DeFi platforms can comply with regulations without compromising privacy — Web3 exec

Decentralized finance (DeFi) has been a rapidly growing sector of the cryptocurrency industry, but it has also faced significant regulatory challenges. With regulators struggling to keep up with the pace of innovation, the lack of clarity around regulations tends to create uncertainty for DeFi projects.

Cointelegraph spoke to Alastair Johnson about regulatory challenges facing the DeFi industry. Johnson is the CEO of an identity “super-wallet” called Nuggets that seeks to deliver verified self-sovereign decentralized identities to users. He said that one of the main regulatory challenges is DeFi platform anonymity, which makes it difficult to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. 

Although privacy is a cornerstone of DeFi, regulatory compliance is essential to protect users and ensure that DeFi platforms are operating within the law. Speaking on how DeFi platforms can balance the need for privacy with regulatory requirements, Johnson shared that “Regulatory compliance will involve implementing AML /KYC procedures. 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 ensure compliance with regulations while maintaining their decentralization. He explained “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 impact of regulation within the space, Johnson noted that increasing regulation in the DeFi sector could have both positive and negative impacts. While regulation could provide legitimacy and protect users from fraudulent activities, excessive and burdensome regulation could stifle innovation and decrease competition, undermining the decentralization and trustlessness of the DeFi ecosystem.

Related: Sen. Warren vows reintroduction of AML bill that extends to DAOs and DeFi

In the future, balancing privacy, regulation, and decentralization will continue to be an ongoing challenge for the DeFi space. However, Johnson said he hopes that by embracing privacy-preserving technologies, implementing self-regulatory measures, and collaborating with regulators, DeFi platforms can find ways to balance the need for regulatory compliance with the principles of privacy and decentralization that underpin the DeFi ecosystem

All Dutch and English crypto news!

FTX EU launches withdrawal website to pay back European users

The European arm of FTX, FTX EU has launched a website to allow European customers to submit withdrawal requests. It comes nearly five months after the...

Russia talks up prospects of BRICS countries developing new currency

A new world order could be emerging as economic powerhouses increase their efforts to distance themselves from US dollar hegemony. According to reports, a top Russian...

Australian ‘Big Four’ bank ANZ halts cash withdrawals from many branches

ANZ, one of Australia's "Big Four" banks, will cease facilitating withdrawals and deposits from a number of its Australian branches as it looks to push...

‘Biased, deceptive’: Center for AI accuses ChatGPT creator of violating trade laws

The Center for Artificial Intelligence and Digital Policy (CAIDP) has filed a complaint with the United States Federal Trade Commission (FTC) in an attempt to...

Beste exchanges

Koop je crypto bij Bitvavo