Regulators prioritize digital identity in decentralized finance (DeFi)


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  • CFTC wants regulators to prioritize digital identity and anti-money laundering in DeFi.
  • Recent legal actions by CFTC show the need for accountability in DeFi.
  • FinCEN’s new system gets 100,000 filings in a week to identify DeFi participants.

In a recent report published by the Commodity Futures Trading Commission (CFTC), the U.S. agency responsible for regulating futures, swaps, and options, policymakers have been urged to focus their attention on digital identity and anti-money laundering (AML) in the decentralized finance (DeFi) sector. The report comes as regulators seek to address concerns that DeFi may evade regulatory scrutiny due to its decentralized and pseudonymous nature.

CFTC calls for prioritization of digital identity

The CFTC’s report emphasizes the need for policymakers to identify and prioritize projects of greatest concern within the DeFi space. Specifically, the report highlights three key areas of focus: digital identity, know your customer (KYC) and AML regimes, and the calibration of privacy within DeFi platforms.

The decentralized nature of DeFi has raised concerns regarding the effectiveness of AML and countering the financing of terrorism (AML/CFT) regimes. The report points out that pseudonymity and disintermediation, prevalent in most DeFi systems, pose serious challenges for policymakers. These challenges stem from the difficulty of properly identifying participants and assigning responsibility within the decentralized ecosystem.

Regulatory scrutiny on DeFi

The CFTC’s interest in regulating DeFi has been evident in recent legal actions. In June, the CFTC won a lawsuit against the decentralized autonomous organization (DAO) known as Ooki DAO, which was accused of offering unregistered commodities. 

By September, the CFTC had also filed lawsuits against three companies building reputable DeFi protocols for their alleged involvement in illegal derivatives trading. These companies eventually settled the charges.

As highlighted in the report, one of the central concerns surrounding DeFi is the absence of clear lines of responsibility and accountability within these systems. Christy Goldsmith Romero, a CFTC Commissioner, expressed concerns about DeFi’s inability to ensure victim recourse, defend against illicit exploitation, or implement necessary changes and controls during crisis and network stress.

FinCEN’s involvement

The Financial Crimes Enforcement Network (FinCEN) is also actively exploring ways to identify individuals participating in decentralized finance. Last week, FinCEN introduced a beneficial ownership reporting system that mandates many U.S.-based companies to disclose information about their ownership and control structures. This initiative aims to shed light on the ownership of companies operating within the United States.
The U.S. Treasury Secretary Janet Yellen highlighted the rapid response to FinCEN’s beneficial ownership reporting system, with over 100,000 filings received within one week.

Disclaimer: The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Benson Mawira

Benson is a blockchain reporter who has delved into industry news, on-chain analysis, non-fungible tokens (NFTs), Artificial Intelligence (AI), etc.His area of expertise is the cryptocurrency markets, fundamental and technical analysis.With his insightful coverage of everything in Financial Technologies, Benson has garnered a global readership.

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