DeFi projects may soon come under the same regulations as financial institutions
According to a new study by blockchain analysis firm Cipher Trace, more than half of all crypto exchanges in the world have weak Know Your Customer (KYC) protocols. Comprehensive KYC protocols are regarded as crucial instruments of anti-money laundering and counter-terror financing regulations in many countries. The study further revealed that exchanges in Europe, the US and the UK were among the worst offenders.
More than 800 decentralized, centralized and automated market maker exchanges were analysed over the course of the study. It found that 56% of them did not follow KYC guidelines despite the anti-money laundering regulations in place by authorities. Interestingly, the highest number of such exchanges were found in Europe – a region known for its stringent regulations. 60% of European Virtual Asset Service Providers have deficient KYC practices.
The report noted that 70% of exchanges registered in the Seychelles have poor KYC norms, leading to the island nation becoming a hotspot for potential money launderers.
The US, UK, and Russia top the list of countries with the highest numbers of exchanges with weak KYC. Singapore is at the top of the pack when it comes to counts of combined weak and porous VASPs.
The study further found that most exchanges avoid mentioning the country of origin on their website or terms and conditions. This appears to be deliberate as 85% of the exchanges that did not bother to mention the country of origin had a frail KYC framework. Some exchanges might be hiding their jurisdiction in order to avoid having to register and comply with AML regulation.
Out of the 21 DEXs examined in the study, a whopping 81% weak, or no, know-your-customer (KYC) practices. However, the study also found that DEXs isn’t the most preferred medium to launder money. Even though $7.9 million of crypto stolen in the KuCoin hack and was sold on decentralized exchange Uniswap, it wasn’t laundered there.
DeFi projects offer traditional financial services and could come under the same regulatory framework as banks and other financial institutions, the report noted.
Dave Jevans, CipherTrace’s chief executive officer, said he didn’t believe DeFi protocols would accept regulations easily, though they cannot avoid it for much longer.
“From what we have experienced over the last couple of months is that they don’t want to have anything to do with KYC,” Jevans said.
“They just say they are writing software and, while they get beneficial funds from it, they are not ‘operating’ it. But it’s interesting to see what the governance of the platforms is, which often happens to be from venture capital-backed companies,” he added.
Written by Harshini Nag