Skip to main content

Problem

According to the statistics, by Q1 '21 the overall monthly trade volume has almost tripled compared to the one as of December 2020 ($25 billion). The average daily DEX trade volume grew from $0.71 billion to $2.26 billion — a quarterly rise of 318%. Uniswap, the most popular DEX at the moment, had more volume than Coinbase, the most credible Centralized Exchange of the whole cryptomarket.

All that’s happening put DeFi under the radar of regulators and governments. Since most DeFi platforms ignore Know-Your-Customer (KYC) or Anti-Money Laundering (AML) procedures, they begin to foresee such transactions as a new haven for illegal activities. In this context, the FATF declares to the G20 that jurisdictions must update requirements in order to implement AML/CFT mitigating measures. Furthermore, a new draft of the European Commission MiCa could restrict EU citizens from accessing DeFi projects. At least if they do not agree with the proposed strict legal regulations.

Since the fast growth of DeFi and DEXs has triggered huge attention in terms of Money Laundering and Terrorist Financing (ML/TF) risks, the lack of KYC and AML procedures became a crucial problem.

This is easily explained by the following significant factors:

  • DEXs are based on blockchains, so they do not rely on specific jurisdictions or regulations;
  • DEXs do not have access to users’ assets and are not performing AML/KYC verification on them;
  • DEXs are in a grey area legally; some people contend that the DEXs are decentralized and therefore can not be governed, while others argue for a strictly defined legal system.

The statistics demonstrate that money laundering via DeFi is increasing - about $34 million of DeFi transactions in 2020 were conducted by criminal actors. Chainalysis forecasts and predicts exponential growth of illegal activity on the DeFi market and this causes another huge market problem - DEXs are regarded as dangerous by institutional investors and credible financial players around the world.

Liquidity pool users (liquidity providers)​

Users supply their liquidity to the pool and when they withdraw their funds back, they automatically face the risk of getting "dirty" assets from illegal market players who use this opportunity to launder money.

Liquidity pools operators​

Liquidity pool operators are interested in protecting themselves (and their users) from “dirty” funds. Some of them want their products to be more credible and adapt to comply with money laundering and governmental KYC regulation. As well, liquidity pool operators (especially who operate in regulated areas) are interested in working with verified counterparties and traditional financial organizations and yet being fully decentralized.