforms we may hold. This way, it is demystified and it can attract a wider audience, and serve as a bridge between DeFi’s disruptive innovation and an established financial order.
4. A Collaborative Synergy Is Needed
Rather than constantly boring a scene for clashes that are disruptive to the crypto ecosystem, it is best that a collaborative synergy is created. Rather than constant clashes, cooperation between DeFi and regulations can induce constructive progress. Regulatory understanding of DeFi’s intricacies can lead to frameworks that can encourage responsible innovation.
5. Regulations Can Encourage Transparent Operations
Compliance fosters transparency, this induces a safe space for users to make better informed, rather than rushing into projects without any ounce of certainty and the like. Clear rules and guidelines will help users understand the risks that they are in for, with DeFi platforms and products. This is all part of the demystification process.
7. Compliance Can Lead To Vast Legal Recognition
Regulatory compliance allows for a wider legal recognition for DeFi projects and cryptocurrencies, it can also further pave the way for collaborations with traditional financial institutions, partnerships, and integration into other established systems, like maybe microfinance banks, the stock market and the like.
8. Market Stability Needs To Be Induced
Because of DeFi’s rapid rise, there is a meteoric rise that has brought unequal opportunities and vulnerability for its users. Compliance regulations can induce stability by mitigating or curbing extreme fluctuations, making room for more orderly market behaviour.
9. Responsible Innovation
The dynamic DeFi ecosystem thrives on innovation, yet unrestrained innovations can have unexpected consequences which ironically is quite unexpected. Compliance ensures that innovation is channelled appropriately, protecting both users and the financial sector as a whole.
10. Compliance Regulations Can Induce Global Acceptance For DeFi
Potential users need to know that they can trust the platforms, and cryptocurrency being offered. A traveller does not stay in a sketchy-looking hotel or an untrustworthy air BnB that looks haunted. There have been so many flop stories from the crypto world that can be fixed with a strategic merge of simple complaints. With induced trust and comfort, DeFi can then have a wider global reach.
Prominent Compliance Challenges In DeFi
Some of the most prominent compliance challenges in DeFi include:
1. Anti-Money Laundering (AML) and Know Your Customer (KYC)
Due to its anonymous nature, cryptocurrency might be utilised for illegal purposes. Ensuring AML and KYC compliance to prevent money laundering, terrorist financing, and fraud is difficult, particularly in decentralised and peer-to-peer transactions.
2. Data Privacy
Privacy Concerns: While pseudonymity is a feature of many cryptocurrencies, privacy concerns and data protection regulations present challenges.
Striking a balance between privacy and regulatory compliance is important for financial platforms, especially ones, where users keep holdings.
3. Token Classification and Securities Laws
It is difficult to determine if a cryptocurrency or token is a security subject to securities legislation. Token classification and compliance with applicable securities regulations can be challenging and have legal ramifications.
4. Uncertain Regulatory Environment
The continually shifting environment of digital currency rules across several jurisdictions offers significant difficulty. Uncertainty exists for businesses and users alike due to a lack of clarification on how cryptocurrencies should be classed, taxed, and controlled.
5. Emerging Technologies
As the crypto sector develops, new technologies such as decentralised identities (DIDs) and decentralised autonomous organisations (DAOs) provide additional compliance challenges as regulatory agencies struggle to comprehend and adapt to these advances.
6. Cross-border Transactions
While cryptocurrency allows for borderless transactions, different countries' rules interfere with international transfers. Balancing compliance with varying regulatory standards becomes difficult for platforms and users involved in worldwide activities.
7. Cross-Border Transactions
While cryptocurrency allows for borderless transactions, different countries' rules interfere with international transfers. Balancing compliance with varying regulatory standards becomes difficult for platforms and users involved in worldwide activities.
8. Rapid Surge Of Users
The rapid surge of users in DeFi can present a host of challenges from compliance to scalability, it makes it difficult for platforms to keep hands-on compliance processes and procedures.
How Youverify Products Solve Compliance Challenges In Decentralised Finance
There are a host of tools and solutions offered by Youverify, and the great thing is that they are utilisable across industries and sizes of business, as well as financial scenes. The Defi world or the crypto world is not out of bounds, luckily. Products were developed with diverse uses and users in mind.
KYC (Know Your Customer) products are software solutions and tools designed to facilitate the process of verifying the identity of customers or users. These products play a crucial role in compliance and risk management across various industries, including finance, banking, cryptocurrency, and more. KYC products aim to ensure that businesses have accurate and up-to-date information about their customers' identities, helping to prevent fraud, money laundering, and other illicit activities.
I. ID Document Verification
In most cases, ID documents or government-issued certificates are considered a credible means of identity identification. However with a digital fast-rising business, it might not be possible to manually verify them accurately, humans are more fit for creative tasks, as they are prone to encounter errors with mundane tasks. Humans may also be susceptible to corruption and bias.
Youverify’s ID document verification KYC service provides a fast and secure way for businesses to verify the identity of their customers. It is a quick and easy way to verify a customer’s government-issued ID documents by scanning and authenticating across Youverify’s global document verification network. It will be helpful for customers looking to get into DeFi platforms to present credible identification documents for identification, which do not have to reflect on their platform profiles.
II. KYC ID Match
This product was created for on-the-go customer onboarding, it is an efficient and reliable way for businesses to easily undertake the identification of their customers in real-time. With the KYC ID Match, customers can be verified and onboarded quickly with accurate results, and at the same time, there is a high level of security and compliance, as there is direct verification of government-issued identification documents. Its quick application can be useful for DeFi platforms, due to the ever-growing onboarding of customers who are moving on the next big project or looking to acquire the “it” coin of the moment.
It is a quick and easy way to onboard customers! Get Started or book a demo.
III. Biometrics Verification
With Youverify, crypto platforms can onboard customers the Safeway using our AI-powered facial recognition and liveness detection technology that seamlessly matches the customer’s face and ID. Biometric verification can be a more secure way to help users of DeFi platforms secure their crypto holdings, it is also more secure to ensure verification, and to also counter cases of stolen documents and the like.
IV. Liveness Detection
In the case of spoofing, DeFi platforms can easily spot deep fakes, in the process of biometric verification for customer onboarding. Youverify has the best AI algorithms that can detect spoofing easily with high accuracy. Individuals with ill intentions may be willing to present deep fakes for verification, however, that can be combatted. Get started or Book a demo.
V. PEP and Sanction Screening
Fraudsters are always moving from one scheme to another or from one platform to another, inexperienced fraudsters or criminals may be naive to present identification details that are compromised. Youverify’s PEP and Sanction are always updated on a daily basis, this way DeFis can easily spot users or identities that have been flagged, these scrupulous users will not be onboarded.
VI. Crypto Monitoring
This is a product we can not wait to share with the world, our crypto-monitoring solution tool can spot suspicious crypto transactions on the go with low false positives. The solution risk profiles users and allows for the real-time monitoring of suspicious transactions. It also allows for easy export of data to tip of the right authorities. It can also manage screening results on a case-by-case basis.
Bottom Line
The landscape of decentralized finance (DeFi) is rapidly evolving, bringing both innovative opportunities and complex compliance challenges to the forefront. The perception of DeFi as an unregulated space is outdated, as regulatory authorities are increasingly focusing their attention on this burgeoning industry. This shift is driven by concerns related to user protection, financial stability, anti-money laundering, and other regulatory issues.
It is now paramount to adhere to compliance regulations and to combine them with DeFi features With Youverify, DeFi platforms can achieve so much efficiency in compliance processes, creating safer spaces for users and getting regulatory agencies or institutions off their backs.
Book a demo session today to see how Youverify can help automate your business’s KYC Due Diligence for effective crypto monitoring! Also, feel free to contact us here for any questions.