If crypto regulation is inevitable, let’s be smart about adapting to it

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Debates over regulatory compliance rage in Washington, in the press and in the crypto community. Whatever the final fate of the bills and proposed amendments, one thing remains constant: Distributed Ledgers and DeFi are here to stay.

They offer solutions to a multitude of problems that we have not been able to solve properly through the fiat system so far. However, for these issues to be resolved, we need to take stock of the issues we face in the shift to mass adoption, decide on the best approach to resolve them, and understand what tradeoffs are needed to integrate once and for all. all blockchain solutions in the mainstream. .

Practical Common Ground Promotes Practical Regulation

As long as compromise is on the table in good faith on the part of all interested parties, the crypto industry will be able to augment the traditional financial system and make the world a better place for countless people. One thing we should all strive to keep in mind during these ongoing discussions is the real opportunity to reduce financial exclusion. People in developing countries need an alternative to their fiduciary systems and, provided certain safeguards are in place, DeFi is the perfect solution for them.

There is a balance that must be struck here – the opportunity exists to offer economic stability and opportunities to the world, but we must do so while protecting users and operating within an anti-money laundering regulatory framework. ‘money (AML). We (the “crypto industry”) need real solutions, not half-measures that will take us further away from legitimacy or take the rug out from under us when the rules inevitably change.

In order for the industry to grow, prosper, and become the dominant mechanism in our global economy, we need to deploy layers of compliance in DeFi.

Progress is being made in getting everyone to understand that regulations are inevitable. But we’re still at the point in the cycle where there’s a lot of friction and reluctance to even allow DeFi to be included in the regulatory conversation. There are wool-dyed crypto enthusiasts who reject the idea of ​​regulation on a decentralized platform. But for the industry to grow, prosper, and ultimately become the dominant mechanism in our global economy, we need to deploy layers of compliance in DeFi.

The story continues

The configuration of the regulatory landscape

The Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, is expected to finalize its standards in the fourth quarter of this year. When these standards are published, more than 200 member countries and jurisdictions will be required to apply them, usually in the form of country-specific laws and regulations. It creates a problem. Countries and jurisdictions around the world that fall under the FATF Global Agreement will likely apply the standards differently. There is no aspect of the agreement that unifies the rules of application in these more than 200 countries and jurisdictions. This could seriously complicate global participation in DeFi protocols due to unique regional Know Your Customer (KYC) and AML requirements.

For example, in the United States, we agree to verify people by electronic means such as facial recognition for KYC purposes. In Germany, however, this is not allowed. The only way to collect KYC information in Germany, in some cases, is if someone is physically participating in a video call with service representatives recording a conversation and following a script.

It is only through a standardized and layered compliance approach that DeFi protocols will remain accessible for global participation.

Since different jurisdictions will have their own separate and nuanced version of the rules, DeFi protocols operating in those jurisdictions will most likely need to rely on licensed and regulated companies to provide compliance services. This will de facto create a need for a partnership between decentralized application (dApp) developers and regulated regulated entities. A new subset of the industry is emerging that will negotiate this relationship between regulators and these private entities, presenting new opportunities to create innovative and competitive solutions that expand the space exponentially, offering DeFi participants a level playing field full of options that reduce costs while increasing liquidity all around.

The victory is in the preparation

It is vitally important to put in place a standardized framework in which licensed and regulated entities based on individual jurisdictions provide compliance services to create the relationship between regulators and dApps. It is only through a standardized, layered compliance approach, which enables both jurisdictional uniqueness and international consistency, that DeFi protocols will remain accessible for global participation. Participation in DeFi would become regional without such a layered compliance approach, which would have the net effect of increasing financial inequalities globally.

The wonderful thing is that we have some incredibly smart and passionate people within our own industry who believe in a set of shared fundamentals. A coordinated activity is already underway to provide solutions and find the perfect and legendary balance of compromise. Using the tools of our trade, we create safe and non-intrusive solutions from the inside out. And the best thing we can do is enthusiastically put them in place now, so when regulators come in for DeFi, they find it ready and able to meet standards without the need for forced change. We can operate in a regulated world and keep the ethics of decentralization intact. If a solution is in place before regulators dictate a solution, we are ahead of the game and in charge of our own decentralized destiny.

Christopher Harding is Director of Risk and Compliance, Head of Compliance at Civic, a decentralized identity platform.

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