Source from YouTube: Whiteboard Crypto
DEX coexists with KYC
DEX has the problem of difficult supervision: The main reason why DEX is difficult to survive in the coming storm is that they claim to lack the ability to identify users who use and contribute to mobile mining pools.
How it works:
With the coming of laws and regulations, DEX needs to speed up its survival and KYC is required to survive the coming regulatory storm.
Regulators from Europe, the United States and elsewhere are busy finalizing the details of how to designate the Decentralized Exchange (DEX) as a “broker”, trading agent or similar entity that influences transfers and cooperates with each other. The United States called for transnational cooperation in its executive order on responsible digital asset development, and the European Union recently called for transnational cooperation in its review of financial stability and integration.
Verifying the identity of users and checking whether money and tokens are illegal helps to ensure that cybercrime is prevented to some extent. It makes DeFi safer for users and more feasible for regulators and policymakers. In order to survive, DEX will eventually have to admit this and adopt a certain degree of identity verification and money laundering prevention.
2. Relevant products to monitor DEX
The Financial Action Task Force (FATF), the standard setter of global anti-money laundering and anti-terrorist financing (AML/CFT) measures, issued a report on the application of its crypto asset guidelines. The FATF report is indispensable reading material for the compliance team of crypto asset businesses and financial institutions. It provides FATF’s views on the regulatory issues facing the global encryption industry and regulators.
The new FATF report points out the key issues that will become the top priority of the regulatory agenda in the second half of 2022 and beyond. Cross-chain DeFi, unmanaged wallet, NFT, and travel rule compliance will be the top priority of the VASP compliance team.
Ensure that you have blockchain analysis capabilities, enabling you to detect and manage the risks of cross-chain DeFi activities and Tornado Cash and other DeFi coin mixers.
Use the blockchain analysis function to identify unmanaged wallets related to sanctioned actors, extortion software gangs, and other illegal actors.
Detect transactions related to the illegal use of NFT.
Understand travel rule solutions and prepare for compliance
3. Regulatory participants
Brian Armstrong, CEO of Coinbase, proposed a blueprint for encryption regulation and advocated US legislation to improve the clarity of encryption regulation
The legislation should start from the centralized participants (stable currency issuers, exchanges, and custodians), because this is where the risk of consumer harm is greatest, and the supervision should focus on the need for additional transparency and disclosure of intermediaries. In addition, he suggested that countries enacting laws for cryptocurrency companies should not only enforce laws at home but also enforce relevant laws for foreign companies serving their own citizens.
4. From profit or reduce part of exchange supervision
One option might be to focus laws and regulations on profit rather than control. With limited legal tools at their disposal to address decentralized exchanges, governments may consider aggressively enacting new laws or rules providing that any profit derived from a decentralized exchange is perse illegal, or perhaps subject to substantial information reporting and regulatory burden. The IRS, for example, could take the position that receiving any profit from a decentralized exchange makes someone a withholding agent, although, again, the definition of withholding agent would likely need to be updated for this to work.
At the other extreme, governments might let certain decentralized exchanges operate in a low or no-regulation zone for the time being. There is actually much to be said for this approach, as it could allow financial technology innovations to flourish while allowing regulators to gather critical information on possible interventions. Regulators ideally would monitor technological developments and work with decentralized exchanges to better understand the technology and see how it is being utilized, before developing a regulatory framework. Perhaps smart contract technology can eventually support automated tax withholding, information reporting, and know-your-customer (KYC) verification, among other regulatory compliance functions.
5. Regulate by developing software
An alternative approach could be to provide software developers — and potential users of DeFI protocols — a regulatory incentive to build and support compliance through a “safe harbor.” Conceptually, a safe harbor could excuse direct liability for software developers and other DeFi participants, if the protocol:
Has a lawful purpose and entails no fraud
Interacts or excluding addresses and/ or jurisdictions encouraging OFAC compliance
Limits or bars margin trading.
The safe harbor could also contemplate requiring that protocols are able to implement any future CFTC-authorized software systems to enforce commodities-related laws (i.e., use “code as law”).
In contrast to common misconceptions, privacy does not equate to non-compliance. Ultimately, Aztec believes in a future where users can easily generate zero-knowledge proofs to demonstrate compliance without exposing any personal information throughout the process.
Now, Aztec mainly focuses on two points in terms of compliance： Network compliance and User Compliance.
The aim of network compliance measures is to limit the introduction of illicit funds (e.g. exploited funds from hacks) into the Aztec Network. They are designed around commonly seen illicit asset transfer patterns (e.g. large sums, time-sensitive).
**Block Deposit Cap: Address-specific Cap: A deposit amount cap is enforced on a per address, per asset, per rollup block basis at the smart contract level and on the zk. money **frontend.
Daily Deposit Cap: 1) IP-specific Cap: A deposit rate cap is enforced on a per IP address, daily basis at the sequencer level. 2)*** Network-wide Cap***: A deposit amount cap is enforced on a network-wide, per-asset, rolling daily basis at the smart contract level.
The aim of user compliance measures is to provide users with means to demonstrate compliance with their individual accounts such as auditors, government authorities, and courts.
**Viewing Key Sharing: All Aztec accounts are created with viewing keys **that guard viewing access to details of all transactions received and sent with the accounts (e.g. sender, receiver, asset type, amounts). In order to demonstrate compliance, users can share their viewing keys with whoever requests viewing access to their Aztec transactions.
The regulatory and compliance requirements for decentralized exchanges are necessary. While supervising DeFi, its innovation, freedom, and other characteristics should be retained to enable better development. DeFi should be a system in which all investors can access and operate important data. It also should be a system that reduces the possibility of manipulation.
Such a system can guide funds to the most promising projects effectively. Appropriate laws and regulations help to create common incentives to benefit the entire financial system. They ensure that investors and participants can obtain safe and fair opportunities while building the market’s integrity.
https://cointelegraph.com/news/identity-is-the-antidote-for-dexs-regulation-problem
https://www.civicresearchinstitute.com/online/PDF/JTI-3601-01-Exchanges.pdf
*Statement on DeFi Risks, Regulations, and Opportunities; *https://www.sec.gov/news/statement/crenshaw-defi-20211109
Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (MiCA) ; https://data.consilium.europa.eu/doc/document/ST-13198-2022-INIT/en/pdf