CFTC urges policymakers to address identity issues in DeFi
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The Commodity Futures Trading Commission (CFTC) recently appealed to the US policymakers, urging them to address identity issues encountered in the operations of numerous decentralized finance (DeFi) projects.
The US commodities regulator issued a report in which it recommended several specific actions meant to be applied to strengthen AML and digital identity issues in the opaque world of DeFi.
US government wants DeFi regulated
The CFTC’s report emerged soon after a study conducted by the US Department of Treasury concerning illicit finance risks in the decentralized finance sector. The study revealed concerning findings, such as the fact that North Korea, alongside thieves, cybercriminals, ransomware attacks, and scammers, tends to use DeFi services for transferring illicit proceeds and laundering this money.
After considering the findings, the US government recommended that federal regulators take steps to address these matters in line with the standing AML and CFT regulations and sanctions obligations.
In other words, the US Government wants to stop illicit actors from abusing the possibilities offered by the DeFi sector for their own purposes. Once again, the crypto industry finds itself in a difficult position, as it offers a number of useful services that the public could greatly benefit from, but its services also stand to aid criminals if not properly regulated.
The problem with DeFi
According to the CFTC Commissioner, Christy Goldsmith Romero, the central concern regarding the DeFi systems is the lack of clear lines of accountability and responsibility. According to Romero, some of the industry designs were specifically made for this purpose, which is now recognized as a serious and disruptive issue.
She further added that this feature of the DeFi sector might present the clearest ways in which the sector poses risks to investors and consumers alike, not to mention market integrity, financial stability, and illicit finance. The ability to avoid responsibility and accountability implies no clear route to ensuring victim recourse or defense against exploitation.
Furthermore, the current state of things also prevents the ability to introduce necessary changes and controls during periods of crisis and network stress. As a result, it is impossible to establish control and minimize the damage during such periods, and all that the market can do is wait for the situation to run its course and calm again on its own, regardless of the damage.
Romero concluded: “Given the potential risks, the report finds that government and industry should take timely action to work together, across regulatory and other strategic initiatives, to better understand DeFi.”
The report by the CFTC also recommended evaluating the options for regulating and imposing requirements to identify information discoverability and verification across all layers of the ecosystem. Doing so would require regulating more centralized identity information, as well as credential repositories and service providers.
