Can ZK-Proofs unravel the Defi compliance labyrinth? Experts weigh

Veröffentlicht:

Aktualisiert:

Von:

At the beginning of this week, the US Ministry of Finance expressed a few strong words when it worked out the risk assessment of decentralized financing (Defi) in the world's first report of this kind.

While the agency managed to start an important discussion about the urgently needed industry guidelines, crypto supporters were firmly involved in regulation through enforcement.

The most important thing is that the regulatory authorities have to become faster before the web3 landscape becomes too confusing and overwhelming so that projects can thrive, says Richard Mico from Banxa.

defi kyc not ideal?

In recent years, Defi has been exposed to a variety of challenges in connection with illegal finances, including fraud, ransomware, hacks and money laundering. These platforms operate across borders without a central authority and present regulatory authorities with considerable challenges.

The study shows that defi protocols alone lost $ 3.1 billion, which made over 82 % of all cryptocurrencies stolen by hackers. This was an increase of 73.3 % in 2021.

Certain companies that use Defi for shameful purposes have forced the regulatory authorities to support "Know your Customer" (KYC) measures to pursue the source of the stolen funds. But the complexity of the unique vulnerabilities and gaps in Defi makes Kyc superfluous according to many industry experts.

In addition, there are strict KYC exams in traditional finances. Nevertheless, the industry observes money washes almost every day. Therefore, Markus Levin, co-founder of XYO Network, believes that Kyc mechanisms are not a miracle weapon to prevent criminal acts.

In conversation with Cryptopotato, the manager explained:

"While procedures such as KYC are quite effective to remove illegal activities of platforms yourself, you are not a miracle weapon to prevent criminal acts. Unfortunately, challenges of challenges Motive challenges of malicious actors to change to alternative platforms with other processes. become. “

The industry emphatically supports "functional" compliance controls and other protective measures against threat actors in all aspects of the blockchain. Richard Mico, Chief Legal Officer from Banxa, said that the supervisory authorities have to make sure that "not to release the baby with the bath".

The focus should be on finding an adequate balance between the cultivation and use of the undeniable advantages of decentralized and automated peer-to-peer finance transactions and at the same time reducing serious threats from illegal finances.

"Accordingly, the regulatory authorities have to think very carefully about which activities they classify as in their area of ​​responsibility (i.e. as a cash service company and/or money transmitter) and the associated effects on the industry, the consumer and the position of the USA as a worldwide innovation center."

aml/cft controls defi

The Treasury report should provide orientation and clarity to the industry. However, it also suggests certain "improvements" of the existing AML/CFT regime beyond the fincen guidelines.

While Mico believes that the report in relation to the recommended "improvements" remains at a very high level, the devil will be in detail. He explained that a "One Size Fits All" approach would harm the ecosystem. Instead, the focus should be on a risk -based approach with an ideology based on innovation.

The Banxa manager further explained that many defi services do not implement AML/CFT controls or other processes to identify users. In many cases, this may be completely sensible, argues Mico. However, he believes that web3 companies have to make careful efforts to comply with local laws and regulations. He also added that AML/CFT controls are essential components to prevent the illegal financial use of crypto.

weighing the role of ZK evidence

One of the greatest knowledge from the 40-page report was the recording of a crypto-based solution-ZK Proofs-as a new compliance technology for Defi, and her mere recognition as a solution was welcomes for many.

zero-knowledge proofs enable a user to prove that a statement is true without showing why it is true. Thus, a person could prove that they are not on a sanction list of the Ministry of Finance without revealing the underlying confidential information, be it a name or an official ID number.

Various industry participants, including Mico, believe that ZK-Proofs are one of many possible instruments that can help reduce the risks associated with defi illegal finances and to support compliance with BSA and sanction obligations. Such solutions can even be integrated into the underlying smart contract, he added.

But so that the technology is useful, it must achieve a mass acceptance. The zero knowledge technology is still in its infancy, and Rico believes that education and sensitization will make a major contribution to making regulatory authorities feel more comfortable with compliance innovations.

"In order to ensure the proper and effective use of ZK evidence as a compliance tool, supervisory authorities can carry out monitoring activities such as audits, inspections and studies in order to check compliance. If the violations or abuse of ZK evidence is determined, the supervisory authorities can take appropriate enforcement measures."

.