The Explosive Growth of DeFi – Who Is at Risk?

The explosive growth of DeFi is driven by a massive influx of liquidity in the market. Anyone today can go through a simple process of exchanging their money for a coin without completing any KYC/AML verifiable processes, invest it in a project with great potential, and crossing fingers, watch the investment grow. In other words, users can easily create wallets and start trading without disclosing any personal data. The process can be squeezed into a short formula – exchange, invest and get rewards.

DeFi and its technology can open up an enormous amount of opportunities for both honest market players and not-so-honest ones. Bad actors serve the function of laundering ‘dirty money’ and systematically put the good actors and their financial activities at risk. Meanwhile, good actors who add a tangible value to the rebuilding of the global financial system can be approached and denied any further activity related to DEXs or prevented from providing liquidity to liquidity pools by FATF.

According to OKEx Insights, Q1 2021 overall monthly DEX trading volume almost tripled compared to the quarter ending in 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 crypto market.

In this context, FATF has declared to the G20 that jurisdictions must update requirements 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.

Chainalysis concludes 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 would cause another huge market problem – DEXs being regarded as dangerous by institutional investors and credible financial players around the world.

Following this information, you’re exposed to several risks that are outlined below.

What are the real risks?

• Liquidity pool users – Users will unwillingly take the high risk of picking up someone else’s ‘dirty’ money trail once they decide to withdraw their assets.
• Liquidity pool operators – Having a product to run means taking responsibility for the funds that the pool holds. The value of the product is completely demolished once it is not credible for all users. It is especially hard to earn users’ trust when your product doesn’t comply with money laundering and governmental KYC regulation.
• DEX traders – There is no way you can classify coins on your own with no external help. Without keeping the history of each transaction, you will never be able to defend whether you knew the buy or sell was ‘clean.’

In conclusion, the smartest solution to keeping yourself safe from any potential ‘dirty money’ traces would be to outsource compliance to the professionals who can guarantee your safety.

Slava Demchuk, certificated anti-money laundering specialist in the crypto industry and member of Blockchain Ukrainian Association. Founder and CEO of AMLSafe, AMLBot and PureFi.io.